<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1995
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. 9
/X/AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/AMENDMENT NO. 11
/X/(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH
DEVELOPING CAPITAL MARKETS FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
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:
<TABLE>
<S> <C>
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., ESQ. Princeton, New Jersey 08543-9011
FRANK P. BRUNO, ESQ.
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
------------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON AUGUST 21, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
- -------------- ---------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................... Cover Page
Item 2. Synopsis................................. Fee Table
Item 3. Condensed Financial Information.......... Consolidated Financial Highlights;
Performance Data
Item 4. General Description of Registrant........ Special and Risk Considerations;
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 Offered..... Cover Page; Fee Table; Merrill Lynch
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 Services... Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities....... General Information -- Description of
Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Determination of Net Asset Value;
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
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
OCTOBER 25, 1995
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. For more information on the Fund's
investment objectives and policies, please see "Investment Objective and
Policies" on page 13. 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 9081, Princeton, New Jersey 08543-9081 [(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 25, 1995 (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 CLASS D
---------- ----------------------- ------------ ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments............................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............ None(d) 4.0% during the 1.0% for one None(d)
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)(E):
Investment Advisory Fees(f)................ 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(g):
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........................ 0.24% 0.24% 0.24% 0.24%
Shareholder Servicing Costs(h)........ 0.17% 0.34% 0.34% 0.17%
Other................................. 0.21% 0.21% 0.21% 0.21%
------- ----- ----- -------
Total Other Expenses.............. 0.62% 0.79% 0.79% 0.62%
------- ----- ----- -------
Total Fund Operating Expenses.............. 1.62% 2.79% 2.79% 1.87%
======= ===== ===== =======
</TABLE>
- ------------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain investment
programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares"-- page 28.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares"-- page 29.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A or Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares" -- page 28.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year of purchase.
(e) Information for Class A shares is stated for the fiscal year ended June 30,
1995. Information under "Other Expenses" for Class B, Class C and Class D
shares is estimated for the fiscal year ending June 30, 1996.
(f) See "Management of the Fund -- Management and Advisory Arrangements" -- page
24.
(g) See "Purchase of Shares -- Distribution Plans" -- page 33.
(h) See "Management of the Fund -- Transfer Agency Services" -- page 25.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including the maximum $52.50 initial sales charge (Class A and Class
D shares only) and assuming (1) the Total Fund Operating Expenses
for each class set forth above, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the period:
Class A......................................................... $ 68 $ 101 $ 136 $235
Class B......................................................... $ 68 $ 107 $ 147 $294*
Class C......................................................... $ 38 $ 87 $ 147 $312
Class D......................................................... $ 71 $ 108 $ 148 $260
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A......................................................... $ 68 $ 101 $ 136 $235
Class B......................................................... $ 28 $ 87 $ 147 $294*
Class C......................................................... $ 28 $ 87 $ 147 $312
Class D......................................................... $ 71 $ 108 $ 148 $260
</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. (the "NASD"). Merrill Lynch may charge its customers
a processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing(SM) System is used
by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P.
("MLAM" or the "Manager") or 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 ongoing distribution fees and the additional incremental
transfer agency costs resulting from the
3
<PAGE> 6
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, are imposed
directly against those classes and not against all assets of the Fund and,
accordingly, such charges will not affect the net asset value of any other class
or have any impact on investors choosing another sales charge option. Dividends
paid by the Fund for each class of shares 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 Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A Maximum 5.25% initial sales
charge(2)(3) No No No
------------------------------------------------------------------------------------------------
B CDSC for a period of four years, B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% 0.25% 0.75% eight years(4)
------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares-- Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead will be subject to a 1.0%
CDSC for one year. See "Class A" and "Class D" below.
(footnotes continued on next page)
4
<PAGE> 7
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares. Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include certain
retirement plans and participants in certain investment programs. In
addition, Class A shares will be offered to Merrill Lynch & Co., Inc.
("ML & Co.") and its subsidiaries (the term "subsidiaries", when used
herein with respect to ML & Co., includes MLAM, FAM and certain other
entities directly or indirectly wholly-owned and controlled by ML &
Co.) and to their directors and employees and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge is
5.25%, which is reduced for purchases of $25,000 and over, and waived
for purchases by certain retirement plans in connection with certain
investment programs. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases will be subject to a 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 the conversion and holding periods 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
5
<PAGE> 8
average net assets attributable to Class C shares. Class C shares are
also subject to a CDSC if they are redeemed within one year of
purchase. Although Class C shares are subject to a 1.0% CDSC for only
one year (as compared to four years for Class B), Class C shares have
no conversion feature and, accordingly, an investor that purchases
Class C shares will be subject to distribution fees that will be
imposed on Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B 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
6
<PAGE> 9
and distribution fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in Class B or Class C
shares. In addition, Class B shares will be converted into Class D shares of the
Fund after a conversion period of approximately eight years, and thereafter
investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares-- Limitations on the Payment of Deferred
Sales Charges".
7
<PAGE> 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, 1995, are included in the Statement of Additional Information.
Further information about the performance of the Fund is contained in the Fund's
most recent annual report to shareholders which may be obtained, without charge,
by calling or by writing the Fund at the telephone number or address on the
front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the consolidated financial statements.
<TABLE>
<CAPTION>
CLASS A SHARES
-----------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED JUNE 30, SEPTEMBER 1,
----------------------------------------------------------- 1989+ TO
1995 1994 1993++ 1992 1991 JUNE 30, 1990
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 14.61 $ 11.62 $ 11.92 $ 10.43 $ 11.58 $ 9.60
-------- -------- -------- -------- -------- -----------
Investment income -- net..................... .24 .11 .12 .15 .24 .24
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net........................ (.40) 3.23 .42 1.59 (.75) 1.88
-------- -------- -------- -------- -------- -----------
Total from investment operations............. (.16) 3.34 .54 1.74 (.51) 2.12
-------- -------- -------- -------- -------- -----------
Less dividends and distributions:
Investment income -- net..................... (.04) (.07) (.14) (.17) (.15) (.13)
Realized gain on investments -- net.......... (.60) (.28) (.70) (.08) (.49) (.01)
In excess of realized gain on
investments -- net......................... (.46) -- -- -- -- --
-------- -------- -------- -------- -------- -----------
Total dividends and distributions............ (1.10) (.35) (.84) (.25) (.64) (.14)
-------- -------- -------- -------- -------- -----------
Net asset value, end of period............... $ 13.35 $ 14.61 $ 11.62 $ 11.92 $ 10.43 $ 11.58
======== ======== ======== ======== ======== ===========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... (1.67)% 28.73% 5.17% 17.02% (4.45)% 22.29%#
======== ======== ======== ======== ======== ===========
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................... 1.62% 1.46% 1.71% 1.64% 1.77% 1.71%*
======== ======== ======== ======== ======== ===========
Investment income (loss) -- net.............. 1.56% .63% (.04)% 1.73% 1.98% 2.69%*
======== ======== ======== ======== ======== ===========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $350,081 $401,996 $142,285 $126,417 $111,947 $104,033
======== ======== ======== ======== ======== ===========
Portfolio turnover........................... 63.37% 66.85% 91.72% 71.05% 84.74% 64.53%
======== ======== ======== ======== ======== ===========
</TABLE>
(Table continues on following page)
8
<PAGE> 11
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES CLASS D SHARES
---------------- -------------- --------------
For the Period For the Period
July 1, 1994+ October 21, 1994+
to June 30, 1995 to June 30, 1995
---------------- --------------------------------------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 14.54 $ 16.71 $ 16.77
-------- ------- -------
Investment income -- net................................. .08 .08 .13
Realized and unrealized loss on investments and foreign
currency transactions -- net........................... (.32) (2.50) (2.48)
-------- ------- -------
Total from investment operations......................... (.24) (2.42) (2.35)
-------- ------- -------
Less dividends and distributions:
Investment income -- net................................. -- (.01) (.03)
Realized gain on investments -- net...................... (.60) (.60) (.60)
In excess of realized gain on investments -- net......... (.46) (.46) (.46)
-------- ------- -------
Total dividends and distributions........................ (1.06) (1.07) (1.09)
-------- ------- -------
Net asset value, end of period........................... $ 13.24 $ 13.22 $ 13.33
============= ============ ============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................... (2.22)%# (14.97)%# (14.49)%#
============= ============ ============
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and distribution
fees................................................... 1.79%* 1.96%* 1.94%*
============= ============ ============
Expenses................................................. 2.79%* 2.96%* 2.19%*
============= ============ ============
Investment income -- net................................. 1.01%* 1.32%* 2.10%*
============= ============ ============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $162,774 $ 18,573 $ 21,899
============= ============ ============
Portfolio turnover....................................... 63.37% 63.37% 63.37%
============= ============ ============
</TABLE>
- ------------------
+ Commencement of operations.
++ Based on average number of shares outstanding.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
9
<PAGE> 12
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. There can be no assurance
that the Fund will be able to obtain required governmental approvals in a timely
manner. In addition, changes to restrictions on foreign ownership of securities
subsequent to the Fund's purchase of such securities may have an adverse effect
on the value of such securities. Certain countries may restrict investment
opportunities in issuers or industries deemed important to national interests.
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. Moreover, individual foreign economies may
10
<PAGE> 13
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rates of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position. In addition, certain foreign
investments may be subject to foreign withholding taxes. These risks are often
heightened for investments in smaller capital markets.
Most of the securities held by the Fund are not registered with the
Securities and Exchange Commission, nor are the issuers thereof subject to the
reporting requirements of such agency. Accordingly, 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. For example, there may be no comparable provisions under certain foreign
laws to insider trading and similar investor protection securities laws that
apply with respect to securities transactions consummated in the United States.
Further, brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than 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
11
<PAGE> 14
foreign markets are also subject to the risk factors associated with foreign
investments generally, as discussed above. There can be no assurance that a
liquid secondary market for options and futures contracts will exist at any
specific time.
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest, and such securities may
not be rated at all for creditworthiness. Securities rated in the medium to
lower rating categories of nationally recognized statistical rating
organizations and unrated securities of comparable quality are predominately
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. The Fund does
not intend to purchase debt securities that are in default or which the Manager
believes will be in default.
Borrowing. As a non-fundamental investment restriction, 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. In addition, 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.
12
<PAGE> 15
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
investment objective of the Fund is to seek long-term capital appreciation by
investing in securities, principally equities, of issuers in countries having
smaller capital markets. Except for Temporary Investments as discussed and
defined below, all of the Fund's assets will consist of direct or indirect
investments in countries having smaller capital markets. The investment
objective of the Fund described above is a fundamental policy of the Fund and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
It is currently expected that under normal conditions at least 65% of the Fund's
net assets will be invested in equity securities. The Fund may employ a variety
of investments and techniques to hedge against market and currency risk. There
can be no assurance that the Fund's investment objective will be achieved.
For purposes of its investment objective, the Fund considers countries
having smaller capital markets to be all countries other than the four countries
having the largest equity market capitalizations. Currently, these four
countries are Japan, the United Kingdom, the United States and Germany. 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,
13
<PAGE> 16
the Fund will not seek to benefit from anticipated short-term fluctuations in
currency exchange rates. The Fund may, from time to time, invest in debt
securities with relatively high yields (as compared to other debt securities
meeting the Fund's investment criteria), notwithstanding that the Fund may not
anticipate that such securities will experience substantial capital
appreciation. Such income can be used, however, to offset the operating expenses
of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or "stockholders", usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
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
14
<PAGE> 17
securities convertible into securities of foreign issuers. The Fund may invest
in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to
disclose material information in the United States, and therefore, there may not
be a correlation between such information and the market value of such ADRs.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to hedge its portfolio
against adverse movements in equity, debt and currency markets. The Fund has
authority to purchase and write (i.e., sell) covered put and call options on its
portfolio securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and financial futures,
and related options on such futures. The Fund may also deal in forward foreign
exchange transactions and foreign currency options and futures, and related
options on such futures. Each of these portfolio strategies is described below.
Although certain risks are involved in options and futures transactions (as
discussed below and in "Risk Factors in Options and Futures Transactions"
below), the Manager believes that, because the Fund will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of the
Fund's shares will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and will not necessarily engage in hedging
transactions in all the smaller capital markets in which the Fund is invested at
any given time. Also, the Fund may not necessarily be engaging in hedging
activities 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
15
<PAGE> 18
for as long as the option is outstanding. The Fund may engage in closing
transactions in order to terminate put options that it has written. The Fund
will not write put options if the aggregate value of the obligations underlying
puts shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security at the stated
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund will not purchase options on securities (including
stock index options discussed below) if as a result of such purchase, the
aggregate cost of all outstanding options on securities held by the Fund would
exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase or
write put and call options on stock indices to hedge against the risks of
market-wide stock price movements in the securities in which the Fund invests.
Options on indices are similar to 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
16
<PAGE> 19
speculative practice under those circumstances. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a futures contract or the purchase of a call option
or the writing of a put option on a future, but under unusual circumstances
(e.g., the Fund experiences a significant amount of redemptions), a long futures
position may be terminated without the corresponding purchase of securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies are utilized under the same market and market sector
conditions (i.e., conditions relating to specific types of investments) in which
the Fund enters into futures transactions. The Fund may purchase put options or
write call options on futures contracts and stock indices rather than selling
the underlying futures contract in anticipation of a decrease in the market
value of its securities. Similarly, the Fund may purchase call options, or write
put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated by
the buyer and seller. See "Restrictions on OTC Options" below for information as
to restrictions on the use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward
foreign exchange among currencies of the different countries in which it will
invest and multinational currency units as a hedge against 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. 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-
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U.S. dollar denominated securities owned by the Fund, sold by the Fund but not
yet delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in U.S.
dollars of an investment in a franc denominated security. In such circumstances,
for example, the Fund may purchase a foreign currency put option enabling it to
sell a specified amount of francs for dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the franc
relative to the dollar will tend to be offset by an increase in the value of the
put option. To offset, in whole or in part, the cost of acquiring such a put
option, the Fund may also sell a call option which, if exercised, requires it to
sell a specified amount of francs for dollars at a specified price by a future
date (a technique called a "straddle"). By selling such a call option in this
illustration, the Fund gives up the opportunity to profit without limit from
increases in the relative value of the franc to the dollar. The Manager believes
that "straddles" of the type which may be utilized by the Fund constitute
hedging transactions and are consistent with the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities which it has committed
or anticipates to purchase which are denominated in such currency and, in the
case of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. The Fund may not incur potential
net liabilities of more than 20% of its total assets from foreign currency
options, futures or related options.
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
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<PAGE> 21
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 15% (10% to the extent required by certain state laws) of the total
assets of the Fund, taken at market value, together with all other assets of the
Fund which are illiquid or are not otherwise readily marketable. However, if the
OTC option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
security minus the option's strike price). The repurchase price with the primary
dealers is typically a formula price which is generally based on a multiple of
the premium received for the option, plus the amount by which the option is
"in-the-money". This policy 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.
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<PAGE> 22
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments will be limited, however,
in order to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended. See "Additional
Information -- Taxes". To qualify, the Fund must comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer, and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A fund which elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5% and
10% requirements with respect to 75% of its total assets. To the extent the Fund
assumes large positions in the securities of a small number of issuers, the
Fund's net asset value may fluctuate to a greater extent than that of a
diversified investment company as a result of changes in the financial condition
or in the market's assessment of issuers, and the Fund may be more susceptible
to any single economic, political or regulatory occurrence than a diversified
investment company.
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 NASD, 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
20
<PAGE> 23
with transactions in U.S. securities, although the Fund will endeavor to achieve
the best net results in effecting such transactions.
Portfolio Turnover. The Manager will effect portfolio transactions without
regard to holding period, if, in its judgment, such transactions are advisable
in light of a change in circumstance in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 100% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year or
less) by the monthly average value of the securities in the portfolio during the
year.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the amount of its commitment
in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement the Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.5% of
the aggregate purchase price of the security which the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security 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 15% (10% to
the extent required by certain state laws) of its assets taken at the time of
acquisition of such commitment or security. The Fund will at all times maintain
a segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt 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.
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<PAGE> 24
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 15% (10% to the extent required by certain
state laws) of its total 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 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act. During the period of such a loan, the Fund receives
the income on the loaned securities and receives either the income on the
collateral or other compensation, i.e., negotiated loan premium or fee, for
entering into the loan and thereby increases its yield. Such loans are
terminable at any time, and the borrower, after notice, will be required to
return borrowed securities within five business days. In the event that the
borrower defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (a) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (b) more than
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<PAGE> 25
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 in any particular industry
(excluding the U.S. Government and its agencies or instrumentalities).
Investment restrictions and policies that are non-fundamental policies may be
changed by the Board of Directors without shareholder approval. As a
non-fundamental policy, the Fund may not borrow amounts in excess of 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 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 settlement 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.
As a non-fundamental policy, the Fund will not invest in securities which
cannot be readily resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
including repurchase agreements and purchase and sale contracts maturing in more
than seven days, if, regarding all such securities, more than 15% of its total
assets (or 10% of its total assets as presently required by certain state laws)
taken at market value would be invested in such securities. Notwithstanding the
foregoing, the Fund may purchase without regard to this limitation securities
that are not registered under the Securities Act of 1933, as amended (the
"Securities Act"), but that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act, provided that the Fund's Board
of Directors continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Board of Directors may adopt
guidelines and delegate to the Manager the daily function of determining and
monitoring liquidity of restricted securities. The Board has determined that
securities which are freely tradeable in their primary market offshore should be
deemed liquid. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The 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 of the Manager and FAM; President and Director
of Princeton Services, Inc.; Executive Vice President of 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.
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<PAGE> 26
RICHARD R. WEST -- Professor of Finance, and Dean from 1984 to 1993, New
York University Leonard N. Stern School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the Fund's investment adviser. The Manager is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Manager provides the Fund with management and investment
advisory services. The Manager or its affiliate, FAM, acts as the manager for
more than 125 other registered investment companies and offers portfolio
management and portfolio analysis services to individuals and institutions. As
of September 30, 1995, the Manager and FAM had a total of approximately $189.4
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management 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, 1995, the fee paid
by the Fund to the Manager was $5,240,621 (based upon average net assets of
approximately $531.4 million). At September 30, 1995, the net assets of the Fund
aggregated approximately $584.9 million. At this asset level, the annual
management fee would aggregate approximately $5.8 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 corporate predecessors 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, 1995,
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<PAGE> 27
the Fund reimbursed the Manager $138,938 for accounting services. For the fiscal
year ended June 30, 1995, the ratio of total expenses to average net assets was
1.62% for Class A shares. For the period July 1, 1994 (commencement of
operations) to June 30, 1995, the annualized ratio of total expenses to average
net assets was 2.79% for Class B shares. For Class C and Class D shares, for the
period October 21, 1994 (commencement of operations) to June 30, 1995, the
annualized ratio of total expenses to average net assets was 2.96% and 2.19%,
respectively.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Act which incorporates the Code of Ethics of the Manager (together,
the "Codes"). The Codes significantly restrict the personal investing activities
of all employees of the Manager and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
a fee of $11.00 per Class A or Class D shareholder account and $14.00 per Class
B or Class C shareholder account, nominal miscellaneous fees (e.g., account
closing fees) and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. For the fiscal year ended
June 30, 1995, the Fund paid the Transfer Agent $1,047,493 pursuant to the
Transfer Agency Agreement for providing transfer agency services. At September
30, 1995, the Fund had 34,774 Class A shareholder accounts, 29,792 Class B
shareholder accounts, 4,271 Class C shareholder accounts and 3,115 Class D
shareholder accounts. At this level of shareholder accounts, the annual fee
payable to the Transfer Agent would aggregate approximately $893,661, plus
out-of-pocket expenses.
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
25
<PAGE> 28
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(SM) 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 the close of business on the New York
Stock Exchange (generally, 4:00 p.m., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the New York Stock Exchange on that day, provided
the Distributor in turn receives the order from the securities dealer prior to
30 minutes after the close of business on the New York Stock Exchange on that
day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the New York Stock Exchange on that day,
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(SM) 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 CDSC and ongoing distribution fees.
A discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing(SM) System
is set forth under "Merrill Lynch Select Pricing(SM) System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and
26
<PAGE> 29
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(1) FEE FEE CONVERSION FEATURE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales
charge(2),(3) No No No
------------------------------------------------------------------------------------------------
B CDSC for a period of four
years, at a rate of 4.0% B shares convert to
during the first year, D shares automatically
decreasing 1.0% annually to after approximately
0.0% 0.25% 0.75% eight years(4)
------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead will be subject to a 1.0%
CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
27
<PAGE> 30
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 SALES LOAD AS DISCOUNT TO
PERCENTAGE OF PERCENTAGE* OF SELECTED DEALERS
OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------------- ------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000................................ 5.25% 5.54% 5.00%
$25,000 but less than $50,000.................... 4.75 4.99 4.50
$50,000 but less than $100,000................... 4.00 4.17 3.75
$100,000 but less than $250,000.................. 3.00 3.09 2.75
$250,000 but less than $1,000,000................ 2.00 2.04 1.80
$1,000,000 and over**............................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994 and on Class A purchases
by certain retirement plan investors in connection with certain investment
programs. If the sales charge is waived in connection with a purchase of
$1,000,000 or more, such purchases will be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Class A purchases made
prior to October 21, 1994, 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 $1,000,000 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 of 1933.
During the fiscal year ended June 30, 1995, the Fund sold 5,308,700 Class A
shares for aggregate net proceeds of $81,203,014. The gross sales charges for
the sale of Class A shares of the Fund for that year were $1,132,905, of which
$72,570 and $1,060,335 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended June 30, 1995 the Distributor received
no CDSCs with respect to redemption within one year after purchase of Class A
shares purchased subject to front-end sales charge waivers. During the period
October 21, 1994 (commencement of operations) to June 30, 1995 the Fund sold
2,389,119 Class D shares for aggregate net proceeds of $33,003,605. The gross
sales charges, for the sale of Class D shares of the Fund for that period were
$390,764, of which $23,946 and $366,818 were received by the Distributor and
Merrill Lynch, respectively. For that period, the Distributor received CDSCs of
approximately $1,059, all of which were paid to Merrill Lynch, with respect to
redemptions within one year after purchase of Class D shares purchased subject
to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A
28
<PAGE> 31
shares of the Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Certain employer sponsored
retirement or savings plans, including eligible 401(k) plans, may purchase Class
A shares of the Fund at net asset value provided such plans meet the required
minimum number of eligible employees or required amount of assets advised by
MLAM or any of its affiliates. Class A shares are available at net asset value
to corporate warranty insurance reserve fund programs provided that the program
has $3 million or more initially invested in MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA(SM) Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services and certain
purchases made in connection with the Merrill Lynch Mutual Fund Adviser program.
In addition, Class A shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Fund. Certain persons who
acquired shares of certain MLAM-advised closed-end funds who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met. For
example, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in
shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
Employer Sponsored Retirement or Savings Plans and to Employee Access
Accounts(SM) available through employers which provide such plans.
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
29
<PAGE> 32
are subject only to a one year 1.0% CDSC. On the other hand, approximately eight
years after Class B shares are issued, such Class B shares, together with shares
issued upon dividend reinvestment with respect to those shares, are
automatically converted into Class D shares of the Fund and thereafter will be
subject to lower continuing fees. See "Conversion of Class B Shares to Class D
Shares" below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and a distribution fee of 0.75% of net
assets as discussed below under "Distribution Plans".
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the 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.
30
<PAGE> 33
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------------- -----------------
<S> <C>
0-1.................................................... 4.00%
1-2.................................................... 3.00
2-3.................................................... 2.00
3-4.................................................... 1.00
4 and thereafter....................................... 0.00
</TABLE>
For the period July 1, 1994 (commencement of operations) to June 30, 1995, the
Distributor received CDSCs of $203,346 with respect to redemptions of Class B
shares, all of which were paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are held
in the MFA program will be included in determining the holding period of Class B
shares reacquired upon termination of participation in the MFA program (see
"Shareholder Services -- Exchange Privilege").
The Class B CDSC is waived on 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 and for any Class B shares that were
acquired and held at the time of the redemption in an Employee Access AccountSM
available through employers providing eligible 401(k) plans. 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
31
<PAGE> 34
Group and held in such account at the time of redemption. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. For the fiscal period October 21, 1994
(commencement of operations) to June 30, 1995, the Distributor received CDSCs of
$3,082 with respect to redemptions of Class C shares, all of which were paid to
Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
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
32
<PAGE> 35
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
The Conversion Period is also modified for retirement plan investors who
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services -- Exchange
Privilege"), then the holding period for such Class A shares will be "tacked" to
the holding period for the Class B shares originally held for purposes of
calculating the Conversion Period of Class B shares reacquired upon termination
of participation in the MFA program.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer 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.
33
<PAGE> 36
For the period July 1, 1994 (commencement of operations) to June 30, 1995,
the Fund paid the Distributor $1,022,078 pursuant to the Distribution Plan
relating to Class B shares (based on average net assets subject to the Class B
Distribution Plan of approximately $102.2 million), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. During the fiscal
period October 21, 1994 (commencement of operations) to June 30, 1995, the Fund
paid the Distributor $77,256 pursuant to the Distribution Plan relating to Class
C shares (based on average net assets subject to such Distribution Plan of
approximately $11.2 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. During the fiscal period October 21, 1994
(commencement of operations) to June 30, 1995, the Fund paid the Distributor
$21,425 pursuant to the Distribution Plan relating to Class D shares (based on
average net assets subject to such Distribution Plan of approximately $12.4
million), all of which was paid to Merrill Lynch for providing account
maintenance services in connection with such shares. At September 30, 1995, the
net assets of the Fund subject to the Class B Distribution Plan aggregated
approximately $191.9 million. At this asset level, the annual fees payable
pursuant to the Class B Distribution Plan would aggregate approximately $1.9
million. At September 30, 1995, the net assets of the Fund subject to the Class
C Distribution Plan aggregated approximately $23.4 million. At this asset level,
the annual fees payable pursuant to the Class C Distribution Plan would
aggregate approximately $233,730. At September 30, 1995, the net assets of the
Fund subject to the Class D Distribution Plan aggregated approximately $27.9
million. At this asset level, the annual fees payable pursuant to the Class D
Distribution Plan would aggregate approximately $69,677 million.
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.
At December 31, 1994, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of the
offering of Class B shares exceeded fully allocated accrual revenues for such
period by approximately $2,785,000 (2.202% of Class B net assets at that date).
Fully allocated accrual data is not yet available for Class C shares. As of June
30, 1995, direct cash expenses for the period since commencement of the offering
of Class B shares exceeded direct cash revenues by $653,845 (.402% of Class B
net assets at that date). For Class C shares, direct cash expenses for the
period October 21, 1994 (commencement of operations) to June 30, 1995 exceeded
direct cash revenues by $11,636 (.063% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans
34
<PAGE> 37
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 fees and the CDSCs). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
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, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial
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Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. The notice in either event
requires the signatures of all persons in whose names the shares are registered,
signed exactly as their names appear on the Transfer Agent's register or on the
certificates, as the case may be. The signatures on the notice must be
guaranteed by an "eligible guarantor institution" (including, for example,
Merrill Lynch branch offices and certain other financial institutions) as such
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 (generally, 4:00 P.M., New York time) on the day received
and that such request is received by the Fund from such dealer not later than 30
minutes after the close of business on the New York Stock Exchange, on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the New York
Stock Exchange, 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
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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 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
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<PAGE> 40
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 are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period for the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for Class
A shares of the same fund on the basis of relative net asset values in
connection with
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<PAGE> 41
the commencement of participation in the MFA program, i.e., no CDSC will apply.
The one year holding period does not apply to shares acquired through
reinvestment of dividends. Upon termination of participation in the MFA program,
Class A shares will be reexchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B or
Class C shares so reacquired or the Conversion Period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held. The Fund's
exchange privilege is modified with respect to purchases of Class A and Class D
shares by non-retirement plan investors under the MFA program. First, the
initial allocation of assets is made under the MFA program. Then, any subsequent
exchange under the MFA program of Class A or Class D shares of a MLAM-advised
mutual fund for Class A or Class D shares of the Fund will be made solely on the
basis of the relative net asset values of the shares being exchanged. Therefore,
there will not be a charge for any difference between the sales charge
previously paid on the shares of the other MLAM-advised mutual fund and the
sales charge payable on the shares of the Fund being acquired in the exchange
under the MFA program.
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are automatically reinvested in full and fractional
shares of the Fund, without sales charge, at the net asset value per share next
determined 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(R) 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(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the Systematic Redemption Program, subject to certain conditions.
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(R) accounts may arrange to have periodic investments made in the Fund in
their CMA(R) accounts or in certain related accounts in amounts of $100 or more
through the CMA(R) 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.
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<PAGE> 42
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 indicative of the Fund's
relative performance for any future period.
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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 income 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 income 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
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 15 minutes after the close of business on the New York Stock
Exchange ("NYSE") (generally, 4:00 P.M., New York time) 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
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<PAGE> 44
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 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 (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately the
amount of the expense accrual differentials between the classes.
Portfolio securities 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.
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).
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<PAGE> 45
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid 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
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<PAGE> 46
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.
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, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
44
<PAGE> 47
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. As of the
date of this Prospectus, the Fund has an authorized capital of 400,000,000
shares of Common Stock, par value $0.10 per share, divided into four classes
designated Class A, Class B, Class C and Class D Common Stock, each of which
consists of 100,000,000 shares. Shares of Class A, Class B, Class C and Class D
Common Stock represent 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 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:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
45
<PAGE> 48
[This page is intentionally left blank.]
46
<PAGE> 49
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 Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
<TABLE>
<S> <C>
1. ........................................................... 4. ..........................................................
2. ........................................................... 5. ..........................................................
3. .......................................................... 6. ..........................................................
</TABLE>
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
..................................................... Date....................
( Zip Code)
<TABLE>
<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................
<S> <C>
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
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 Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor .........................................................
Date............................................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
47
<PAGE> 50
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. -- AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
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.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
......................,19 .......
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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.
<TABLE>
<S> <C>
By............................................................... ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name....................................................... (2) Name....................................................
Account Number................................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
- ----- -----
- - -
- - -
- - -
- - -
- ----- -----
This form, when completed, should be mailed to:
Merrill Lynch Developing Capital Markets Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the shareholder's signature.
...............................................................
Dealer Name and Address
By ............................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- ----------- ------------------ ................................
/ / / / / / / / / F/C Last Name
- ----------- -----------------
Branch-Code F/C No.
- ----------- -----------------
/ / / / / / / / /
- ----------- -----------------
Dealer's Customer Account No.
</TABLE>
48
<PAGE> 51
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. -- AUTHORIZATION FORM
(PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE
AUTOMATIC INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
Address.............................................................................
.................................................................................... Account Number...........................
(if existing account)
</TABLE>
- --------------------------------------------------------------------------------
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 withdrawals 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 AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ....................................................................
Account Number..................................................................
Bank Address....................................................................
......................................................................
Signature of Depositor..........................................................
Date............................................................................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
49
<PAGE> 52
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. -- AUTHORIZATION FORM
(PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch 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.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Developing Capital Markets Fund, Inc. as indicated
below:
Amount of each check or ACH debit $..........................................
Account number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City ................ State ................ Zip................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
50
<PAGE> 53
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
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> 54
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.............................. 2
Merrill Lynch Select Pricing(SM)
System............................... 3
Consolidated Financial Highlights...... 8
Special and Risk Considerations........ 10
Investment Objective and Policies...... 13
Portfolio Strategies Involving
Options and Futures............... 15
Other Investment Policies and
Practices......................... 20
Investment Restrictions.............. 22
Management of the Fund................. 23
Board of Directors................... 23
Management and Advisory
Arrangements...................... 24
Code of Ethics....................... 25
Transfer Agency Services............. 25
Purchase of Shares..................... 25
Initial Sales Charge Alternatives --
Class A and Class D Shares........ 28
Deferred Sales Charge Alternatives --
Class B and Class C Shares........ 29
Distribution Plans................... 33
Limitations on the Payment of
Deferred Sales Charges............ 35
Redemption of Shares................... 35
Redemption........................... 35
Repurchase........................... 36
Reinstatement Privilege -- Class A
and Class D Shares................ 36
Shareholder Services................... 37
Performance Data....................... 39
Additional Information................. 41
Dividends and Distributions.......... 41
Determination of Net Asset Value..... 41
Taxes................................ 42
Organization of the Fund............. 45
Shareholder Reports.................. 45
Shareholder Inquiries................ 45
Authorization Form..................... 47
Code # 10893-1095
</TABLE>
(MERRILL LYNCH LOGO)
MERRILL LYNCH
DEVELOPING CAPITAL
MARKETS FUND, INC.
(Artwork)
PROSPECTUS
October 25, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 55
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
25, 1995 (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 25, 1995.
<PAGE> 56
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. (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 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 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, 1994 and 1995, the Fund's portfolio turnover rate was 66.85% and 63.37%,
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
2
<PAGE> 57
believes that, because the Fund will engage in options and futures transactions
only for hedging purposes, the options and futures portfolio strategies of the
Fund will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of its shares, the net asset value of the Fund's shares will fluctuate. There
can be no assurance that the Fund's hedging transactions will be effective. The
following is further information relating to portfolio strategies involving
options and futures the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a particular hedge against the price of the
underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security at
a price that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written. The
Fund will not write put options if the aggregate value of the obligations
underlying the put options shall exceed 50% of the Fund's net assets.
Options referred to herein and in the Fund's Prospectus may be options
traded on foreign securities exchanges such as the Amsterdam Stock Exchange, the
Stock Exchange of Singapore or the Sydney Stock Exchange. An option position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. If a secondary market does not exist, it might not be
possible to effect closing transactions in particular options, with the result,
in the case of a covered call option, that the Fund will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon 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
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transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
The Fund may also enter into over-the-counter options transactions ("OTC
options"), which are two party contracts with price and terms negotiated between
the buyer and seller. The Fund will only enter into OTC options transactions
with respect to portfolio securities for which management believes the Fund can
receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option). The staff of the
Securities and Exchange Commission (the "Commission") has taken the position
that OTC options and the assets used as cover for written OTC options are
illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund may purchase
either exchange-traded options or OTC options. The Fund will not purchase
options on securities (including stock index options discussed below) if as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is typically between 2% and 15% of the value of the
futures contract, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit
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assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation margin",
are required to be made on a daily basis as the price of the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "mark to market". At any time prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker, and the
purchaser realizes a loss or gain. In addition, a nominal commission is paid on
each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its strategy
of investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Fund and commodities brokers with
respect to initial and variation margin. Section 18(f) of the Investment Company
Act prohibits an open-end investment company such as the Fund from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a "senior
security" under the Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot, i.e., cash basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than one tenth of one percent due to the costs of
converting from one currency to another. The Fund has authority, however, to
deal in forward foreign exchange among currencies of the different countries in
which it will invest as a hedge against possible variations in the foreign
exchange rates among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in forward foreign
exchange. The Fund may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. 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
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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 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
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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 (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
investment 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
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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 15% (10% to
the extent required by certain state laws) of its total assets taken at the time
of acquisition of such commitment or security. The Fund will at all times
maintain a segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Because the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the commitment
period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with a member bank of the Federal Reserve System or primary dealer in U.S.
Government securities 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
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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 15% (10% to the extent required by certain state laws) of its
total 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.
Lending of Portfolio Securities. Subject to the investment restrictions
stated 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.
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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 affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio holding
or participate in the restructuring of the obligation.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities (which for
this purpose and under the Investment Company Act means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management. 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.
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5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors. Under the non-fundamental investment
restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (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 50% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities, or
in securities described in (e) below.
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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 securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the 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 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 settlement of other
securities transactions.
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 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 15% (10% to the extent required by certain state laws)
of the total assets of the Fund, taken at market value, together with all other
assets of the Fund which are illiquid or are not otherwise readily marketable.
However, if the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (i.e., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Directors of the
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<PAGE> 67
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.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage". Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with the Manager or any of
its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firm
or any of its affiliates participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages 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 (63) -- President and Director(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("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 Merrill Lynch Funds Distributor, Inc. (the "Distributor").
DONALD CECIL (68) -- 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 (68) -- Director(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (64) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; former
Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia University Graduate School of Business since 1990;
Adjunct Professor, Wharton School, University of Pennsylvania, 1990; Partner,
Small Cities Cablevision, Inc.
RICHARD R. WEST (57) -- Director(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, New York University
Leonard N. Stern School of Business Administration; Director of Bowne & Co.,
Inc. (financial printers), Vornado, Inc. (real estate holding company), Smith-
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<PAGE> 68
Corona Corporation (manufacturer of typewriters and word processors), and
Alexander's Inc. (real estate company).
EDWARD D. ZINBARG (60) -- Director(2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of The Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of The Prudential Foundation.
TERRY K. GLENN (55) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
NORMAN R. HARVEY (62) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
DONALD C. BURKE (35) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from
1982 to 1990.
GRACE PINEDA (38) -- Vice President(1)(2) -- Vice President of the Manager
and Senior Portfolio Manager since 1989.
GERALD M. RICHARD (46) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993; Vice President of the Distributor since 1981
and Treasurer since 1984.
MARK B. GOLDFUS (49) -- 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, 1995, the officers and Directors of the Fund as a group
(12 persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund owned less than 1% of the outstanding shares of
common stock of ML & Co.
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, 1995, fees and
expenses paid to non-affiliated Directors aggregated $40,132.
The following table sets forth for the fiscal year ended June 30, 1995,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1994, the aggregate compensation
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<PAGE> 69
paid by all investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM Advised Funds"), to the non-affiliated Directors:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM FUND AND
RETIREMENT OTHER MLAM/FAM
BENEFITS ACCRUED ADVISED FUNDS
COMPENSATION AS PART OF PAID
NAME OF DIRECTOR FROM FUND FUND'S EXPENSES TO DIRECTOR(1)
- ------------------------------------------------- ------------ ---------------- --------------
<S> <C> <C> <C>
Donald Cecil..................................... $9,750 None $276,350
Edward H. Meyer.................................. $8,500 None $251,600
Charles C. Reilly................................ $8,500 None $276,900
Richard R. West.................................. $8,500 None $300,900
Edward D. Zinbarg................................ $4,333 None $125,500*
</TABLE>
- ---------------
* $125,500 represents the amount Mr. Zinbarg would have received if he had
been a Director for the entire calendar year ended December 31, 1994. Mr.
Zinbarg was elected to the Fund's Board of Directors effective October 25,
1994.
(1) In addition to the Fund, the Directors serve on the boards of other MLAM/FAM
Advised Funds as follows: Mr. Cecil (34 funds); Mr. Meyer (34 funds); Mr.
Reilly (53 funds); Mr. West (53 funds) and Mr. Zinbarg (16 funds).
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,
1993, 1994 and 1995, the management fees paid by the Fund to the Manager
aggregated $1,303,056, $3,033,147 and $5,240,621, respectively.
Under the laws of a certain state, the Fund currently may not pay the
Manager a management fee with respect to the Fund's assets invested in the
shares of another investment company on which such other 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
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<PAGE> 70
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, 1993, 1994 and 1995, 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, 1993, 1994 and 1995, the amount of such
reimbursement was $127,749, $101,404 and $138,938, respectively. Certain
expenses in connection with the distribution of Class B, Class C and Class D
shares will be financed by the Fund pursuant to distribution plans in compliance
with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Distribution Plans".
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the Investment Company Act because of
their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the 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> 71
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(SM) 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 which utilize the Merrill Lynch Select Pricing(SM) System are referred to
herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
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, 1993, 1994 and 1995, the Fund sold its
Class A shares through the Distributor and Merrill Lynch, as a dealer. For the
period October 21, 1994 (commencement of operations) to June 30, 1995, the Fund
sold its Class D shares through the Distributor and Merrill Lynch, as a dealer.
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 the Distributor. 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. For
the fiscal year ended June 30, 1995, the Fund sold 5,308,700 Class A shares for
aggregate net proceeds to the Fund of $81,203,014. The gross sales charges for
the sale of Class A shares for that period were $1,132,905, of which $1,060,335
was received by Merrill Lynch and $72,570 was received by the Distributor. For
the period October 21, 1994 (commencement of operations) to June 30, 1995, the
Fund sold 2,389,119 Class D shares for aggregate net proceeds to the Fund of
$33,003,605. The gross sales charges for the sale of Class D shares for that
period were $390,764 of which $366,818 was received by Merrill Lynch and $23,946
was received by the Distributor.
17
<PAGE> 72
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code of 1986, as amended (the "Code")) although more than
one beneficiary is involved. The term "purchase" also includes purchases by any
"company", as that term is defined in the Investment Company Act, but does not
include purchases by any such company which has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount. The
term "purchase" shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser. The term
"purchase" also includes purchases by employee benefit plans not qualified under
Section 401 of the Code, including purchases by employees or by employers on
behalf of employees, by means of a payroll deduction plan or otherwise, of
shares of the Fund. Purchases by such a company or non-qualified employee
benefit plan will qualify for the above quantity discounts only if the Fund and
the Distributor are able to realize economies of scale in sales effort and sales
related expense by means of the company, employer or plan making the Fund's
Prospectus available to individual investors or employees and forwarding
investments by such persons to the Fund and by any such employer or plan bearing
the expense of any payroll deduction plan.
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 its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing(SM) System commenced
operations), and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A Shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994, and wish
to reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares of
the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares"), if
the following conditions are met. First, the sale of the closed-end fund shares
must be made through Merrill Lynch, and the net proceeds therefrom must be
immediately reinvested in Eligible Class A or Class D Shares. Second, the
closed-end fund shares must either have been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
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
18
<PAGE> 73
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 (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.
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<PAGE> 74
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 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.
Employee Access Accounts(SM). Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that provide
employer sponsored retirement or savings plans that are eligible to purchase
such shares at net asset value. The initial minimum for such accounts is $500,
except that the initial minimum for shares purchased for such accounts pursuant
to the Automatic Investment Program is $50.
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 ML&Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML&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 are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a
20
<PAGE> 75
redemption of a mutual fund that was sponsored by the financial consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund, and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds from
a redemption of shares of 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 redemption of such
shares of the other mutual fund and that such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the 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
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<PAGE> 76
Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with
respect to the account maintenance and/or distribution fees paid by the Fund to
the Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholder. Each
Distribution Plan further provides 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 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.
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<PAGE> 77
The following table sets forth comparative information as of June 30, 1995,
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum with respect to Class B shares for
the period July 1, 1994 (commencement of operations) to June 30, 1995, and under
the NASD maximum sales charge rule for the period October 21, 1994 (commencement
of operations) to June 30, 1995, with respect to Class C shares.
DATA CALCULATED AS OF JUNE 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD JULY 1,
1994 (COMMENCEMENT OF OPERATIONS) TO
JUNE 30, 1995:
Under NASD Rule as Adopted............. $126,403 $ 7,900 $419 $8,319 $970 $ 7,349 $1,221
Under Distributor's Voluntary Waiver... $126,403 $ 7,900 $419 $8,319 $970 $ 7,349 $1,221
CLASS C SHARES, FOR THE PERIOD OCTOBER
21, 1994 (COMMENCEMENT OF OPERATIONS)
TO JUNE 30, 1995:
Under NASD Rule as Adopted............. $ 20,335 $ 1,265 $ 50 $1,315 $ 61 $ 1,254 $ 139
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during period
indicated other than shares acquired through dividend reinvestment and the
exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares -- Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to Class B shares, the
voluntary maximum.
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
Commission may by order permit for the protection of security holders of the
23
<PAGE> 78
Fund. The Commission shall by rules and regulations determine the conditions
under which (i) trading shall be deemed to be restricted and (ii) an emergency
shall be deemed to exist within the meaning of clause (2) above.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-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 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the redemption
is requested within one year of the death or initial determination of
disability. For the period July 1, 1994 (commencement of operations) to June 30,
1995, the Distributor received CDSCs with respect to redemptions of Class B
shares of $203,346, all of which was paid to Merrill Lynch. Similarly, for the
fiscal period October 21, 1994 (commencement of operations) to June 30, 1995,
the Distributor received CDSCs with respect to redemptions of Class C shares of
$3,082, all of which was paid to Merrill Lynch.
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 employer 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. The CDSC is also waived for any Class B shares that were
acquired and held at the time of redemption by Employee Access Accounts
available through employers that provide Eligible 401(k) Plans. The initial
minimum for
24
<PAGE> 79
such accounts is $500, except that the initial minimum for shares purchased for
such accounts pursuant to the Automatic Investment Program is $50.
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
companies or other accounts for which investment discretion is exercised.
Conversely, the Fund may be the primary beneficiary of the research or services
received as a result of portfolio transactions effected for such other accounts
or investment companies.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States generally will
be conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with such affiliated
persons are prohibited from dealing with the Fund as principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Since transactions in the over-the-counter market
usually involve transactions with dealers acting as principal for their own
accounts, affiliated persons of the Fund, including Merrill Lynch and any of its
affiliates, will not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. See "Investment Objective
and Policies -- Current Investment Restrictions". For the fiscal year ended June
30, 1995, the Fund paid total brokerage commissions of $3,053,465, of which
$97,749 or 3.20% was paid to Merrill Lynch for effecting 5.59% of the aggregate
amount of transactions on which the Fund paid brokerage commissions. 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
25
<PAGE> 80
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.
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.
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 Prospectus 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 15 minutes after the close of business on the New York
Stock Exchange (generally 4:00 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 account
maintenance fees applicable with respect to the Class D shares; moreover, the
26
<PAGE> 81
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 share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials 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.
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.
27
<PAGE> 82
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he be issued certificates for his shares, and
then must turn the certificates over to the new firm for re-registration as
described in the preceding sentence. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
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(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement accounts) through the
CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions are automatically reinvested in full and fractional shares of the
Fund at the net asset value per share next determined after the close of 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.
28
<PAGE> 83
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
as determined as of 15 minutes after the close of business on the New York Stock
Exchange (generally 4:00 P.M., New York time) on the 24th day of each month or
the 24th day of the last month of each quarter, whichever is applicable. If the
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 preceding 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(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions are
made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Merrill Lynch financial consultant.
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<PAGE> 84
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 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 for the newly
acquired shares of the other fund as more fully described below. Class A, Class
B, Class C and Class D shares also 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 at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges 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
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<PAGE> 85
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period for the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for
two and a half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since 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.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program. Such
retirement plans may exchange Class B, Class C or Class D shares that have been
held for at least one year for Class A shares of the same fund on the basis of
relative net asset values in connection with the commencement of participation
in the MFA program, i.e., no CDSC will apply. The one year holding period does
not apply to shares acquired through reinvestment of dividends. Upon termination
of participation in the MFA program, Class A shares will be re-exchanged for the
class of shares originally held. For purposes of computing any CDSC that may be
payable upon redemption of Class B or Class C shares so reacquired, or the
conversion period for Class B shares so reacquired, the holding period for the
Class A shares will be "tacked" to the holding period for the Class B or Class C
shares originally held.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of the Fund may, in turn,
be exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of 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 would not incur a CDSC.
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<PAGE> 86
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.
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
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<PAGE> 87
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, INC. ... As high a level of total investment
return as is consistent with a
reasonable and relatively low level
of 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.
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
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<PAGE> 88
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.
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.
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<PAGE> 89
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 FUNDAMENTAL VALUE
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian)... A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund
whose objective is to provide
capital appreciation and income by
investing in securities with at
least 65% of the portfolio's assets
being invested in equities.
MERRILL LYNCH GLOBAL ALLOCATION FUND,
INC. .............................. High total return, consistent with
prudent risk, through a
fully-managed investment policy
utilizing United States and foreign
equity, debt and money market
securities, the combination of which
will be varied from time to time
both with respect to the types of
securities and markets in response
to changing market and economic
trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT.......... High total investment return from
investment in a global portfolio of
debt instruments denominated in
various currencies and
multi-national currency units.
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<PAGE> 90
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 OPPORTUNITY
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian)... A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series
fund, whose objective is to provide
a high total investment return
through an investment policy
utilizing United States and foreign
equity, debt and money market
securities, the combination of which
will vary depending upon changing
market and economic trends.
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.
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<PAGE> 91
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT.......... Growth of capital and, secondarily,
income from investment in a
diversified portfolio of equity
securities placing principal
emphasis on those securities which
management of the fund believes to
be undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet
investor suitability standards).... Capital appreciation through
worldwide investment in equity
securities of companies that derive
or are expected to derive a
substantial portion of their sales
from products and services in
healthcare.
MERRILL LYNCH 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.
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<PAGE> 92
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.
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.
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<PAGE> 93
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.
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.
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<PAGE> 94
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.
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 QUALITY BOND PORTFOLIO
(available only for exchanges by
certain individual retirement
accounts for which Merrill Lynch
acts as custodian) ................ A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series
fund, whose objective is to provide
a high level of current income
through investment in a diversified
portfolio of debt obligations, such
as corporate bonds and notes,
convertible securities, preferred
stocks and governmental obligations.
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<PAGE> 95
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,
INC. ................................ Capital appreciation through
worldwide investment in equity
securities of companies that derive
or are expected to derive a
substantial portion of their sales
from products and services in
technology.
MERRILL LYNCH TEXAS MUNICIPAL
BOND FUND.......................... A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is 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 U.S. GOVERNMENT
SECURITIES PORTFOLIO (available only
for exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian) ........................ A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series
fund, whose objective is to provide
a high current return through
investments in U.S. Government and
government agency securities,
including GNMA mortgage-backed
certificates and other
mortgage-backed government
securities.
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<PAGE> 96
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 TRUST..... Preservation of capital, liquidity
and the highest possible current
income consistent with the foregoing
objectives from the short-term money
market securities in which the Trust
invests.
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (available only for
exchanges within certain retirement
plans)............................. Currently the only portfolio of
Merrill Lynch Retirement Series
Trust, a series fund, whose
objectives are current income,
preservation of capital and
liquidity available from investing
in a diversified portfolio of
short-term money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES........................... Preservation of capital, current
income and liquidity available from
investing in direct obligations of
the U.S. Government and repurchase
agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND......................... Preservation of capital, liquidity
and current income through
investment exclusively in a
diversified portfolio of short-term
marketable securities which are
direct obligations of the U.S.
Treasury.
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<PAGE> 97
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.
43
<PAGE> 98
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. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one
44
<PAGE> 99
of such months, then such dividend will be treated for tax purposes as being
paid by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim U.S. foreign tax credits with respect to such taxes,
subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to include their proportionate shares of such withholding
taxes on their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the 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
45
<PAGE> 100
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 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. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest or currency exchange rates with respect
to its investments.
46
<PAGE> 101
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income 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.
------------------------------
47
<PAGE> 102
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.
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.
48
<PAGE> 103
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES*
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ------------------------------------------- ----------------- ------------------ ----------------- ------------------
<CAPTION>
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended June 30, 1995............... (6.83)% $ 931.70 -- --
Five Years Ended June 30, 1995............. 7.12% $ 1,410.40 -- --
Inception (September 1, 1989) to June 30,
1995..................................... 9.80% $ 1,724.80 -- --
Inception (July 1, 1994) to June 30,
1995..................................... -- -- (5.84)% $ 941.60
<CAPTION>
Annual Total Return
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended June 30, 1995................... (1.67)% $ 983.30 -- --
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 -- --
Inception (July 1, 1994) to June 30,
1995..................................... -- -- (2.22)% $ 977.80
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (September 1, 1989) to June 30,
1995..................................... 72.48% $ 1,724.80 -- --
Inception (July 1, 1994) to June 30,
1995..................................... -- -- (5.84)% $ 941.60
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES** CLASS D SHARES**
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ------------------------------------------- ----------------- ------------------ ----------------- ------------------
<CAPTION>
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to June 30,
1995..................................... (21.99)% $ 842.50 (26.28)% $ 810.20
<CAPTION>
Annual Total Return
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to June 30,
1995..................................... (14.97)% $ 850.30 (14.49)% $ 855.10
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to June 30,
1995..................................... (15.75)% $ 842.50 (18.98)% $ 810.20
</TABLE>
- ---------------
* Information as to Class B shares is presented only for the period July 1,
1994 to June 30, 1995. Prior to July 1, 1994, no Class B shares were publicly
issued.
** Information as to Class C and Class D shares is presented only for the period
October 21, 1994 to June 30, 1995. Prior to October 21, 1994, no Class C or
Class D shares were publicly issued.
49
<PAGE> 104
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares, applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
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. At the date
of this Statement of Additional Information, the Fund 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. Each share of Class A, Class B,
Class C and Class D Common Stock represents an interest in the same assets of
the Fund and is identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The 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
shareholders be held upon the written request of at least 10% of the outstanding
shares of the Fund entitled to vote at such meeting. Voting rights for Directors
are not cumulative. Shares issued are fully paid and non-assessable and have no
preemptive rights. Redemption and conversion rights are discussed elsewhere
herein and in the Prospectus. Each share is entitled to participate equally in
dividends and distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities. Stock certificates are issued by the transfer agent only on
specific request. Certificates for fractional shares are not issued in any case.
Shareholders may, in accordance with Maryland law, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Directors at
the request of 25% of the outstanding shares of the Fund. A Director may be
removed at a special meeting of shareholders by a vote of a majority of the
votes entitled to be cast for the election of Directors.
50
<PAGE> 105
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on June 30, 1995, and its shares outstanding on that date is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets....................................... $350,081,400 $162,773,938 $18,572,768 $21,899,049
============= ============= ============ ============
Number of Shares Outstanding..................... 26,225,174 12,297,981 1,404,635 1,642,796
============= ============= ============ ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding).................. $13.35 $13.24 $13.22 $13.33
Sales Charge (for Class A and Class D shares:
5.25% of offering price (5.54% of net asset
value per share))*............................. .74 ** ** .74
------------ ------------ ----------- -----------
Offering Price................................... $14.09 $13.24 $13.22 $14.07
============= ============= ============ ============
</TABLE>
- ------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C Shares are not subject to an initial sales charge but may
be subject to a CDSC upon redemption. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Class B and Class C Shares" in the Prospectus
and "Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent directors of the
Fund. The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
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
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund -- Transfer Agency Services"
in the Prospectus.
51
<PAGE> 106
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 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 October 1, 1995.
52
<PAGE> 107
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,
1995, 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
five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1995 by correspondence with the custodian and brokers or other alternative
procedures. 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, 1995, 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
August 3, 1995
53
<PAGE> 108
[This page is intentionally left blank.]
<PAGE> 109
Merrill Lynch Developing Capital
Markets Fund, Inc., June 30, 1995
<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> <S> <C> <S> <C> <C> <C>
Morocco Banking 150,000 Wafa Bank $ 5,810,251 $ 6,124,508 1.1%
Building & 161,154 Groupe Omnium Nord Africain 6,606,902 6,579,926 1.2
Construction
Building 8,000 Les Ciments de l'Oriental 272,020 317,033 0.1
Materials
Total Investments in Morocco 12,689,173 13,021,467 2.4
South Beverage 193,300 South African Breweries Ltd. 4,536,254 5,516,401 1.0
Africa 45,227 South African Breweries Ltd. (ADR) (b) 956,130 1,288,970 0.2
------------ ------------ ------
5,492,384 6,805,371 1.2
Beverages & 570,300 Rembrandt Group Ltd. 4,334,695 3,921,744 0.7
Tobacco
Mining 95,000 De Beers Consolidated Mines Ltd.
(ADR)(b) 2,201,328 2,458,125 0.4
Multi-Industry 289,400 The Morgan Stanley Africa Investment
Fund, Inc. 3,357,059 3,328,100 0.6
106,600 New South Africa Fund, Inc. 1,495,194 1,532,375 0.3
90,900 Southern Africa Fund, Inc. 1,331,240 1,283,963 0.2
------------ ------------ ------
6,183,493 6,144,438 1.1
Steel 2,413,340 South Africa Iron & Steel Industrial
Corporation, Ltd. 2,616,810 2,741,602 0.5
Transportation ZAL 87,100,000 Transnet Ltd., 15% due 10/01/1995 21,325,967 23,838,399 4.3
Total Investments in South Africa 42,154,677 45,909,679 8.2
Total Investments in Africa 54,843,850 58,931,146 10.6
</TABLE>
54
<PAGE> 110
<TABLE>
<CAPTION>
EUROPE
<S> <S> <C> <S> <C> <C> <C>
Czech Banking 13,500 Komercni Banka 2,034,490 679,180 0.1
Republic
Electrical 9,206 ++Podnik Vypocetni Techniky (PVT)
Equipment (Preferred) 1,903,926 819,420 0.1
Food 43,000 ++Ceska General Food A.S. 4,520,734 3,627,709 0.7
Paper 60,807 SEPAP A.S. 3,025,696 3,082,708 0.6
Total Investments in the Czech
Republic 11,484,846 8,209,017 1.5
Greece Banking 84,650 Ergo Bank (Registered) S.A. 3,038,469 3,895,978 0.7
Beverage 183,750 Hellenic Bottling Co. S.A. (Bearer) 2,892,532 5,458,244 1.0
Food 407,308 Delta Dairy S.A. (Ordinary) 8,341,550 8,476,527 1.5
45,287 Delta Dairy S.A. (Preferred) 1,170,377 870,981 0.2
------------ ------------ ------
9,511,927 9,347,508 1.7
Total Investments in Greece 15,442,928 18,701,730 3.4
Hungary Food 56,807 ++Pick Szeged Reszvenytarsasag
(GDS) (a) (e) 2,947,401 2,881,535 0.5
Insurance 230,000 Pharmauti Gyogyszer es
Elelmiszeripari Reszvenytarsasag
(ADR) (b)(e) 2,638,750 1,897,500 0.3
Pharmaceuticals 12,000 ++Gedeon Richter Ltd. 199,500 192,000 0.0
Retail Stores 1,142,000 ++FOTEX RT-Fotex Elso Amerikai-Magyar
Fotoszolgaltatasi Reszvenytarsasag 5,506,157 1,671,220 0.3
Telecommunications 26,510 Magyar TavKzlesi Reszvenytarsasag
(Ordinary) 5,403,627 4,204,514 0.8
Total Investments in Hungary 16,695,435 10,846,769 1.9
Poland Appliances & 89,000 ++Swarzedzkie Fabryki Mebli S.A. 2,102,193 817,560 0.1
Household
Durables
Automotive 70,000 ++T.C. Debica 993,561 986,969 0.2
Banking 243,029 Wielkopolski Bank Kredytowy 1,809,800 591,867 0.1
Beverage 1,275 ++Zaklady Piwowarskie w Zywcu S.A.
(Zywiec) 97,645 96,422 0.0
Electrical 150,000 Elektrim Towarzystwo Handlowe S.A. 1,916,544 528,733 0.1
Equipment
Engineering & 136,000 ++Mostostal--Export S.A. 354,819 342,833 0.1
Construction
Food 40,000 International Fast Food Corp. 267,500 42,500 0.0
Total Investments in Poland 7,542,062 3,406,884 0.6
</TABLE>
55
<PAGE> 111
<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> <S> <C> <S> <C> <C> <C>
Portugal Banking 352,212 Banco Comercial Portugues S.A.
(Registered) $ 4,850,549 $ 4,664,039 0.8%
77,000 Banco Totta E Acores S.A. 1,657,285 1,632,695 0.3
------------ ------------ ------
6,507,834 6,296,734 1.1
Building & 145,200 Efacec S.A. 2,601,521 1,728,099 0.3
Construction 320,400 Soares da Costa S.A. 5,230,896 5,691,373 1.0
107,200 Sociedade de Empreitadas Somague S.A. 755,699 696,580 0.1
------------ ------------ ------
8,588,116 8,116,052 1.4
Retail 125,200 Jeronimo Martins S.A. 2,895,368 6,379,891 1.2
354,350 Sonae Investimentos-SGPS S.A. 7,668,173 8,485,495 1.5
------------ ------------ ------
10,563,541 14,865,386 2.7
Telecommunications 51,500 ++Portugal Telecom S.A. (ADR) (b) 964,338 972,062 0.2
Total Investments in Portugal 26,623,829 30,250,234 5.4
Russia Multi-Industry 184,000 Templeton Russia Fund, Inc. 2,677,200 2,677,200 0.5
Total Investments in Russia 2,677,200 2,677,200 0.5
Turkey Automotive 1,400,000 Tofas Turk Otomobil Fabrikasi A.S. 1,266,868 1,235,853 0.2
Beverage 1,708,160 ++Ege Biracilik Ve Malt Sanayii A.S. 472,057 2,010,510 0.4
Building 2,583,000 Alarko Holdings A.S. 2,017,717 2,280,149 0.4
Materials
Food 750,000 ++Kerevitas Gida Sanayii Ve
Ticaret A.S. 546,032 2,037,121 0.4
Industrial 2,078,332 ++Turk Siemens Kablo Ve Elektrik
Components Sanayii A.S. 392,822 635,072 0.1
Insurance 8,911,000 Aksigorta A.S. 2,227,750 1,734,599 0.3
Retail 5,401,500 Migros Turk A.S. 3,320,905 6,051,930 1.1
Total Investments in Turkey 10,244,151 15,985,234 2.9
Total Investments in Europe 90,710,451 90,077,068 16.2
LATIN
AMERICA
Argentina Automobiles 215,436 Compania Interamericana de
Automoviles S.A. (CINA) 3,264,299 1,045,074 0.2
Foreign ARS 15,250,000 Republic of Argentina, 7.312%
Government due 3/31/2005 9,718,500 9,226,250 1.7
Obligation
Oil & 1,551,800 Astra Compania Argentina de
Related Petroleo S.A. 3,240,628 2,328,166 0.4
Real Estate 49,000 Inversiones y Representaciones
S.A. (GDR)(d) 1,270,753 1,139,250 0.2
Total Investments in Argentina 17,494,180 13,738,740 2.5
Brazil Automotive 159,300 CAPCO Automotive Products
Corporation S.A. 2,105,696 1,234,575 0.2
Banking 660,439,023 Banco Bradesco S.A. (Preferred) 4,497,996 5,593,294 1.0
11,926,207 Banco Bradesco S.A. (Preferred)
(Receipts)** 88,923 101,004 0.0
</TABLE>
56
<PAGE> 112
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
42,567,626 Banco Nacional S.A. (Preferred) 892,993 827,319 0.1
------------ ------------ ------
5,479,912 6,521,617 1.1
Beverage 13,769,200 ++Companhia Cervejaria Brahma
S.A. PN (Preferred) 3,785,725 4,514,832 0.8
97,313 ++Companhia Cervejaria Brahma
S.A. PN (Preferred) (Pro Rata) 22,355 31,908 0.0
574,872 ++Companhia Cervejaria Brahma S.A.
(Preferred) (Warrants) (c) 14,956 74,902 0.0
------------ ------------ ------
3,823,036 4,621,642 0.8
Electrical 17,753,900 Light--Servicios de Eletricidade S.A. 6,393,851 5,590,262 1.0
Equipment
Food 11,020,000 La Bombril S.A. PN (Preferred) 255,679 229,733 0.0
Mining 31,057,000 Companhia Vale do Rio Doce S.A. PN
(Preferred) 5,239,937 4,687,213 0.8
Oil & Related 46,963,333 Petroleo Brasileiro S.A. (Preferred) 6,380,127 3,977,351 0.7
Paper & Forest 2,500,000 ++MelPaper S.A. (Preferred) 1,631,371 542,888 0.1
Producers
Retail 1,500,000 ++Mesbla S.A. (Preferred) 350,350 89,577 0.0
Steel 4,756,900,000 Usinas Siderurgicas de Minas Gerais--
Usiminas S.A. (Preferred) 3,918,468 5,371,525 1.0
Telecommunications 198,500 Telecomunicacoes Brasileiras S.A.--
Telebras (ADR) (b) (e) 8,023,799 6,500,875 1.2
53,142,632 Telecomunicacoes Brasileiras S.A.--
Telebras ON 1,682,509 1,505,996 0.3
1,288,771 Telecomunicacoes Brasileiras S.A.--
Telebras ON (Pro Rata) 90,344 36,522 0.0
144,564,938 Telecomunicacoes Brasileiras S.A.--
Telebras PN (Preferred) 6,320,115 4,756,045 0.9
5,546,475 Telecomunicacoes Brasileiras S.A.--
Telebras PN (Preferred) (Pro Rata) 388,513 182,474 0.0
------------ ------------ ------
16,505,280 12,981,912 2.4
Utilities 4,242,400 Centrais Eletricas Brasileiras S.A.--
Eletrobras (Preferred) 1,180,141 1,128,543 0.2
126,740 Companhia Energetica de Minas
Gerais S.A. (CEMIG) (ADR) (b) (e) 3,205,227 2,408,060 0.4
------------ ------------ ------
4,385,368 3,536,603 0.6
Total Investments in Brazil 56,469,075 49,384,898 8.7
Chile Apparel 6,800,201 Bata Chile S.A. 1,920,913 1,276,177 0.2
Broadcasting & 5,072,871 Editorial Lord Cochrane S.A. 2,830,178 2,135,230 0.4
Publishing
Telecommunications 28,000 Compania de Telefonos de Chile S.A.
(ADR) (b) 3,037,806 2,278,500 0.4
Total Investments in Chile 7,788,897 5,689,907 1.0
Ecuador Building 4,825 La Cemento Nacional C.A. 1,449,510 1,109,750 0.2
Materials
Total Investments in Ecuador 1,449,510 1,109,750 0.2
</TABLE>
57
<PAGE> 113
<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> <S> <C> <S> <C> <C> <C>
Mexico Beverage 809,000 Fomento Economico Mexicano, S.A.
de C.V. (Femsa) 'B' $ 1,884,922 $ 1,888,313 0.3%
180,000 Fomento Economico Mexicano, S.A.
de C.V. (Femsa) (ADR) (b) 403,200 414,000 0.1
------------ ------------ ------
2,288,122 2,302,313 0.4
Building 1,078,000 ++Apasco, S.A. de C.V. 3,827,100 4,274,085 0.8
Materials 167,000 Cementos Mexicanos, S.A. de C.V.
(Class B) (ADR) (b) 1,509,987 603,389 0.1
------------ ------------ ------
5,337,087 4,877,474 0.9
Financial 155,250 ++Banca Quadrum, S.A. de C.V. (ADR)
Services (b)(e) 2,012,895 1,009,125 0.2
Food 1,600,000 ++Grupo Herdez, S.A. de C.V. 'A' 1,450,009 473,221 0.1
Health & 590,800 Kimberly-Clark de Mexico, S.A. de C.V. 7,174,776 6,781,685 1.2
Personal Care
Leisure 1,410,650 ++Grupo Carso, S.A. de C.V. 'A' 10,196,917 7,712,906 1.4
348,000 ++Grupo Carso, S.A. de C.V. (ADR) (b) 4,682,938 3,784,500 0.7
------------ ------------ ------
14,879,855 11,497,406 2.1
Retail 2,375,000 Cifra, S.A. de C.V. 'C' 4,796,743 3,128,697 0.6
287,800 ++Grupo Empresarial Fenix, S.A.
de C.V. (ELEKTRA) 'L' Shares 2,404,684 919,304 0.2
------------ ------------ ------
7,201,427 4,048,001 0.8
Telecommunications 266,550 Telefonos de Mexico, S.A. de C.V.
(ADR)(b) 14,534,412 7,896,544 1.4
Total Investments in Mexico 54,878,583 38,885,769 7.1
Panama Beverage 105,750 Panamerican Beverages, Inc. (Class A) 3,034,784 3,172,500 0.6
Total Investments in Panama 3,034,784 3,172,500 0.6
Peru Banking 180,420 ++Banco de Credito de Peru S.A. 94,494 315,250 0.1
51,548 Banco Wiese Limitado S.A. (ADR) (b) 493,750 425,271 0.1
------------ ------------ ------
588,244 740,521 0.2
Mining 513,330 ++Southern Peru Copper Corp. S.A. 2,086,477 2,322,864 0.4
110,419 ++Southern Peru Copper Corp. S.A.
'T' Shares 350,031 374,742 0.1
------------ ------------ ------
2,436,508 2,697,606 0.5
Total Investments in Peru 3,024,752 3,438,127 0.7
Venezuela Textiles 520,860 Mantex S.A.C.A. 74,978 76,331 0.0
Utilities 3,040,560 C.A. La Electricidad de Caracas
S.A.I.C.A.--S.A.C.A. 4,407,191 3,180,063 0.6
Total Investments in Venezuela 4,482,169 3,256,394 0.6
Total Investments in Latin America 148,621,950 118,676,085 21.4
MIDDLE
EAST
Israel Banking 202,800 ++Bank Hapoalim Ltd. 316,966 319,208 0.1
</TABLE>
58
<PAGE> 114
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Engineering & 5,900 ++Koor Industries Ltd. 501,711 503,338 0.1
Construction
Total Investments in Israel 818,677 822,546 0.2
Pakistan Electrical 1,299,490 ++Karachi Electric Supply Corp. Ltd. 1,121,386 1,122,094 0.2
Equipment
Total Investments in Pakistan 1,121,386 1,122,094 0.2
Total Investments in the Middle East 1,940,063 1,944,640 0.4
PACIFIC
BASIN/ASIA
Australia Merchandising 303,850 Amway Asia Pacific Ltd. 8,779,737 11,014,563 2.0
Total Investments in Australia 8,779,737 11,014,563 2.0
China Appliances & 8,935,500 Shenzhen China Bicycles Co.
Household (Holdings) Ltd. 'B' 4,685,279 2,887,151 0.5
Durables
Total Investments in China 4,685,279 2,887,151 0.5
Hong Kong Automotive 7,320,000 Sime Darby (Hong Kong) Ltd. 9,705,114 8,041,565 1.5
Financial 20,747,000 Winton Holdings Ltd. 6,398,529 5,041,082 0.9
Services
Food 21,439,000 C.P. Pokphand Co. Ltd. (Ordinary) 5,782,063 7,550,602 1.4
Total Investments in Hong Kong 21,885,706 20,633,249 3.8
India Broadcasting & 888,600 Videocon International Ltd. (GDR) (d) 7,773,607 3,154,530 0.6
Publishing
Building & 31,250 The Associated Cement Co. Ltd. 2,499,847 3,463,927 0.6
Construction
Chemicals 355,500 Mardia Chemical Ltd. 1,545,509 1,143,669 0.2
Energy 661,000 Bombay Suburban Electric Supply Co.
Ltd. 3,601,257 2,947,603 0.5
333,000 ++Cochin Refinery Ltd. 2,604,742 1,951,648 0.4
------------ ------------ ------
6,205,999 4,899,251 0.9
Finance 24,120 ++Housing Development Finance Corp. 1,835,541 1,832,336 0.3
Financial 2,086,000 ++Industrial Credit & Investment
Services Corporation of India, Ltd. 8,060,896 6,378,595 1.2
Recreation & 565,000 Suraj Diamonds Ltd. 1,552,990 1,484,711 0.3
Consumer
Goods
Textiles 55,000 Grasim Industries Ltd. 1,084,096 1,058,130 0.2
600,000 ++JCT Ltd. 1,064,009 1,022,456 0.2
103,900 ++Raymond Woolen Mills Ltd. 758,836 794,267 0.1
120,000 Reliance Industries Ltd. 1,076,886 1,009,078 0.2
------------ ------------ ------
3,983,827 3,883,931 0.7
Utilities 1,001,250 ++Kec International Ltd. 5,050,805 4,241,639 0.8
Total Investments in India 38,509,021 30,482,589 5.6
</TABLE>
59
<PAGE> 115
<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> <S> <C> <S> <C> <C> <C>
Indonesia Banking 2,790,500 P.T. Bank Bali $ 7,645,923 $ 7,082,805 1.3%
Broadcasting & $ 4,245,000 P.T. Surya Citra Television,
Publishing 4% due 7/01/1997 (Convertible) 4,258,125 4,202,550 0.8
Consumer--Goods 17,000 P.T. Wicaksana Overseas International 48,350 42,958 0.0
Energy Equipment & 5,197,000 P.T. Kabelmetal Indonesia 8,139,759 8,755,054 1.6
Services 1,379,200 P.T. Supreme Cable Manufacturing
Corp. (Sucaco) 3,991,337 4,058,293 0.7
------------ ------------ ------
12,131,096 12,813,347 2.3
Telecommunications 147,420 P.T. Indonesian Satellite Corp.
(ADR) (b) 5,600,335 5,638,815 1.0
Total Investments in Indonesia 29,683,829 29,780,475 5.4
Malaysia Broadcasting 1,792,000 Sistem Televisyen Malaysia BHD 5,245,284 4,778,667 0.9
Food 57,000 Nestle (Malaysia) BHD 374,558 437,292 0.1
Newspaper/ 1,256,000 New Straits Times Press BHD 5,118,753 3,890,379 0.7
Publishing
Steel 2,706,000 Maruichi (Malaysia) Steel Tube BHD 6,417,204 10,046,892 1.8
Total Investments in Malaysia 17,155,799 19,153,230 3.5
New Transportation 1,700,000 Ports of Auckland Ltd. 2,117,611 3,349,518 0.6
Zealand
Total Investments in New Zealand 2,117,611 3,349,518 0.6
Philippines Multi-Industry 583,550 ++Benpres Holdings Corp. (e) 4,969,875 4,814,288 0.9
Total Investments in the Philippines 4,969,875 4,814,288 0.9
South Automotive 65,106 ++Dong Ah Tire Industries 3,645,738 4,354,855 0.8
Korea
Food 29,390 Lotte Confectionery Corp. 3,401,600 3,953,812 0.7
Telecommunications 20,257 Korea Mobile Telecommunications Corp. 11,026,169 20,476,081 3.7
100,700 Korea Mobile Telecommunications
Corp. (GDR)(d) 3,337,550 3,524,500 0.6
------------ ------------ ------
14,363,719 24,000,581 4.3
Utilities 483,470 Korea Electric Power Corp. 17,725,759 18,652,683 3.4
Total Investments in South Korea 39,136,816 50,961,931 9.2
Sri Lanka Building & 262,500 Lankan Tiles 337,398 266,047 0.0
Construction
Diversified 90,625 Aitken Spence 518,247 345,787 0.1
Total Investments in Sri Lanka 855,645 611,834 0.1
Taiwan Merchandising 244,873 Hocheng Group Corp. (ADR)(b)(e) 6,742,165 2,877,258 0.5
Total Investments in Taiwan 6,742,165 2,877,258 0.5
Total Investments in Pacific Basin/
Asia 174,521,483 176,566,086 32.1
</TABLE>
60
<PAGE> 116
<TABLE>
<CAPTION>
SHORT-TERM Face
SECURITIES Amount
<S> <S> <C> <S> <C> <C> <C>
Commercial $ 20,000,000 AIG Funding, Inc., 5.92% due
Paper* 7/19/1995 19,940,800 19,940,800 3.6
15,000,000 ANZ (Delaware), Inc., 5.82% due
7/12/1995 14,973,325 14,973,325 2.7
10,000,000 Ciesco L.P., 5.94% due 7/12/1995 9,981,850 9,981,850 1.8
20,000,000 Daimler-Benz AG, 5.93% due 7/06/1995 19,983,528 19,983,528 3.6
8,835,000 General Electric Capital Corp.,
6.20% due 7/03/1995 8,831,957 8,831,957 1.6
20,000,000 Matterhorn Capital Corp., 5.93% due
7/12/1995 19,963,761 19,963,761 3.6
------------ ------------ ------
93,675,221 93,675,221 16.9
Commercial IDR 7,000,000,000 P.T. Bakrie & Brothers, 18.50% due
Paper*-- 7/25/1995 3,114,294 3,115,833 0.6
Foreign 3,000,000,000 P.T. Indah Kiat Pulp & Paper Corp.,
18% due 7/12/1995 1,340,170 1,344,348 0.2
------------ ------------ ------
4,454,464 4,460,181 0.8
Foreign MXN 27,510,490 Mexican Cetes (Certificados de la
Government Tesoreria de la Federacion),
Obligations* 43.50% due 8/24/1995 4,555,875 4,129,995 0.7
Total Investments in Short-Term
Securities 102,685,560 102,265,397 18.4
Total Investments $573,323,357 548,460,422 99.1
============
Other Assets Less Liabilities 4,866,733 0.9
------------ ------
Net Assets $553,327,155 100.0%
============ ======
<FN>
*Commercial Paper and certain Foreign Government Obligations are
traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
**The receipts may be exchanged for shares until 9/11/1995.
++Non-income producing security.
(a)Global Depositary Shares (GDS).
(b)American Depositary Receipts (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)Global Depositary Receipts (GDR).
(e)Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $22,389,000,
representing 4.05% of net assets.
<CAPTION>
Aquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Banca Quadrum, S.A. de C.V. (ADR) 7/28/1993 $ 2,012,895 $ 1,009,125
Benpres Holdings Corp. 10/25/1994 4,969,875 4,814,288
Companhia Energetica de Minas Gerias S.A.
(CEMIG) (ADR) 9/22/1994 3,205,227 2,408,060
Hocheng Group Corp. (ADR) 8/09/1994 6,742,165 2,877,258
Pharmauti Gyogyszer es Elelmiszeripari
Reszvenytarsasag (ADR) 6/15/1994 2,638,750 1,897,500
Pick Szeged Reszvenytarsasag (GDS) 11/20/1992 2,947,401 2,881,535
to 8/11/1994
Telecomunicacoes Brasileiras S.A.--Telebras 12/28/1993
(ADR) to 6/02/1995 8,023,799 6,500,875
Total Restricted Securities $30,540,112 $22,388,641
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
61
<PAGE> 117
<TABLE>
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$573,323,357) (Note 1a) $548,460,422
Foreign cash (Note lc) 8,815,460
Receivables:
Securities sold $ 6,643,071
Interest 1,502,527
Capital shares sold 1,459,781
Dividends 935,030 10,540,409
------------
Prepaid registration fees and other assets (Note 1f) 109,114
------------
Total assets 567,925,405
------------
Liabilities: Payables:
Securities purchased 10,080,006
Capital shares redeemed 734,244
Investment adviser (Note 2) 451,862
Distributor (Note 2) 148,861 11,414,973
------------
Accrued expenses and other liabilities 3,183,277
------------
Total liabilities 14,598,250
------------
Net Assets: Net assets $553,327,155
============
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000
Consist of: shares authorized $ 2,622,517
Class B Shares of Common Stock, $.10 par value, 100,000,000
shares authorized 1,229,798
Class C Shares of Common Stock, $.10 par value, 100,000,000
shares authorized 140,464
Class D Shares of Common Stock, $.10 par value, 100,000,000
shares authorized 164,280
Paid-in capital in excess of par 583,870,233
Undistributed investment income--net 3,689,081
Accumulated distributions in excess of realized capital losses
on investments and foreign currency transactions--net (13,589,754)
Unrealized depreciation on investments and foreign currency
transactions--net (24,799,464)
------------
Net assets $553,327,155
============
Net Asset Class A--Based on net assets of $350,081,400 and 26,225,174
Value: shares outstanding $ 13.35
============
Class B--Based on net assets of $162,773,938 and 12,297,981
shares outstanding $ 13.24
============
Class C--Based on net assets of $18,572,768 and 1,404,635
shares outstanding $ 13.22
============
Class D--Based on net assets of $21,899,049 and 1,642,796
shares outstanding $ 13.33
============
See Notes to Consolidated Financial Statements.
</TABLE>
62
<PAGE> 118
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended June 30, 1995
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 9,190,848
(Notes 1d & 1e): Dividends (net of $911,836 foreign withholding tax) 8,249,878
------------
Total income 17,440,726
------------
Expenses: Investment advisory fees (Note 2) $ 5,240,621
Custodian fees 1,282,912
Account maintenance and distribution fees--Class B (Note 2) 1,022,078
Transfer agent fees--Class A (Note 2) 729,814
Registration fees (Note 1f) 287,760
Printing and shareholder reports 281,409
Transfer agent fees--Class B (Note 2) 269,846
Accounting services (Note 2) 138,938
Professional fees 137,115
Account maintenance and distribution fees--Class C (Note 2) 77,256
Directors' fees and expenses 40,132
Transfer agent fees--Class C (Note 2) 24,453
Transfer agent fees--Class D (Note 2) 23,380
Account maintenance fees--Class D (Note 2) 21,425
Pricing fees 9,452
Amortization of organization expenses (Note 1f) 4,362
Other 229,672
------------
Total expenses 9,820,625
------------
Investment income--net 7,620,101
------------
Realized & Realized loss from:
Unrealized Gain Investments--net (6,474,042)
(Loss) on Foreign currency transactions--net (2,123,405) (8,597,447)
Investments & ------------
Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net (27,587,323)
Transactions Foreign currency transactions--net 139,041 (27,448,282)
- --Net (Notes ------------ ------------
1b, 1c, 1e & 3): Net realized and unrealized loss on investments and foreign
currency transactions (36,045,729)
------------
Net Decrease in Net Assets Resulting from Operations $(28,425,628)
============
See Notes to Consolidated Financial Statements.
</TABLE>
63
<PAGE> 119
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended June 30,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 7,620,101 $ 1,688,321
Realized gain (loss) on investments and foreign currency
transactions--net (8,597,447) 36,390,093
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net (27,448,282) (12,637,885)
------------ ------------
Net increase (decrease) in net assets resulting from operations (28,425,628) 25,440,529
------------ ------------
Dividends & Investment income--net: Class A (987,487) (902,496)
Distributions to Class C (5,936) --
Shareholders Class D (15,439) --
(Note 1g):
Realized gain on investments--net: Class A (16,617,087) (4,808,440)
Class B (4,736,505) --
Class C (268,632) --
Class D (301,893) --
In excess of realized gain on investments--net: Class A (12,942,881) --
Class B (3,689,216) --
Class C (209,235) --
Class D (235,141) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (40,009,452) (5,710,936)
------------ ------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 219,766,488 239,981,410
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 151,331,408 259,711,003
Beginning of year 401,995,747 142,284,744
------------ ------------
End of year* $553,327,155 $401,995,747
============ ============
<FN>
*Undistributed investment income--net (Note 1i) $ 3,689,081 $ 564,507
============ ============
</TABLE>
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have
been derived from information provided in the Class A
financial statements.
For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1995 1994 1993++ 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 14.61 $ 11.62 $ 11.92 $ 10.43 $ 11.58
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .24 .11 .12 .15 .24
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (.40) 3.23 .42 1.59 (.75)
-------- -------- -------- -------- --------
Total from investment operations (.16) 3.34 .54 1.74 (.51)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.04) (.07) (.14) (.17) (.15)
</TABLE>
64
<PAGE> 120
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Realized gain on investments--net (.60) (.28) (.70) (.08) (.49)
In excess of realized gain on
investments--net (.46) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (1.10) (.35) (.84) (.25) (.64)
-------- -------- -------- -------- --------
Net asset value, end of year $ 13.35 $ 14.61 $ 11.62 $ 11.92 $ 10.43
======== ======== ======== ======== ========
Total Investment Based on net asset value per share (1.67%) 28.73% 5.17% 17.02% (4.45%)
Return:** ======== ======== ======== ======== ========
Ratios to Expenses 1.62% 1.46% 1.71% 1.64% 1.77%
Average ======== ======== ======== ======== ========
Net Assets: Investment income (loss)--net 1.56% .63% (.04%) 1.73% 1.98%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $350,081 $401,996 $142,285 $126,417 $111,947
Data: ======== ======== ======== ======== ========
Portfolio turnover 63.37% 66.85% 91.72% 71.05% 84.74%
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have For the Period
been derived from information provided in the July 1, 1994++++ For the Period
financial statements. to June 30, October 21, 1994++++
1995 to June 30, 1995
Increase (Decrease) in Net Asset Value: Class B Class C Class D
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.54 $ 16.71 $ 16.77
Operating -------- -------- --------
Performance: Investment income--net .08 .08 .13
Realized and unrealized loss on investments and foreign
currency transactions--net (.32) (2.50) (2.48)
-------- -------- --------
Total from investment operations (.24) (2.42) (2.35)
-------- -------- --------
Less dividends and distributions:
Investment income--net -- (.01) (.03)
Realized gain on investments--net (.60) (.60) (.60)
In excess of realized gain on investments--net (.46) (.46) (.46)
-------- -------- --------
Total dividends and distributions (1.06) (1.07) (1.09)
-------- -------- --------
Net asset value, end of period $ 13.24 $ 13.22 $ 13.33
======== ======== ========
Total Investment Based on net asset value per share (2.22%)+++ (14.97%)+++ (14.49%)+++
Return:** ======== ======== ========
Ratios to Expenses, excluding account maintenance and
Average distribution fees 1.79%* 1.96%* 1.94%*
Net Assets: ======== ======== ========
Expenses 2.79%* 2.96%* 2.19%*
======== ======== ========
Investment income--net 1.01%* 1.32%* 2.10%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $162,774 $ 18,573 $ 21,899
Data: ======== ======== ========
Portfolio turnover 63.37% 63.37% 63.37%
======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the period.
++++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Consolidated Financial Statements.
</TABLE>
65
<PAGE> 121
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-
diversified, open-end management investment company. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is
a summary of significant accounting policies followed by the Fund:
(a) Valuation of securities--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. 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 which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities
are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counter party does not perform under the
contract.
* Forward foreign exchange contracts--The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium
or discount is amortized over the life of the contracts.
* Foreign currency options and futures--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 delivered, or committed or anticipated
to be purchased by the Fund.
* Options--The Fund is authorized to 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 purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
66
<PAGE> 122
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is re-
quired. Under the applicable foreign tax law, a withholding tax may
be imposed on interest, dividends and capital gains at various
rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date, except that if the ex-dividend date has passed
certain dividends from foreign securities are recorded as soon as
the Fund is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) 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.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates. Distributions in
excess of realized capital gains are due primarily to differing tax
treatments for futures transactions and post-October losses.
(h) Basis of consolidation--The accompanying consolidated financial
statements include the accounts of Inversiones en Marcado Accionario
de Valores Chile Limitada., a wholly-owned subsidiary, which
primarily invests in Chilean securities. Intercompany accounts and
transactions have been eliminated.
(i) Reclassification--Generally accepted accounting principles
require that certain differences between undistributed net investment
income for financial reporting purposes, if permanent, be reclassified
to accumulated net realized capital losses. Accordingly, current
year's permanent book/tax differences of $3,486,719 have been re-
classified from undistributed net investment income to accumulated
net realized capital losses. These reclassifications have no effect
on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 1.0%, on an annual basis,
of the average daily value of the Fund's net assets. The Investment
Advisory Agreement obligates MLAM to reimburse the Fund to the
extent the Fund's expenses (excluding interest, taxes, distribution
fees, brokerage fees and commissions, and extraordinary items)
exceed 2.5% of the Fund's first $30 million of average daily net
assets, 2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
MLAM's obligation to reimburse the Fund is limited to the amount of
the management fee. No fee payment will be made to MLAM during any
fiscal year which will cause such expenses to exceed the expense
limitations at the time of such payment.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C shareholders.
67
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
For the year ended June 30, 1995, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $72,570 $1,060,335
Class D $23,946 $ 366,818
</TABLE>
For the year ended June 30, 1995, MLPF&S received contingent
deferred sales charges of $203,346 and $3,082 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $74,420 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
June 30, 1995.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLFDS, MLFD, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 1995 were $378,627,716 and $285,332,357,
respectively.
Net realized and unrealized losses as of June 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Unrealized
Realized Gains
Losses (Losses)
<S> <C> <C>
Long-term investments $ (6,418,947) $(24,442,772)
Short-term investments (55,095) (420,163)
Foreign currency transactions (2,123,405) 63,471
------------ ------------
Total $ (8,597,447) $(24,799,464)
============ ============
</TABLE>
As of June 30, 1995, net unrealized depreciation for Federal income
tax purposes aggregated $24,862,935, of which $46,178,452 related to
appreciated securities and $71,041,387 related to depreciated
securities. The aggregate cost of investments at June 30, 1995 for
Federal income tax purposes was $573,323,357.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $219,766,488 and $239,981,410 for the years ended June 30, 1995
and June 30, 1994, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended June 30, 1995 Shares Amount
<S> <C> <C>
Shares sold 5,308,700 $ 81,203,014
Shares issued to shareholders
in reinvestment of dividends &
distributions 1,836,555 26,556,587
------------ ------------
Total issued. 7,145,255 107,759,601
Shares redeemed (8,433,943) (120,621,522)
------------ ------------
Net decrease (1,288,688) $(12,861,921)
============ ============
</TABLE>
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended June 30, 1994 Shares Amount
<S> <C> <C>
Shares sold 20,121,319 $316,594,559
Shares issued to shareholders
in reinvestment of dividends &
distributions 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
============ ============
</TABLE>
68
<PAGE> 124
<TABLE>
<CAPTION>
Class B Shares for the Period Dollar
July 1, 1994++ to June 30, 1995 Shares Amount
<S> <C> <C>
Shares sold 14,365,857 $217,255,334
Shares issued to shareholders
in reinvestment of distributions 530,932 7,656,040
------------ ------------
Total issued. 14,896,789 224,911,374
Shares redeemed (2,458,974) (33,445,698)
Automatic conversion of shares (139,834) (2,000,726)
------------ ------------
Net increase 12,297,981 $189,464,950
============ ============
<FN>
++Commencement of Operations.
</TABLE>
<TABLE>
<CAPTION>
Class C Shares for the Period Dollar
October 21, 1994++ to June 30, 1995 Shares Amount
<S> <C> <C>
Shares sold 1,551,655 $ 21,809,222
Shares issued to shareholders
in reinvestment of dividends &
distributions 31,002 446,738
------------ ------------
Total issued. 1,582,657 22,255,960
Shares redeemed (178,022) (2,376,474)
------------ ------------
Net increase 1,404,635 $ 19,879,486
============ ============
<FN>
++Commencement of Operations.
</TABLE>
<TABLE>
<CAPTION>
Class D Shares for the Period Dollar
October 21, 1994++ to June 30, 1995 Shares Amount
<S> <C> <C>
Shares sold 2,389,119 $ 33,003,605
Automatic conversion of shares 139,223 2,000,726
Shares issued to shareholders
in reinvestment of dividends &
distributions 36,193 523,355
------------ ------------
Total issued. 2,564,535 35,527,686
Shares redeemed (921,739) (12,243,713)
------------ ------------
Net increase 1,642,796 $ 23,283,973
============ ============
<FN>
++Commencement of Operations.
</TABLE>
5. Commitments:
At June 30, 1995, the Fund entered into foreign exchange contracts
under which it had agreed to purchase and sell various foreign
currencies with approximate values of $3,288,000 and $959,000,
respectively.
69
<PAGE> 125
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......... 2
Portfolio Strategies Involving Options
and Futures........................... 2
Other Investment Policies and
Practices............................. 7
Investment Restrictions................. 10
Management of the Fund.................... 13
Directors and Officers.................. 13
Management and Advisory
Arrangements.......................... 15
Purchase of Shares........................ 17
Initial Sales Charge Alternatives -
Class A and Class D Shares............ 17
Reduced Initial Sales Charges........... 19
Distribution Plans...................... 21
Limitations on the Payment of Deferred
Sales Charges......................... 22
Redemption of Shares...................... 23
Deferred Sales Charges - Class B and
Class C Shares........................ 24
Portfolio Transactions and Brokerage...... 25
Determination of Net Asset Value.......... 26
Shareholder Services...................... 27
Investment Account...................... 27
Automatic Investment Plans.............. 28
Automatic Reinvestment of Dividends and
Capital Gains Distributions........... 28
Systematic Withdrawal Plans - Class A
and Class D Shares.................... 29
Exchange Privilege...................... 30
Dividends, Distributions and Taxes........ 44
Dividends and Distributions............. 44
Taxes................................... 44
Performance Data.......................... 48
General Information....................... 50
Description of Shares................... 50
Computation of Offering Price Per
Share................................. 51
Independent Auditors.................... 51
Custodian............................... 51
Transfer Agent.......................... 51
Legal Counsel........................... 52
Reports to Shareholders................. 52
Additional Information.................. 52
Security Ownership of Certain
Beneficial Owners..................... 52
Independent Auditors' Report.............. 53
Financial Statements...................... 54
</TABLE>
Code#10894-1095
(MERRILL LYNCH LOGO)
MERRILL LYNCH
DEVELOPING CAPITAL
MARKETS FUND, INC.
[ARTWORK]
STATEMENT OF
ADDITIONAL
INFORMATION
October 25, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 126
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 Addition Information
bull.
<PAGE> 127
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Consolidated Financial Highlights for each of the years in the five year
period ended June 30, 1995, 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, 1995.
Consolidated Statement of Assets and Liabilities as of June 30, 1995.
Consolidated Statement of Operations for the fiscal year ended June 30,
1995.
Consolidated Statements of Changes in Net Assets for each of the fiscal
years in the two year period ended June 30, 1995.
Consolidated Financial Highlights for each of the years in the five year
period ended June 30, 1995.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S>
1(a) -- Articles of Incorporation of the Registrant, dated April 13, 1989.(d)
(b) -- Articles of Amendment to Articles of Incorporation of the Registrant, dated May
17, 1989.(d)
(c) -- Articles of Amendment to Articles of Incorporation of the Registrant, dated June
16, 1989.(d)
(d) -- Form of Articles Supplementary to Articles of Incorporation of the Registrant,
dated June 29, 1994.(d)
(e) -- Articles of Amendment to Articles of Incorporation of the Registrant, dated
October 17, 1994.
(f) -- Articles Supplementary to Articles of Incorporation of the Registrant, dated
October 17, 1994.
2 -- By-Laws of the Registrant.(a)
3 -- None.
4 -- Portions of the Articles of Incorporation and the By-Laws of the Registrant
defining the rights of holders of shares of the Registrant.(b)
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.(d)
6(a) -- Form of Class A Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.(e)
(b) -- Class B Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(d)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc.
with respect to the Merrill Lynch Mutual Fund Adviser program.(c)
(d) -- Form of Class C Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.(e)
(e) -- Form of Class D Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.(e)
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 Merrill Lynch Financial Data Services,
Inc.(a)
(b) -- Form of Agreement relating to use of name between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.(a)
10 -- None.
</TABLE>
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<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S>
</TABLE>
<TABLE>
<C> <S>
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.(d)
(b) -- Form of Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of the Registrant.(e)
(c) -- Form of Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of the Registrant.(e)
16(a) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A Shares.(a)
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B Shares.
(c) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class C Shares.
(d) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class D Shares.
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
18 -- None.
</TABLE>
- ------------------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
(EDGAR) phase-in requirements.
(b) Reference is made to Article V, Article VI, Article VII, Article VIII and
Article X of the Registrant's Articles of Incorporation, as amended and
supplemented, filed as Exhibits 1(a), 1(b), 1(c), 1(d), 1(e) and 1(f) 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 filed as Exhibit (2) to the Registration Statement.
(c) Filed on October 28, 1993 as an Exhibit to Post-Effective Amendment No. 6 to
Registrant's Registration Statement under the Securities Act of 1933, on
Form N-1A.
(d) Filed on May 13, 1994 as an Exhibit to Post-Effective Amendment No. 7 to
Registrant's Registration Statement under the Securities Act of 1933, on
Form N-1A.
(e) Filed on October 17, 1994 as an Exhibit to Post-Effective Amendment No. 8 to
Registrant's Registration Statement under the Securities Act of 1933, on
Form N-1A.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person. The Registrant owns all of the stock of Merrill Lynch DCM, Inc., a
Delaware corporation formed specifically to facilitate investment in accordance
with the applicable investment restrictions of a particular foreign country.
Such subsidiary is included in the Registrant's consolidated financial
statements.
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<PAGE> 129
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1995
-------------------------------------------------------- ------------------
<S> <C>
Class A Common Stock, par value $0.10 per share......... 34,774
Class B Common Stock, par value $0.10 per share......... 29,792
Class C Common Stock, par value $0.10 per share......... 4,271
Class D Common Stock, par value $0.10 per share......... 3,115
</TABLE>
- ---------------
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Each officer and director of the Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
C-3
<PAGE> 130
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 INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment Adviser"),
acts as investment adviser for the following open-end investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Balanced Fund for Investment and Retirement, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc.; and for the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.,
and The Municipal Fund Accumulation Program, Inc.; and for the following
closed-end investment companies: Apex Municipal Fund, Inc., Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
MuniAssets Fund, 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 California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California
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<PAGE> 131
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Investment Adviser, FAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of Merrill Lynch Financial Data Services, Inc.
("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since July 1, 1993 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 paragraphs and Messrs.
Giordano, Harvey, Hewitt, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISOR PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------ ---------------------------- --------------------------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services...... General Partner General Partner of FAM
Arthur Zeikel........... President and Director President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.; Executive
Vice President of Merrill Lynch
Terry K. Glenn.......... Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
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
General Counsel and and Secretary of FAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
</TABLE>
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<PAGE> 132
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISOR PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------ ---------------------------- --------------------------------------
<S> <C> <C>
Ronald M. Kloss......... Senior Vice President and Senior Vice President and Controller
Controller of FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle,
Jr. .................. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Richard L. Reller....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President and Senior Vice President and Treasurer of
Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and the Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Program, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, Graczyk, and Wasel is One Financial Center, 15th
Floor, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
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 Assistant
Treasurer None
Mark A. DeSario.............. Vice President None
James T. Fatseas............. Vice President None
Stanley Graczyk.............. Vice President None
Michelle T. Lau.............. Vice President None
Debra W. Landsman-Yaros...... Vice President None
Gerald M. Richard............ Vice President and Treasurer Treasurer
Salvatore Venezia............ Vice President None
William Wasel................ Vice President None
Robert Harris................ Secretary Secretary
</TABLE>
(c) Not applicable.
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<PAGE> 133
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 its transfer agent, Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Fund -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant is not
a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish 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.
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<PAGE> 134
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 24th day of October 1995.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
(REGISTRANT)
By /s/ TERRY K. GLENN
------------------------------------
(TERRY K. GLENN, EXECUTIVE VICE
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)
- ----------------------------------- ------------------------------- -----------------
<C> <S> <C>
ARTHUR ZEIKEL* President and Director
- ----------------------------------- (Principal Executive Officer)
(ARTHUR ZEIKEL)
GERALD M. RICHARD* Treasurer (Principal Financial
- ----------------------------------- and Accounting Officer)
(GERALD M. RICHARD)
DONALD CECIL* Director
- -----------------------------------
(DONALD CECIL)
EDWARD H. MEYER* Director
- -----------------------------------
(EDWARD H. MEYER)
CHARLES C. REILLY* Director
- -----------------------------------
(CHARLES C. REILLY)
RICHARD R. WEST* Director
- -----------------------------------
(RICHARD R. WEST)
EDWARD D. ZINBARG* Director
- -----------------------------------
(EDWARD D. ZINBARG)
*By /s/ TERRY K. GLENN
- -----------------------------------
(TERRY K. GLENN, ATTORNEY-IN-FACT)
October 24, 1995
</TABLE>
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<PAGE> 135
POWER OF ATTORNEY
I, Edward D. Zinbarg, hereby authorize Arthur Zeikel, Terry K.
Glenn, Gerald M. Richard, Mark B. Goldfus, Robert Harris or Michael J.
Hennewinkel, or any of them, as attorney-in-fact, to sign on my behalf any
amendments to the Registration Statement for each of the following registered
investment companies and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission: Emerging Tigers Fund, Inc.; Merrill Lynch
Americas Income Fund, Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.;
Merrill Lynch Dragon Fund, Inc.; Merrill Lynch EuroFund; Merrill Lynch Global
Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for Investment and
Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch Global SmallCap
Fund, Inc.; Merrill Lynch Healthcare Fund, Inc.; Merrill Lynch International
Equity Fund; Merrill Lynch Latin America Fund, Inc.; Merrill Lynch Middle
East/Africa Fund, Inc.; Merrill Lynch Pacific Fund, Inc.; Merrill Lynch
Short-Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.; and
Worldwide DollarVest Fund, Inc.
Dated: February 21, 1995 /s/ Edward D. Zinbarg
----------------------------------
Edward D. Zinbarg
(Director of each above referenced
Maryland corporation and Trustee
of each above referenced
Massachusetts business trust)
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<PAGE> 136
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
SUPPLEMENT DATED OCTOBER 25, 1995
TO PROSPECTUS DATED OCTOBER 25, 1995
FOR USE IN OHIO
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to the 15% restriction on illiquid
securities, the State of Ohio does not recognize Rule 144A securities as
securities which are free of restrictions as to resale. Consequently, to the
extent required by Ohio law, the Fund will not invest more than 50% of its total
assets in securities of issuers which are restricted as to disposition,
including Rule 144A securities, or in securities having a record, together with
predecessors, of less than three years of continuous operation.
Investment in the Fund may involve a higher degree of risk than investment
in more traditional open-end diversified investment companies because although
the Fund may not purchase more than 10% of the voting securities of any one
issuer with regard to 50% of the Fund's assets, the remaining assets may be
invested without this restriction. See "Investment Objective and
Policies -- Other Investment Policies and Practices -- Non-Diversified Status".
This Prospectus, as supplemented, must be delivered to Ohio investors prior
to the consummation of the sale of the Fund shares.
Code #10893-1095OH
<PAGE> 137
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S> <C>
1(e) -- Articles of Amendment to Articles of Incorporation of the Registrant,
dated October 17, 1994.
(f) -- Articles Supplementary to Articles of Incorporation of the Registrant,
dated October 17, 1994.
2 -- By-Laws of the Registrant.(a)
5(a) -- Management Agreement between the Registrant and Merrill Lynch Asset
Management, Inc.(a)
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 Merrill Lynch Financial
Data Services, Inc.(a)
(b) -- Form of Agreement relating to use of name between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.(a)
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
13 -- Certificate of Merrill Lynch Asset Management, Inc.(a)
16(a) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A
Shares.(a)
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B
Shares.
(c) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class C
Shares.
(d) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class D
Shares.
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
18 -- None.
</TABLE>
- ---------------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
(EDGAR) phase-in requirements.
<PAGE> 1
EXHIBIT 99.1(e)
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC., a Maryland
corporation having its principal Maryland office c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202 (hereinafter called
the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended by adding the
following provision at the end of Article V:
(9) The Board of Directors may classify and reclassify any issued
shares of capital stock into one or more additional or other classes or
series as may be established from time to time by setting or changing in any
one or more respects the designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series; provided, however, that any
such classification or reclassification shall not substantially adversely
affect the rights of holders of such issued shares. The Board's authority
pursuant to this paragraph shall include, but not be limited to, the power to
vary among all the holders of a particular class or series (a) the length of
time shares must be held prior to reclassification to shares of another class
or series (the "Holding Period(s)"), (b) the manner in which the time for such
Holding Period(s) is determined and (c) the class or series into which the
particular class or series is being reclassified; provided, however, that,
subject to the first sentence of this section, with respect to holders of the
Corporation's shares issued on or after the date of the Corporation's first
effective prospectus which sets forth Holding Period(s) (the "First Holding
Period Prospectus"), the Holding Period(s), the manner in which the time for
such Holding Period(s) is determined and the class or series into which the
particular class or series is being reclassified shall be disclosed in the
Corporation's prospectus or statement of additional information in effect at
the time such shares, which are the subject of the reclassification, were
issued; and provided, further, that, subject to the first sentence of this
section, with respect to holders of the Corporation's Class B shares issued
prior to the date of the
<PAGE> 2
Corporation's First Holding Period Prospectus, the Holding Period shall be ten
(10) years for retirement plan (as recognized by the Internal Revenue Code of
1986, as amended from time to time) holders of issued Class B shares purchased
without a contingent deferred sales charge (a "CDSC-Waived Retirement Plan")
and shall be the Holding Period set forth in the Corporation's First Holding
Period Prospectus, for all other holders of issued Class B shares; Class B
shares held by a CDSC-Waived Retirement Plan shall be reclassified to Class D
shares in the month following the month in which the first Class B share of any
mutual fund advised by Merrill Lynch Asset Management, L.P., Fund Asset
Management, L.P., or their affiliates or successors, held by such CDSC-Waived
Retirement Plan has been held for the ten (10) year Holding Period established
by the Corporation's Board of Directors for such CDSC-Waived Retirement Plan
Class B shareholder; and the Class B shares of every shareholder other than
CDSC-Waived Retirement Plans shall be reclassified to Class D shares in the
month following the month in which such shares have been held for the Holding
Period established by the Corporation's Board of Directors for shareholders
other than CDSC-Waived Retirement Plans in the Corporation's First Holding
Period Prospectus.
SECOND: The foregoing Articles of Amendment have been effected in the
manner and by the vote required by the Corporation's charter and the laws of
the State of Maryland. Pursuant to Section 2-604 of the Maryland Corporations
and Associations Code, the amendment was advised by the Board of Directors of
the Corporation and approved by the stockholders.
THIRD: Except as amended hereby, the Corporation's charter shall
remain in full force and effect.
FOURTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.
FIFTH: These Articles of Amendment shall be effective at the very
beginning of the day on October 21, 1994.
The President acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of his knowledge,
information and belief, the matters set forth in these Articles of Amendment
with respect to the authorization and approval of the amendment of the
Corporation's charter are true in all material respects, and that this
statement is made under the penalties for perjury.
2
<PAGE> 3
IN WITNESS WHEREOF, MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND,
INC. has caused these Articles of Amendment to be signed in its name and on its
behalf by its President, a duly authorized officer of the Corporation, and
attested by its Secretary as of the 17th day of October, 1994.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC.
/s/ ARTHUR ZEIKEL
-----------------------------------------
Arthur Zeikel
President
Attest:
/s/ MARK B. GOLDFUS
- --------------------------
Mark B. Goldfus, Secretary
3
<PAGE> 1
EXHIBIT 99.1(f)
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION AND CREATING TWO ADDITIONAL CLASSES
OF COMMON STOCK
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC., a Maryland
corporation having its principal Maryland office c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202 (hereinafter called
the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940, as amended, with authority to issue TWO HUNDRED
MILLION (200,000,000) shares of capital stock. The Corporation has two classes
of capital stock consisting of ONE HUNDRED MILLION (100,000,000) shares of
Class A Common Stock and ONE HUNDRED MILLION (100,000,000) shares of Class B
Common Stock. All shares of all classes and series of the Corporation's
capital stock have a par value of Ten Cents ($.10) per share and an aggregate
par value of TWENTY MILLION Dollars ($20,000,000).
SECOND: The Board of Directors of the Corporation, acting in
accordance with Section 2-105(c) of the Maryland Corporations and Associations
Code, hereby increases the total number of authorized shares of Class B Common
Stock of the Corporation by TWO HUNDRED MILLION (200,000,000) shares.
THIRD: After this increase in the number of authorized shares of
capital stock of the Corporation, the Corporation will have authority to issue
FOUR HUNDRED MILLION (400,000,000) shares of capital stock and the capital
stock will consist of ONE HUNDRED MILLION (100,000,000) shares of Class A
Common Stock and THREE HUNDRED MILLION (300,000,000) shares of Class B Common
Stock.
FOURTH: After this increase in the number of authorized shares of
capital stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of FORTY MILLION Dollars ($40,000,000).
FIFTH: Pursuant to authority expressly vested in the Board of
Directors of the Corporation by its charter, the Board of Directors has
reclassified ONE HUNDRED MILLION (100,000,000) authorized and unissued shares
of the Class B Common Stock of the Corporation as Class C Common Stock of par
value of Ten Cents
<PAGE> 2
($.10) per share and of the aggregate par value of TEN MILLION Dollars
($10,000,000).
SIXTH: The preferences, designations, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of Class C Common Stock are as follows:
The Class C Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical preferences, designations,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption as the Class B
Common Stock as of the date of these Articles Supplementary, except as
otherwise set forth in the Corporation's charter and further except that:
(i) Expenses related to the distribution of the Class C Common Stock
shall be borne solely by such class and such class shall have exclusive voting
rights with respect to matters relating to the expenses being borne solely by
such class;
(ii) Such distribution expenses borne solely by Class C Common Stock
shall be appropriately reflected (in the manner determined by the Board of
Directors) in the net asset value, dividends, distribution and liquidation
rights of the shares of such class; and
(iii) Class C Common Stock shall not be reclassified into Class D
shares.
SEVENTH: Pursuant to authority expressly vested in the Board of
Directors of the Corporation by its charter, the Board of Directors has
reclassified ONE HUNDRED MILLION (100,000,000) authorized and unissued shares
of the Class B Common Stock of the Corporation as Class D Common Stock of par
value of Ten Cents ($.10) per share and of the aggregate par value of TEN
MILLION Dollars ($10,000,000).
EIGHTH: The preferences, designations, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of Class D Common Stock are as follows:
The Class D Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical preferences, designations,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption as the Class B
Common Stock as of the date of these Articles Supplementary,
2
<PAGE> 3
except as otherwise set forth in the Corporation's charter and further except
that:
(i) Expenses related to the distribution of the Class D Common Stock
shall be borne solely by such class and such class shall have exclusive voting
rights with respect to matters relating to the expenses being borne solely by
such class; and
(ii) Such distribution expenses borne solely by Class D Common Stock
shall be appropriately reflected (in the manner determined by the Board of
Directors) in the net asset value, dividends, distribution and liquidation
rights of the shares of such class.
3
<PAGE> 4
IN WITNESS WHEREOF, MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND,
INC. has caused these Articles Supplementary to be signed in its name and on
its behalf by its President and attested by its Secretary on October 17th,
1994.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC.
By /s/ ARTHUR ZEIKEL
--------------------------------
Arthur Zeikel
President
Attest:
/s/ MARK B. GOLDFUS,
- --------------------------
Mark B. Goldfus, Secretary
THE UNDERSIGNED, President of MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC., who executed on behalf of said Corporation the foregoing Articles
Supplementary, of which this certificate is made a part, hereby acknowledges,
in the name and on behalf of said Corporation, the foregoing Articles
Supplementary to be the corporate act of said Corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the authorization and approval thereof
are true in all material respects, and that this statement is made under the
penalties for perjury.
/s/ ARTHUR ZEIKEL
--------------------------
Arthur Zeikel
President
4
<PAGE> 1
Ex-99.2
BY-LAWS
OF
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the
Corporation shall be in the City of Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal
executive office of the Corporation shall be at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Section 3. Other Offices. The Corporation may have such
other offices in such places as the Board of Directors may from
time to time determine.
ARTICLE II
Meeting of Stockholders
Section 1. Annual Meeting. The Corporation shall not be
required to hold an annual meeting of its stockholders in any
year in which none of the following is required to be acted on by
the holders of the capital stock under the Investment Company Act
of 1940, as amended: (a) election of directors, (b) approval of
the Corporation's investment advisory agreement; (c) ratification
<PAGE> 2
of the selection of independent public accountants; and (d)
approval of the Corporation's distribution agreement. In the
event that the Corporation shall be required to hold an annual
meeting of stockholders by the Investment Company Act of 1940, as
amended, such meeting shall be held: (a) at a date and time set
by the Board of Directors in accordance with the Investment
Company Act of 1940, as amended, if the purpose of the meeting is
to elect directors or to approve an investment advisory agreement
or distribution agreement; and (b) on a date fixed by the board
of directors during the month of November (i) in the fiscal year
immediately following the fiscal year in which independent
accountants were appointed if the purpose of the meeting is to
ratify the selection of such independent accountants, or (ii) in
any fiscal year if an annual meeting is to be held for any reason
other than as specified in the foregoing. Any stockholders'
meeting held in accordance with the preceding sentence shall for
all purposes constitute the annual meeting of stockholders for
the fiscal year of the Corporation in which the meeting is held.
At any such meeting, the stockholders shall elect directors to
hold the offices of any directors who have held office for more
than one year or who have been elected by the board of directors
to fill vacancies which result from any cause.
Section 2. Secial Meetings. Special meetings of the
stockholders, unless otherwise provided by law or by the Articles
of Incorporation, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the
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<PAGE> 3
written request of the holders of at least 10% of the outstanding
shares of capital stock of the Corporation entitled to vote at
such meeting.
Section 3. Place of Meetings. Meetings of the stockholders
shall be held at such place within the United States as the Board
of Directors may from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of
the place, date and time of the holding of each stockholders'
meeting and, if the meeting is a special meeting, the purpose or
purposes of the special meeting, shall be given personally or by
mail, not less than ten nor more than ninety days before the date
of such meeting, to each stockholder entitled to vote at such
meeting and to each other stockholder entitled to notice of the
meeting. Notice by mail shall be deemed to be duly given when
deposited in the United States mail addressed to the stockholder
at his address as it appears on the records of the Corporation,
with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived
by any stockholder who shall attend such meeting in person or by
proxy, or who shall, either before or after the meeting, submit a
signed waiver of notice which is filed with the records of the
meeting. When a meeting is adjourned to another time and place,
unless the Board of Directors, after the adjournment, shall fix a
new record date for an adjourned meeting, or the adjournment is
for more than one hundred and twenty days after the original
-3-
<PAGE> 4
record date, notice of such adjourned meeting need not be given
if the time and place to which the meeting shall be adjourned
were announced at the meeting at which the adjournment is taken.
Section 5. Quorum. At all meetings of the stockholders,
the holders of a majority of the shares of stock of the Corpo-
ration entitled to vote at the meeting, present in person or by
proxy, shall constitute a quorum for the transaction of any
business, except as otherwise provided by statute or by the
Articles of Incorporation. In the absence of a quorum no busi-
ness may be transacted, except that the holders of a majority of
the shares of stock present in person or by proxy and entitled to
vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by
these By-Laws, until the holders of the requisite amount of
shares of stock shall be so present. At any such adjourned
meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by
proxy, of holders of the number of shares of stock of the Corpo-
ration in excess of a majority thereof which may be required by
the laws of the State of Maryland, the Investment Company Act of
1940, as amended, or other applicable statute, the Articles of
Incorporation, or these By-Laws, for action upon any given matter
shall not prevent action at such meeting upon any other matter or
matters which may properly come before the meeting, if there
-4-
<PAGE> 5
shall be present thereat, in person or by proxy, holders of the
number of shares of stock of the Corporation required for action
in respect of such other matter or matters.
Section 6. Organization. At each meeting of the stock-
holders, the Chairman of the Board (if one has been designated by
the Board), or in his absence or inability to act, the President,
or in the absence or inability to act of the Chairman of the
Board and the President, a Vice President, shall act as chairman
of the meeting. The Secretary, or in his absence or inability to
act, any person appointed by the chairman of the meeting, shall
act as secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all
meetings of the stockholders shall be as determined by the
chairman of the meeting.
Section 8. Votings. Except as otherwise provided by statute
or the Articles of Incorporation, each holder of record of shares
of stock of the Corporation having voting power shall be entitled
at each meeting of the stockholders to one vote for every share
of such stock standing in his name on the record of stockholders
of the Corporation as of the record date determined pursuant to
Section 9 of this Article or if such record date shall not have
been so fixed, then at the later of (i) the close of business on
the day on which notice of the meeting is mailed or (ii) the
thirtieth day before the meeting.
-5-
<PAGE> 6
Each stockholder entitled to vote at any meeting of
stockholders may authorize another person or persons to act for
him by a proxy signed by such stockholder or his attorney-in-
fact. No proxy shall be valid after the expiration of eleven
months from the date thereof, unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases where such proxy
states that it is irrevocable and where an irrevocable proxy is
permitted by law. Except as otherwise provided by statute, the
Articles of Incorporation or these By-Laws, any corporate action
to be taken by vote of the stockholders shall be authorized by a
majority of the total votes cast at a meeting of stockholders by
the holders of shares present in person or represented by proxy
and entitled to vote on such action.
If a vote shall be taken on any question other than the
election of directors, which shall be by written ballot, then
unless required by statute or these By-Laws, or determined by the
chairman of the meeting to be advisable, any such vote need not
be by ballot. On a vote by ballot, each ballot shall be signed
by the stockholder voting, or by his proxy, if there be such
proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors
may set a record date for the purpose of determining stockholders
entitled to vote at any meeting of the stockholders. The record
date, which may not be prior to the close of business on the day
the record date is fixed, shall be not more than ninety nor less
-6-
<PAGE> 7
than ten days before the date of the meeting of the stockholders.
All persons who were holders of record of shares at such time,
and not others, shall be entitled to vote at such meeting and any
adjournment thereof.
Section 10. Inspectors. The Board may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at
such meeting or any adjournment thereof. If the inspectors shall
not be so appointed or if any of them shall fail to appear or
act, the chairman of the meeting may, and on the request of any
stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath to execute faithfully the duties of
inspector at such meeting with strict impartiality and according
to the best of his ability. The inspectors shall determine the
number of shares outstanding and the voting powers of each, the
number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the result,
and do such acts as are proper to conduct the election or vote
with fairness to all stockholders. On request of the chairman of
the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge,
request or matter determined by them and shall execute a certif-
-7-
<PAGE> 8
icate of any fact found by them. No director or candidate for
the office of director shall act as inspector of an election of
directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting.
Except as otherwise provided by statute or the Articles of
Incorporation, any action required to be taken at any meeting of
stockholders, or any action which may be taken at any meeting of
such stockholders, may be taken without a meeting, without prior
notice and without a vote, if the following are filed with the
records of stockholders meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder
entitled to vote on the matter and (ii) a written waiver of any
right to dissent signed by each stockholder entitled to notice of
the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise provided in
the Articles of Incorporation, the business and affairs of the
Corporation shall be managed under the direction of the Board of
Directors. All powers of the Corporation may be exercised by or
under authority of the Board of Directors except as conferred on
or reserved to the stockholders by law or by the Articles of
Incorporation or these By-Laws.
<PAGE> 9
Section 2. Number of Directors. The number of directors
shall be fixed from time to time by resolution of the Board of
Directors adopted by a majority of the Directors then in office;
provided, however, that the number of directors shall in no event
be less than three nor more than fifteen except that the Corpo-
ration may have two directors if there is no stock outstanding,
or so long as there are less than three stockholders. Any
vacancy created by an increase in Directors may be filled in
accordance with Section 6 of this Article III. No reduction in
the number of directors shall have the effect of removing any
director from office prior to the expiration of his term unless
such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need
not be stockholders.
Section 3. Election and Term of Directors. Directors shall
be elected annually, by written ballot at a meeting of stock-
holders held for that purpose; provided, however, that if no
meeting of the stockholders of the Corporation is required to be
held in a particular year pursuant to Section 1 of Article II of
these By-Laws, directors shall be elected at the next meeting
held. The term of office of each director shall be from the time
of his election and qualification until the election of directors
next succeeding his election and until his successor shall have
been elected and shall have qualified, or until his death, or
-9-
<PAGE> 10
until he shall have resigned, or have been removed as hereinafter
provided in these By-Laws, or as otherwise provided by statute or
the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may
resign at any time by giving written notice of his resignation to
the Board or the Chairman of the Board or the President or the
Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the
Corporation may be removed by the stockholders by a vote of a
majority of the votes entitled to be cast for the election of
directors.
Section 6. Vacancies. Any vacancies in the Board, whether
arising from death, resignation, removal, an increase in the
number of directors or any other cause, shall be filled by a vote
of the majority of the Board of Directors then in office even
though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors,
if after the filling of said vacancy or vacancies, less than
two-thirds of the directors then holding office shall have been
elected by the stockholders of the Corporation. In the event
that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a
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<PAGE> 11
special meeting of the stockholders shall be held as promptly as
possible and in any event within sixty days, for the purpose of
filling said vacancy or vacancies. Any directors elected or
appointed to fill a vacancy shall hold office only until the next
meeting of stockholders of the Corporation and until a successor
shall have been chosen and qualifies or until his earlier resig-
nation or removal.
Section 7. Place of Meetings. Meetings of the Board may be
held at such place as the Board may from time to time determine
or as shall be specified in the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board
may be held without notice at such time and place as may be
determined by the Board of Directors.
Section 9. Special Meetings. Special meetings of the Board
may be called by two or more directors of the Corporation or by
the Chairman of the Board or the President.
Section 10. Telephone Meetings. Members of the Board of
Directors or of any committee thereof may participate in a
meeting by means of a conference telephone or similar communica-
tions equipment if all persons participating in the meeting can
hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in
a meeting by these means constitutes presence in person at the
meeting.
-11-
<PAGE> 12
Section 11. Notice of Special Meetings. Notice of each
special meeting of the Board shall be given by the Secretary as
hereinafter provided, in which notice shall be stated the time
and place of the meeting. Notice of each such meeting shall be
delivered to each director, either personally or by telephone or
any standard form of telecommunication, at least twenty-four
hours before the time at which such meeting is to be held, or by
first-class mail, postage prepaid, addressed to him at his resi-
dence or usual place of business, at least three days before the
day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any
special meeting need not be given to any director who shall,
either before or after the meeting, sign a written waiver of
notice which is filed with the records of the meeting or who
shall attend such meeting. Except as otherwise specifically
required by these By-Laws, a notice or waiver or notice of any
meeting need not state the purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less
than two, of the members of the entire Board shall be present in
person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and
except as otherwise expressly required by statute, the Articles
of Incorporation, these By-Laws, the Investment Company Act of
1940, as amended, or other applicable statute, the act of a
majority of the directors present at any meeting at which a
quorum is present shall be the act of the Board. In the absence
-12-
<PAGE> 13
of a quorum at any meeting of the Board, a majority of the
directors present thereat may adjourn such meeting to another
time and place until a quorum shall be present thereat. Notice
of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the
adjournment and, unless such time and place were announced at the
meeting at which the adjournment was taken, to the other direc-
tors. At any adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at
the meeting as originally called.
Section 14 Organization. The Board may, by resolution
adopted by a majority of the entire Board, designate a Chairman
of the Board, who shall preside at each meeting of the Board. In
the absence or inability of the Chairman of the Board to preside
at a meeting, the President or, in his absence of inability to
act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside
thereat. The Secretary (or, in his absence or inability to act,
any person appointed by the Chairman) shall act as secretary of
the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a
Meeting. Subject to the provisions of the Investment Company Act
of 1940, as amended, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting if all members of the
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<PAGE> 14
Board or committee, as the case may be, consent thereto in
writing, and the writings or writing are filed with the minutes
of the proceedings of the Board or committee.
Section 16. Compensation. Directors may receive
compensation for services to the Corporation in their capacities
as directors or otherwise in such manner and in such amounts as
may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of
the Board of Directors to direct that the purchase, sale,
retention and disposal of portfolio securities and the other
investment practices of the Corporation are at all times consis-
tent with the investment policies and restrictions with respect
to securities investments and otherwise of the Corporation, as
recited in the current Prospectus and Statement of Additional
Information of the Corporation, as filed from time to time with
the Securities and Exchange Commission and as required by the
Investment Company Act of 1940, as amended. The Board however,
may delegate the duty of management of the assets and the
administration of its day to day operations to an individual or
corporate management company and/or investment adviser pursuant
to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of
renewals thereof, of the Board of Directors and/or the stock-
holders of the Corporation in accordance with the provisions of
the Investment Company Act of 1940, as amended.
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<PAGE> 15
ARTICLE IV
Committees
Section 1. Executive Committee. The Board may, by
resolution adopted by a majority of the entire board, designate
an Executive Committee consisting of two or more of the directors
of the corporation, which committee shall have and may exercise
all the powers and authority of the Board with respect to all
matters other than:
(a) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Articles
of Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving
on the Board or on any committee of the Board, including the
Executive Committee;
(d) the approval or termination of any contract with an
investment adviser or principal underwriter, as such terms are
defined in the Investment Company Act of 1940, as amended, or the
taking of any other action required to be taken by the Board of
Directors by the Investment Company Act of 1940, as amended;
(e) the amendment or repeal of these By-Laws or the
adoption of new By-Laws;
(f) the amendment or repeal of any resolution of the Board
which by its terms may be amended or repealed only by the Board;
(g) the declaration of dividends and the issuance of
capital stock of the Corporation; and
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<PAGE> 16
(h) the approval of any merger or share exchange which does
not require stockholder approval.
The Executive Committee shall keep written minutes of its
proceedings and shall report such minutes to the Board. All such
proceedings shall be subject to revision or alteration by the
Board; provided, however, that third parties shall not be preju-
diced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of
Directors may from time to time, by resolution adopted by a
majority of the whole Board, designate one or more other com-
mittees of the Board, each such committee to consist of two or
more directors and to have such powers and duties as the Board of
Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of
the members of any committee shall be present in person at any
meeting of such committee in order to constitute a quorum for the
transaction of business at such meeting, and the act of a
majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or
any two members of any committee may fix the time and place of
its meetings unless the Board shall otherwise provide. In the
absence or disqualification of any member of any committee, the
member or members thereof present at any meeting and not dis-
qualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent
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<PAGE> 17
or disqualified member. The Board shall have the power at any
time to change the membership of any committee, to fill all
vacancies, to designate alternate members to replace any absent
or disqualified member, or to dissolve any such committee.
Nothing herein shall be deemed to prevent the Board from
appointing one or more committees consisting in whole or in part
of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any
authority or power of the Board in the management of the business
or affairs of the Corporation.
ARTICLE V
Officers, Agents and Employees
Section 1. Number of Qualifications. The officers of the
Corporation shall be a President, a Secretary and a Treasurer,
each of whom shall be elected by the Board of Directors. The
Board of Directors may elect or appoint one or more Vice Presi-
dents and may also appoint such other officers, agents and
employees as it may deem necessary or proper. Any two or more
offices may be held by the same person, except the offices of
President and Vice President, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity.
Such officers shall be elected by the Board of Directors each
year at a meeting of the Board of Directors, each to hold office
for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he
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shall have resigned, or have been removed, as hereinafter
provided in these By-Laws. The Board may from time to time
elect, or delegate to the President the power to appoint, such
officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries)
and such agents, as may be necessary or desirable for the busi-
ness of the Corporation. Such officers and agents shall have
such duties and shall hold their offices for such terms as may be
prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may
resign at any time by giving written notice of resignation to the
Board, the Chairman of the Board, President or the Secretary. Any
such resignation shall take effect at the time specified therein or,
if the time when it shall become effective shall not be specified
therein, immediately upon its receipt; and, unless otherwise speci-
fied therein, the acceptance of such resignation shall be necessary
to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer,
agent or employee of the Corporation may be removed by the Board of
Directors with or without cause at any time, and the Board may dele-
gate such power of removal as to agents and employees not elected or
appointed by the Board of Directors. Such removal shall be without
prejudice to such person's contract rights, if any, but the appoint-
ment of any person as an officer, agent or employee of the Corpo-
ration shall not of itself create contract rights.
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<PAGE> 19
Section 4. Vacancies. A vacancy in any office, whether arising
from death, resignation, removal or any other cause, may be filled
for the unexpired portion of the term of the office which shall be
vacant, in the manner prescribed in these By-Laws for the regular
election or appointment to such office.
Section 5. Compensation. The compensation of the officers of
the Corporation shall be fixed by the Board of Directors, but this
power may be delegated to any officer in respect of other officers
under his control.
Section 6. Bonds or Other Security. If required by the Board,
any officer, agent or employee of the Corporation shall give a bond
or other security for the faithful performance of his duties, in such
amount and with such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief
executive officer of the Corporation. In the absence of the Chairman
of the Board (or if there be none), he shall preside at all meetings
of the stockholders and of the Board Directors. He shall have,
subject to the control of the Board of Directors, general charge of
the business and affairs of the Corporation. He may employ and
discharge employees and agents of the Corporation, except such as
shall be appointed by the Board, and he may delegate these powers.
Section 8. Vice President. Each Vice President shall have such
powers and perform such duties as the Board of Directors or the
President may from time to time prescribe.
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<PAGE> 20
section 9. Treasurer. The Treasurer shall
(a) have charge and custody of, and be responsible for, all the
funds and securities of the Corporation, except those which the
corporation has placed in the custody of a bank or trust company or
member of a national securities exchange (as that term is defined in
the Securities Exchange Act of 1934, as amended) pursuant to a
written agreement designating such bank or trust company or member of
a national securities exchange as custodian of the property of the
Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) cause all moneys and other valuable to be deposited to the
credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable, to
the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking
proper vouchers therefor; and
(f) in general, perform all the duties incident to the office
of Treasurer and such other duties as from time to time may be
assigned to him by the Board or the President.
Section 10. Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided for
the purpose, the minutes of all meetings of the Board, the committees
of the Board and the stockholders;
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<PAGE> 21
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation
and affix and attest the seal to all stock certificates of the Corpo-
ration (unless the seal of the Corporation on such certificates shall
be a facsimile, as hereinafter provided) and affix and attest the
seal to all other documents to be executed on behalf of the Corpo-
ration under its seal;
(d) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and
(e) in general, perform all the duties incident to the office
of Secretary and such other duties as from time to time may be
assigned to him by the Board or the President.
Section 11. Delegation of Duties. In case of the absence of
any officer of the Corporation, or for any other reason that the
Board may deem sufficient, the Board may confer for the time being
the powers or duties, or any of them, of such officer upon any other
officer or upon any director.
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ARTICLE VI
Indemnification
Each officer and director of the Corporation shall be
indemnified by the Corporation to the full extent permitted under the
General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Corpo-
ration 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 Corporation to indemnify such person must
be based upon the reasonable determination of independent legal
counsel or the vote of a majority of a quorum of the directors who
are neither "interested persons," as defined in Section 2(a)(19) of
the Investment Company Act of 1940, as amended, nor parties to the
proceeding ("non-party independent directors"), after review of the
facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Each officer and director of the Corporation claiming
indemnification within the scope of this Article VI shall be entitled
to advances from the Corporation for payment of the reasonable
expenses incurred by him in connection with proceedings to which he
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<PAGE> 23
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 Corporation a
written affirmation of his good faith belief that the standard of
conduct necessary for indemnification by the Corporation has been met
and a written 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 addi-
tional conditions is met: (a) the person seeking indemnification
shall provide a security in form and amount acceptable to the Corpo-
ration for his undertaking; (b) the Corporation is insured against
losses arising by reason of the advance; (c) a majority of a quorum
of non-party independent directors, or independent legal counsel in a
written opinion, shall determine, based on a review of facts readily
available to the Corporation at the time the advance is proposed to
be made, that there is reason to believe that the person seeking
indemnification will ultimately be found to be entitled to indemni-
fication.
The Corporation may purchase insurance on behalf of an officer
or director protecting such person to the full extent permitted under
the General Laws of the State of Maryland, from liability arising
from his activities as officer or director of the Corporation. The
Corporation, however, may not purchase insurance on behalf of any
officer or director of the Corporation that protects or purports to
protect such person from liability to the Corporation or to its
stockholders to which such officer or director would otherwise be
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<PAGE> 24
subject by reason of willful misfeasance, bad faith, gross negli-
gence, or reckless disregard of the duties involved in the conduct of
his office.
The Corporation may indemnify, make advances or purchase
insurance to the extent provided in this Article VI on behalf of an
employee or agent who is not an officer or director of the Corpora-
tion.
ARTICLE VII
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Board, repre-
senting the number of shares of stock of the Corporation owned by
him, provided, however, that certificates for fractional shares will
not be delivered in any case. The certificates representing shares
of stock shall be signed by or in the name of the Corporation by the
President or a Vice President and by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer and sealed with
the seal of the Corporation. Any or all of the signatures or the
seal on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile sig-
nature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate
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<PAGE> 25
shall be issued, it may be issued by the Corporation with the same
effect as if such officer, transfer agent or registrar were still in
office at the date of issue.
Section 2. Books of Account and Record of Stockholders. There
shall be kept at the principal executive office of the Corporation
correct and complete books and records of account of all the business
and transactions of the Corporation. There shall be made available
upon request of any stockholder, in accordance with Maryland law, a
record containing the number of shares of stock issued during a
specified period not to exceed twelve months and the consideration
received by the Corporation for each such share.
Section 3. Transfers of Shares. Transfers of shares of stock
of the Corporation shall be made on the stock records of the Corpo-
ration only by the registered holder thereof, or by his attorney
thereunto authorized by power of attorney duly executed and filed
with the Secretary or with a transfer agent or transfer clerk, and on
surrender of the certificate or certificates, if issued, for such
shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as
otherwise provided by law, the Corporation shall be entitled to
recognize the exclusive right of a person in whose name any share or
shares stand on the record of stockholders as the owner of such share
or shares for all purposes, including, without limitation, the rights
to receive dividends or other distributions, and to vote as such
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<PAGE> 26
owner, and the Corporation shall not be bound to recognize any equit-
able or legal claim to or interest in any such share or shares on the
part of any other person.
Section 4. Regulations. The Board may make such additional
rules and regulations, not inconsistent with these By-Laws, as it may
deem expedient concerning the issue, transfer and registration of
certificates for shares of stock of the Corporation. It may appoint,
or authorize any officer or officers to appoint, one or more transfer
agents or one or more transfer clerks and one or more registrars and
may require all certificates for shares of stock to bear the signa-
ture or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The
holder of any certificates representing shares of stock of the
Corporation shall immediately notify the Corporation of any loss,
destruction or mutilation of such certificate, and the Corporation
may issue a new certificate of stock in the place of any certificate
theretofore issued by it which the owner thereof shall allege to have
been lost or destroyed or which shall have been mutilated, and the
Board may, in its discretion, require such owner or his legal repre-
sentatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the
Board in its absolute discretion shall determine, to indemnify the
Corporation against any claim that may be made against it on account
of the alleged loss or destruction of any such certificate, or
issuance of a new certificate. Anything herein to the contrary
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<PAGE> 27
notwithstanding, the Board, in its absolute discretion, may refuse to
issue any such new certificate, except pursuant to legal proceedings
under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distri-
butions. The Board may fix, in advance, a date not more than ninety
days preceding the date fixed for the payment of any dividend or the
making of any distribution or the allotment of rights to subscribe
for securities of the Corporation, or for the delivery of evidences
of rights or evidences of interests arising out of any change,
conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to
receive any such dividend, distribution, allotment, rights or inter-
ests, and in such case only the stockholders of record at the time so
fixed shall be entitled to receive such dividend, distribution,
allotment, rights or interests.
Section 7. Information to Stockholders and others. Any
stockholder of the Corporation or his agent may inspect and copy
during usual business hours the Corporation's By-Laws, minutes of the
proceedings of its stockholders, annual statements of its affairs,
and voting trust agreements on file at its principal office.
ARTICLE VIII
Seal
The seal of the Corporation shall be circular in form and shall
bear, in addition to any other emblem or device approved by the Board
of Directors, the name of the Corporation, the year of its incorpora-
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<PAGE> 28
tion and the words "Corporate Seal" and "Maryland." Said seal may be
used by causing it or a facsimile thereof to be impressed or affixed
or in any other manner reproduced.
ARTICLE IX
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of the
corporation shall end on the 30th day of June.
ARTICLE X
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of
Directors of the Corporation may from time to time determine.
Section 2. Custodians. All securities and other investments
shall be deposited in the safe keeping of such banks or other com-
panies as the Board of Directors of the Corporation may from time to
time determine. Every arrangement entered into with any bank or
other company for the safe keeping of the securities and investments
of the Corporation shall contain provisions complying with the
Investment Company Act of 1940, as amended, and the general rules and
regulations thereunder.
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<PAGE> 29
ARTICLE XI
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for
the payment of money shall be signed by such officer or officers or
person or persons as the Board of Directors by resolution shall from
time to time designate.
Section 2. Sale or Transfer of Securities. Stock certificates,
bonds or other securities at any time owned by the Corporation may be
held on behalf of the Corporation or sold, transferred or otherwise
disposed of subject to any limits imposed by these By-Laws and pur-
suant to authorization by the Board and, when so authorized to be
held on behalf of the Corporation or sold, transferred or otherwise
disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer
or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
ARTICLE XII
Independent Public Accountants
The firm of independent public accountants which shall sign or
certify the financial statements of the Corporation which are filed
with the Securities and Exchange Commission shall be selected
annually by the Board of Directors and, if required by the provisions
of the Investment Company Act of 1940, as amended, ratified by the
stockholders.
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<PAGE> 30
ARTICLE XIII
Annual Statement
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual
period of the Corporation and at such other times as may be directed
by the Board. A report to the stockholders based upon each such
examination shall be mailed to each stockholder of the Corporation of
record on such date with respect to each report as may be determined
by the Board, at his address as the same appears on the books of the
Corporation. Such annual statement shall also be available at the
annual meeting of stockholders, if any, and, within 20 days after the
meeting (or, in the absence of an annual meeting, within 20 days
after the end of the month of October following the end of the fiscal
year), be placed on file at the Corporation's principal office. Each
such report shall show the assets and liabilities of the Corporation
as of the close of the annual or quarterly period covered by the
report and the securities in which the funds of the Corporation were
then invested. Such report shall also show the Corporation's income
and expenses for the period from the end of the Corporation's
preceding fiscal year to the close of the annual or quarterly period
covered by the report and any other information required by the
Investment Company Act of 1940, as amended, and shall set forth such
other matters as the Board or such firm of independent public
accountants shall determine.
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ARTICLE XIV
Amendments
These By-Laws or any of them may be amended, altered or repealed
at any regular meeting of the stockholders or at any special meeting
of the stockholders at which a quorum is present or represented,
provided that notice of the proposed amendment, alteration or repeal
be contained in the notice of such special meeting. These By-Laws
may also be amended, altered or repealed by the affirmative vote of a
majority of the Board of Directors at any regular or special meeting
of the Board of Directors, except any particular By-Law which is
specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act
of 1940, as amended.
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<PAGE> 1
Ex-99 .5(a)
MANAGEMENT AGREEMENT
AGREEMENT made this 19th day of June, 1989, by and between
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC., a Maryland
corporation (hereinafter referred to as the "Fund"), and MERRILL
LYNCH ASSET MANAGEMENT, INC., a Delaware corporation (hereinafter
referred to as the "Manager").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as a non-
diversified open-end investment company registered under the
Investment Company Act of 1940, as amended (hereinafter referred
to as the "Investment Company Act"); and
WHEREAS, the Manager is engaged principally in rendering
management and investment advisory services and is registered as
an investment adviser under the Investment Advisers Act of 1940;
and
WHEREAS, the Fund desires to retain the Manager to provide
management and investment advisory services to the Fund in the
manner and on the terms hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and
investment advisory services to the Fund on the terms and condi-
tions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
covenants hereinafter contained, the Fund and the Manager hereby
agree as follows:
<PAGE> 2
ARTICLE I
Duties of the Manager
The Fund hereby employs the Manager to act as a manager and
investment adviser of the Fund and to furnish, or arrange for
affiliates to furnish, the management and investment advisory
services described below, subject to the policies of, review by
and overall control of the Board of Directors of the Fund, for
the period and on the terms and conditions set forth in this
Agreement. The Manager hereby accepts such employment and agrees
during such period, at its own expense, to render, or arrange for
the rendering of, such services and to assume the obligations
herein set forth for the compensation provided for herein. The
Manager and its affiliates shall for all purposes herein be deem-
ed to be independent contractors and shall, unless otherwise
expressly provided or authorized, have no authority to act for or
represent the Fund in any way or otherwise be deemed agents of
the Fund.
(a) Management Services. The Manager shall perform (or
arrange for the performance by affiliates of the Manager) the
management and administrative services necessary for the
operation of the Fund, including administering shareholder
accounts and handling shareholder relations. The Manager shall
provide the Fund with office space, facilities, equipment and
necessary personnel and such other services as the Manager,
subject to review by the Directors, shall from time to time
determine to be necessary or useful to perform its obligations
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<PAGE> 3
under this Agreement. The Manager shall also, on behalf of the
Fund, conduct relations with custodians, depositories, transfer
agents, dividend disbursing agents, other shareholder servicing
agents, accountants, attorneys, underwriters, brokers and
dealers, corporate fiduciaries, insurers, banks and such other
persons in any such other capacity deemed to be necessary or
desirable. The Manager shall monitor generally the Fund's
compliance with investment policies and restrictions as set forth
in the currently effective prospectus and statement of additional
information relating to the shares of the Fund under the
Securities Act of 1933, as amended (the "Prospectus" and
"Statement of Additional Information", respectively) The
Manager shall make reports to the Directors of its performance of
obligations hereunder and furnish advice and recommendations with
respect to such other aspects of the business and affairs of the
Fund as it shall determine to be desirable.
(b) Investment Advisory Services. The Manager shall pro-
vide (or arrange for affiliates to provide) the Fund with such
investment research, advice and supervision as the latter may
from time to time consider necessary for the proper supervision
of the assets of the Fund, shall furnish continuously an
investment program for the Fund and shall determine from time to
time which securities shall be purchased, sold or exchanged and
what portion of the assets of the Fund shall be held in the
various securities in which the Fund invests, options, futures,
options on futures or cash, subject always to the restrictions of
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<PAGE> 4
the Articles of Incorporation and By-Laws of the Fund, as amended
from time to time, the provisions of the Investment Company Act
and the statements relating to the Fund's investment objectives,
investment policies and investment restrictions as the same are
set forth in the Prospectus and Statement of Additional
Information. The Manager shall make decisions for the Fund as to
foreign currency matters and make determinations as to foreign
exchange contracts, foreign currency options, foreign currency
futures and related options on foreign currency futures. The
Manager shall make decisions for the Fund as to the manner in
which voting rights, rights to consent to corporate action and
any other rights pertaining to the Fund's portfolio securities
shall be exercised. Should the Directors at any time, however,
make any definite determination as to investment policy and noti-
fy the Manager thereof in writing, the Manager shall be bound by
such determination for the period, if any, specified in such
notice or until similarly notified that such determination has
been revoked. The Manager shall take, on behalf of the Fund, all
actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place
all orders for the purchase or sale of portfolio securities for
the Fund's account with brokers or dealers selected by it, and to
that end, the Manager is authorized as the agent of the Fund to
give instructions to the Custodian of the Fund as to deliveries
of securities and payments of cash for the account of the Fund.
In connection with the selection of such brokers or dealers and
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<PAGE> 5
the placing of such orders with respect to assets of the Fund,
the Manager is directed at all times to seek to obtain execution
and prices within the policy guidelines determined by the
Directors and set forth in the Prospectus and Statement of Addi-
tional Information. Subject to this requirement and the provi-
sions of the Investment Company Act, the Securities Exchange Act
of 1934, as amended, and other applicable provisions of law, the
Manager may select brokers or dealers with which it or the Fund
is affiliated.
ARTICLE II
Allocation of Charges and Expenses
(a) The Manager. The Manager assumes and shall pay for
maintaining the staff and personnel necessary to perform its
obligations under this Agreement, and shall at its own expense,
provide the office space, facilities, equipment and necessary
personnel which it is obligated to provide under Article I here-
of, and shall pay all compensation of officers of the Fund and
all Directors of the Fund who are affiliated persons of the
Manager.
(b) The Fund. The Fund assumes and shall pay or cause to
be paid all other expenses of the Fund (except for the expenses
paid by the Distributor), including, without limitation: taxes,
expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports, prospectuses
and statements of additional information, charges of the custo-
dian, any sub-custodian and transfer agent, expenses of portfolio
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<PAGE> 6
transactions, expenses of redemption of shares, Securities and
Exchange Commission fees, expenses of registering the shares
under Federal, state and foreign laws, fees and actual out-of-
pocket expenses of Directors who are not affiliated persons of
the Manager, accounting and pricing costs (including the daily
calculation of the net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-
recurring expenses, and other expenses properly payable by the
Fund. It is also understood that the Fund will reimburse the
Manager for its costs in providing accounting services to the
Fund. The Distributor will pay certain of the expenses of the
Fund incurred in connection with the continuous offering of
shares of common stock in the Fund.
ARTICLE III
Compensation of the Manager
(a) Management and Investment Advisory Fee. For the ser-
vices rendered, the facilities furnished and expenses assumed by
the Manager, the Fund shall pay to the Manager at the end of each
calendar month a fee based upon the average daily value of the
net assets of the Fund, as determined and computed in accordance
with the description of the determination of net asset value con-
tained in the Prospectus and Statement of Additional Information,
at the annual rate of 1.00% of the average daily net assets of
the Fund, commencing on the day following effectiveness hereof.
If this Agreement becomes effective subsequent to the first day
of a month or shall terminate before the last day of a month,
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<PAGE> 7
compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the
calculation of the fee as set forth above. Subject to the
provisions of subsection (b) hereof, payment of the Manager's
compensation for the preceding month shall be made as promptly as
possible after completion of the computations contemplated by
subsection (b) hereof. During any period when the determination
of net asset value is suspended by the Directors, the net asset
value of a share as of the last business day prior to such
suspension shall for this purpose be deemed to be the net asset
value at the close of each succeeding business day until it is
again determined.
(b) Expense Limitations. In the event the operating
expenses of the Fund, including amounts payable to the Manager
pursuant to subsection (a) hereof, for any fiscal year ending on
a date on which this Agreement is in effect exceed the expense
limitations applicable to the Fund imposed by applicable state
securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Manager shall
reduce its management fee by the extent of such excess and, if
required pursuant to any such laws or regulations, will reimburse
the Fund in the amount of such excess; provided, however, to the
extent permitted by law, there shall be excluded from such
expenses the amount of any interest, taxes, brokerage fees and
commissions, distribution fees and extraordinary expenses
(including but not limited to legal claims and liabilities and
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<PAGE> 8
litigation costs and any indemnification related thereto) paid or
payable by the Fund. Whenever the expenses of the Fund exceed a
pro rata portion of the applicable annual expense limitations,
the estimated amount of reimbursement under such limitations
shall be applicable as an offset against the monthly payment of
the fee due to the Manager. Should two or more such expenses
limitations be applicable as at the end of the last business day
of the month, that expense limitation which results in the
largest reduction in the Manager's fee shall be applicable.
ARTICLE IV
Limitation of Liability of the Manager
The Manager shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or
for any act or omission in the management of the Fund, except for
willful misfeasance, bad faith or gross negligence in the perfor-
nance of its duties, or by reason of reckless disregard of its
obligations and duties hereunder. As used in this Article IV,
the term "Manager" shall include any affiliates of the Manager
performing services for the Fund contemplated hereby and direc-
tors, officers and employees of the Manager and such affiliates.
ARTICLE V
Activities of the Manager
The services of the Manager to the Fund are not to be deemed
to be exclusive, the Manager and any person controlled by or
under common control with the Manager (for purposes of this
Article V referred to as "affiliates") is free to render services
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<PAGE> 9
to others. It is understood that Directors, officers, employees
and shareholders of the Fund are or may become interested in the
Manager and its affiliates, as directors, officers, employees,
partners and shareholders or otherwise, and that directors,
officers, employees, partners and shareholders of the Manager and
its affiliates are or may become similarly interested in the
Fund, and that the Manager and directors, officers, employees,
partners and shareholders of its affiliates may become interested
in the Fund as shareholder or otherwise.
ARTICLE VI
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first
above written and shall remain in force until May 31, 1991 and
thereafter, but only 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) a majority of those Directors who are not parties to
this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Directors or by vote of a majority
of the outstanding voting securities of the Fund, or by the Mana-
ger, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its
assignment.
-9-
<PAGE> 10
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the vote of a majority
of outstanding voting securities of the Fund, and (ii) a majority
of those Directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act of 1940 and the
Rules and Regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange
Commission under said Act.
ARTICLE IX
Governing Law
This Agreement shall be construed in accordance with laws of
the State of New York and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws
of the State of New York, or any of the provisions herein, con-
flict with the applicable provisions of the Investment Company
Act, the latter shall control.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC.
By/s/ Gerald M. Richard
MERRILL LYNCH ASSET MANAGEMENT, INC.
By /s/ Mark B. Goldfus
-11-
<PAGE> 1
Ex-99.8
This AGREEMENT is effective July 17, 1989, and is between THE CHASE
MANHATTAN BANK, N.A. (the "Bank") and MERRILL LYNCH DEVELOPING
CAPTIAL MARKETS FUND, INC.(the "Customer".)
1. Customer Accounts.
The Bank agrees to establish and maintain the following
accounts ("Accounts"):
(a) a custody account in the name of the Customer ("Custody
Account) for any and all stocks, shares, bonds, debentures, notes,
mortgages or other obligations for the payment of money, bullion,
coin and any certificates, receipts, warrants or other instruments
representing rights to receive, purchase or subscribe for the same
or evidencing or representing any other rights or interests therein
and other similar property whether certificated or uncertificated
as may be received by the Bank or its Subcustodian (as defined in
Section 3) for the account of the Customer ("Securities"); and
(b) a deposit account in the name of the Customer ("Deposit
Account")for any and all cash in any currency received by the Bank
or its Subcustodian for the account of the Customer, which cash
shall not be subject to withdrawal by draft or check.
The Customer warrants its authority to: 1) deposit the cash and
Securities ("Assets") received in the Accounts and 2) give
Instructions (as defined in Section 11) concerning the Accounts.
The Bank may deliver securities of the same class in place of those
deposited in the Custody Account.
Upon written agreement between the Bank and the Customer,
additional Accounts may be established and separately
accounted for as additional Accounts under the terms of this
Agreement.
2. Maintenance of Securities and Cash at Bank and Subcustodian
Locations.
Unless Instructions specifically require another location
acceptable to the Bank:
(a) Securities will be held in the country or other
jurisdiction in which the principal trading market for such
Securities is located, where such Securities are to be presented
for payment or where such Securities are acquired; and
(b) cash will be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the
legal currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the
particular currency. To the extent Instructions are issued and the
Bank can comply with such Instructions, the Bank is authorized to
maintain cash balances on deposit for the Customer with itself or
one of its affiliates at such reasonable rates of interest as may
from time to time be paid on such accounts, or in non-interest
bearing accounts as the Customer may direct, if acceptable to the
Bank.
If the Customer wishes to have any of its Assets held in the
custody of an institution other than the established Subcustodians
or their securities depositories, such arrangement must be
authorized by a written agreement, signed by the Bank and the
Customer.
3. Subcustodians and Securities Depositories.
The Bank may act under this Agreement through the subcustodians
listed in Schedule A of this Agreement with which the Bank has
entered into subcustodial agreements (Subcustodians). The Customer
authorizes the Bank to hold Assets in the Accounts in accounts
which the Bank has established with one or more of its branches or
Subcustodians. The Bank and Subcustodians are authorized to hold
any of the Securities in their account with any securities
depository in which they participate.
The Bank reserves the right to add new, replace or remove
Subcustodians. The Customer will be given reasonable notice by the
Bank of any amendment to Schedule A. Upon request by the Customer,
the Bank will identify the name, address and principal place of
business of any Subcustodian of the Customer's Assets and the name
and address of the governmental agency or other regulatory
authority that supervises or regulates such Subcustodian.
4. Use of Subcustodian.
(a) The Bank will identify Assets on its books as belonging to
the Customer
(b) A Subcustodian will hold Assets together with assets
belonging to other customers of the Bank in accounts identified on
such Subcustodian's books as special custody accounts for the
exclusive benefit of customers of the Bank.
(c) Any Assets in the Accounts held by a Subcustodian will be
subject only to the instructions of the Bank or its agent. Any
Securities held in a securities depository for the account of a
Subcustodian will be subject only to the instructions of such
Subcustodian.
(d) Any agreement the Bank enters into with a Subcustodian for
holding its customer's assets shall provide that such assets will
not be subject to any right, charge, security interest, lien or
claim of any kind in favor of such Subcustodian except for safe
custody or administration, and that the beneficial ownership of
such assets will be freely transferable without the payment of
money or value other than for safe custody or administration. The
foregoing shall not apply to the extent of any special agreement or
arrangement made by the Customer with any particular Subcustodian.
<PAGE> 2
5. Deposit Account Transactions.
(a) The Bank or its Subcustodians will make payments from the
Deposit Account upon receipt of Instructions which include all
Information required by the Bank.
(b) In the event that any payment to be made under this Section
5 exceeds the funds available in the Deposit Account, the Bank, in
its discretion, may advance the Customer such excess amount which
shall be deemed a loan payable on demand, bearing interest at the
rate customarily charged by the Bank on. similar loans.
(c) If the Bank credits the Deposit Account on a payable date,
or at any time prior to actual collection and reconciliation to the
Deposit Account, with interest, dividends, redemptions or any other
amount due, the Customer will promptly return any such amount upon
oral or written notification: (i) that such amount has not been
received in the ordinary course of business or (ii) that such
amount was incorrectly credited. If the Customer does not
promptly return any amount upon such notification, the Bank shall
be entitled, upon oral or written notification to the Customer, to
reverse such credit by debiting the Deposit Account for the amount
previously credited. The Bank or its Subcustodian shall have no
duty or obligation to institute legal proceedings, file a claim or
a proof of claim in any insolvency proceeding or take any other
action with respect to the collection of such amount, but may act
for the Customer upon Instructions after consultation with the
Customer.
6. Custody Account Transactions.
(a) Securities will be transferred, exchanged or delivered by
the Bank or its Subcustodian upon receipt by the Bank of
Instructions which include all information required by the Bank.
Settlement and payment for Securities received for, and delivery of
Securities out of, the Custody Account may be made in accordance
with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation,
delivery of Securities to a purchaser, dealer or their agents
against a receipt with the expectation of receiving later payment
and free delivery. Delivery of Securities out of the Custody Account
may also be made in any manner specifically required by Instructions
acceptable to the Bank.
(b) The Bank, in its discretion, may credit or debit the
Accounts on a contractual settlement date with cash or Securities
with respect to any sale, exchange or purchase of Securities.
Otherwise, such transactions will be credited or debited to the
Accounts on the date cash or Securities are actually received by the
Bank and reconciled to the Accounts.
(i) The Bank may reverse credits or debits made to the
Accounts in its discretion if the related transaction
fails to settle within a reasonable period, determined by
the Bank in its discretion, after the contractual
settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section
6 are returned by the recipient thereof, the Bank may
reverse the credits and debits of the particular
transaction at any time.
7. Actions of the Bank.
The Bank shall follow Instructions received regarding Assets
held in the Accounts. However, until it receives Instructions to
the contrary, the Bank will perform the following functions.
(a) Present for payment any Securities which are called,
redeemed or retired or otherwise become payable and all coupons and
other income items which call for payment upon presentation, to the
extent that the Bank or Subcustodian is actually aware of such
opportunities.
(b) Execute in the name of the Customer such ownership and
other certificates as may be required to obtain payments in respect
of Securities.
(c) Exchange interim receipts or temporary Securities for
definitive Securities.
(d) Appoint brokers and agents for any transaction involving
the Securities, including, without limitation, affiliates of the
Bank or any Subcustodian.
(e) Issue statements to the Customer, at times mutually agreed
upon, identifying the Assets in the Accounts.
The Bank will send the Customer an advice or notification of
any transfers of Assets to or from the Accounts. Such statements,
advices or notifications shall indicate the identity of the entity
having custody of the Assets. Unless the Customer sends the Bank a
written exception or objection to any Bank statement within sixty
days of receipt, the Customer shall be deemed to have approved such
statement. In such event, or where the Customer has otherwise
approved any such statement, the Bank shall, to the extent permitted
by law, be released, relieved and discharged with respect to all
matters set forth in such statement or reasonably implied therefrom
as though it had been settled by the decree of a court of competent
Jurisdiction in an action where the Customer and all persons having
or claiming an interest in the Customer or the Customer's Accounts
were parties.
<PAGE> 3
All collections of funds or other property paid or distributed
in respect of Securities in the Custody Account shall be made at the
risk of the Customer. The Bank shall have no liability for any loss
occasioned by delay in the actual receipt of notice by the Bank or
by its Subcustodians of any payment, redemption or other transaction
regarding Securities in the Custody Account in respect of which the
Bank has agreed to take any action under this Agreement.
8. Corporate Actions; Proxies.
Whenever the Bank receives information concerning the Securities
which requires discretionary action by the beneficial owner of the
Securities (other than a proxy), such as subscription rights, bonus
issues, stock repurchase plans and rights offerings, or legal
notices or other material intended to be transmitted to securities
holders ("Corporate Actions"), the Bank will give the Customer
notice of such Corporate Actions to the extent that the Bank's
central corporate actions department has actual knowledge of a
Corporate Action in time to notify its customers.
When a rights entitlement or a fractional interest resulting
from a rights issue, stock dividend, stock split or similar
Corporate Action is received which bears an expiration date, the
Bank will endeavor to obtain Instructions from the Customer or its
Authorized Person, as defined in Section 10, but if Instructions are
not received in time for the Bank to take timely action, or actual
notice of such Corporate Action was received too late to seek
Instructions, the Bank is authorized to sell such rights entitlement
or fractional interest and to credit the Deposit Account with the
proceeds or take any other action it deems, in good faith, to be
appropriate in which case it shall be held harmless for any such
action.
The Bank will deliver proxies to the Customer or its designated
agent pursuant to special arrangements which may have been agreed to
in writing. Such proxies shall be executed in the appropriate
nominee name relating to Securities in the Custody Account
registered in the name of such nominee but without indicating the
manner in which such proxies are to be voted; and where bearer
Securities are involved, proxies will be delivered in accordance
with Instructions.
9. Nominees.
Securities which are ordinarily held in registered form may be
registered in a nominee name of the Bank, Subcustodian or securities
depository, as the case may be. The Bank may, without notice to the
Customer, cause any such Securities to cease to be registered in the
name of any such nominee and to be registered in the name of the
Customer. In the event that any Securities registered in a nominee
name are called for partial redemption by the issuer, the Bank may
allot the called portion to the respective beneficial holders of
such class of security in any manner the Bank deems to be fair and
equitable. The Customer agrees to hold the Bank, Subcustodians, and
their respective nominees harmless from any liability arising
directly or indirectly from their status as a mere record holder of
Securities in the Custody Account.
10. Authorized Persons.
As used in this Agreement, the term "Authorized Person" means
employees or agents including investment managers as have been
designated by written notice from the Customer or its designated
agent to act on behalf of the Customer under this Agreement. Such
persons shall continue to be Authorized Persons until such time as
the Bank receives Instructions from the Customer or its designated
agent that any such employee or agent is no longer an Authorized
Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized
Person received by the Bank, via telephone, telex, TWX, facsimile
transmission, bank wire or other teleprocess or electronic
instruction or trade information system acceptable to the Bank which
the Bank believes in good faith to have been given by Authorized
Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Bank may
specify. Unless otherwise expressly provided, all Instructions
shall continue in full force and effect until cancelled or
superseded.
Any Instructions delivered to the Bank by telephone shall
promptly thereafter be confirmed in writing by an Authorized Person
(which confirmation may bear the facsimile signature of such
Person), but the Customer will hold the Bank harmless for the
failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the
telephone instructions received or the Bank's failure to produce
such confirmation at any subsequent time. Either Party may
electronically record any Instructions given by telephone, and any
other telephone discussions with respect to the Custody Account.
The Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which the Bank shall
make available to the Customer or its Authorized Persons.
<PAGE> 4
12. Standard of Care; Liabilities.
(a) The Bank shall be responsible for the performance of only
such duties as are set forth in this Agreement or expressly
contained in Instructions which are consistent with the provisions
of this Agreement.
(i) The Bank will use reasonable care with respect to its
obligations under this Agreement and the safekeeping of
Assets. The Bank shall be liable to the Customer for any
loss which shall occur as the result of the failure of a
Subcustodian to exercise reasonable care with respect to
the safekeeping of such Assets to the same extent that the
Bank would be liable to the Customer if the Bank were
holding such Assets in New York. In the event of any loss
to the Customer by reason of the failure of the Bank or its
Subcustodian to utilize reasonable care, the Bank shall be
liable to the Customer only to the extent of the Customer's
direct damages, to be determined based on the market value
of the property which is the subject of the loss at the
date of discovery of such loss and without reference to any
special conditions or circumstances.
(ii) The Bank will not be responsible for any act,
omission, default or for the solvency of any broker or
agent which it or a Subcustodian appoints unless such
appointment was made negligently or in bad faith.
(iii) The Bank shall be indemnified by, and without
liability to the Customer for any action taken or omitted
by the Bank whether pursuant to Instructions or otherwise
within the scope of this Agreement such act or omission was
in good faith, without negligence. In performing its
obligations under this Agreement, the Bank may rely on the
genuineness of any document which it believes in good faith
to have been validly executed.
(iv) The Customer agrees to pay for and hold the Bank
harmless from any liability or loss resulting from the
imposition or assessment of any taxes or other governmental
charges, and any related expenses with respect to income
from or Assets in the Accounts.
(v) The Bank shall be entitled to rely, and may act upon
the advice of counsel (who may be counsel for the Customer)
on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
(vi) The Bank need not maintain any insurance for the
benefit of the Customer.
(vii) Without limiting the foregoing, the Bank shall not be
liable for any loss which results from: 1) the general risk
of investing, or 2) investing or holding Assets in a
particular country including, but not limited to, losses
resulting from nationalization, expropriation or other
governmental actions; regulation of the banking or
securities industry; currency restrictions, devaluations or
fluctuations; and market conditions which prevent the
orderly execution of securities transactions or affect the
value of Assets.
(viii) Neither party shall be liable to the other for any
loss due to forces beyond their control including, but not
limited to strikes or work stoppages, acts of war or
terrorism, insurrection, revolution, nuclear fusion,
fission or radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of
this Section 12, it is specifically acknowledged that the Bank shall
have no duty or responsibility to:
(i) question Instructions or make any suggestions to the
Customer or an Authorized Person regarding such
Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise the Customer or an Authorized Person
regarding any default in the payment of principal or
income of any security other than as provided in Section
5(c) of this Agreement;
(iv) evaluate or report to the Customer or an Authorized
Person regarding the financial condition of any broker,
agent or other party to which Securities are delivered
or payments are made pursuant to this Agreement; or
(v) review or reconcile trade confirmations received
from brokers. The Customer or its Authorized Persons
issuing Instructions shall bear any responsibility to
review such confirmations against Instructions issued to
and statements issued by the Bank.
(c) The Customer authorizes the Bank to act under this Agreement
notwithstanding that the Bank or any of its divisions or affiliates
may have a material interest in a transaction, or circumstances are
such that the Bank may have a potential conflict of duty or interest
including the fact that the Bank or any of its affiliates may
provide brokerage services to other customers, act as financial
advisor to the issuer of Securities, act as a lender to the issuer
of Securities, act in the same transaction as agent for more than
one customer, have a material interest in the issue of Securities,
or earn profits from any of the activities listed herein.
<PAGE> 5
13. Fees and Expenses.
The Customer agrees to pay the Bank for its services under
this Agreement such amount as may be agreed upon in writing,
together with the Bank's reasonable out-of-pocket or incidental
expenses, including, but not limited to legal fees. The Bank
shall have a lien on and is authorized to charge any Accounts of
the Customer for any amount owing to the Bank under any provision
of this Agreement.
14. Miscellaneous.
(a) Foreign Exchange Transactions. To facilitate the
administration of the Customer's trading and investment activity,
the Bank is authorized to enter into spot or forward foreign
exchange contracts with the Customer or an Authorized Person for
the Customer and may also provide foreign exchange through its
subsidiaries, affiliates or Subcustodians. Instructions,
including standing instructions, may be issued with respect to
such contracts but the Bank may establish rules or limitations
concerning any foreign exchange facility made available. In all
cases where the Bank, its subsidiaries, affiliates or
Subcustodians enter into a foreign exchange contract related to
Accounts, the terms and conditions of the then current foreign
exchange contract of the Bank, its subsidiary, affiliate or
Subcustodian and, to the extent not inconsistent, this Agreement,
shall apply to such transaction.
(b) Certification of Residency, etc. The Customer certifies
that it is a resident of the United States and agrees to notify
the Bank of any changes in residency. The Bank may rely upon
this certification or the certification of such other facts as
may be required to administer the Bank's obligations under this
Agreement. The Customer will indemnify the Bank against all
losses, liability, claims or demands arising directly or
indirectly from any such certifications.
(c) Access to Records. The Bank shall allow the Customer's
independent public accountants reasonable access to the records
of the Bank relating to the Assets as is required in connection
with their examination of books and records pertaining to the
Customer's affairs. Subject to restrictions under applicable
law, the Bank shall also obtain an undertaking to permit the
Customer's Independent public accountants reasonable access to
the records of any Subcustodian which has physical possession of
any Assets as may be required in connection with the examination
of the Customer's books and records.
(d) Governing Law; Successors and Assigns. This Agreement
shall be governed by the laws of the State of New York and shall
not be assignable by either party, but shall bind the successors
in interest of the Customer and the Bank.
(e) Entire Agreement, Applicable Riders. Customer
represents that the Assets deposited in the Accounts are
(check one):
employee benefit plan or other assets subject
------- to the Employee Retirement income Security Act
of l974, asamended ("ERISA");
* mutual fund assets subject to Securities and
Exchange Commission ("SEC') rules and
regulations;
-------
neither of the above.
-------
This Agreement consists exclusively of this document
together with Schedule A, Exhibits I______and the following
rider(s) [check applicable rider(s)]:
ERISA
-------
* MUTUAL FUND
-------
SPECIAL TERMS AND CONDITIONS
-------
There are no other provisions of this Agreement and this
Agreement supersedes any other agreements, whether written or
oral, between the parties. Any amendment to this Agreement must
be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions
of this Agreement are held invalid, illegal or unenforceable in
any respect on the basis of any particular circumstances or in
any jurisdiction, the validity, legality and enforceability of
any such provision and the remaining provisions, under other
circumstances or in other jurisdictions will not in any way be
affected or impaired.
<PAGE> 6
(g) Waiver. Except as otherwise provided in this Agreement,
no failure or delay on the part of either party in exercising
any power or right under this Agreement operates as a waiver,
nor does any single or partial exercise of any power or right
preclude any other or further exercise thereof, or the exercise
of any other power or right. No waiver by a party of any
provision of this Agreement, or waiver of any breach or default,
is effective unless in writing and signed by the party against
whom the waiver is to be enforced.
(h) Notices. All notices under this Agreement shall be
effective when actually received. Any notices or other
communications which may be required under this Agreement are to
be sent to the parties at the following addresses or such other
addresses as may subsequently be given to the other party in
writing:
Bank: The Chase Manhattan Bank, N.A.
1211 Avenue of the Americas
New York, NY 10036
Attention: Global Custody Division
Customer: MERRILL LYNCH DEVELOPING MARKETS FUND INC.
MERRILL LYNCH ASSET MENAGEMENT
800 SCUDDERS MILL ROAD
PLAINSBORO, NJ 08536
(i) Termination. This Agreement may be terminated by the
Customer or the Bank by giving sixty days written notice to the
other, provided that such notice to the Bank shall specify the
names of the persons to whom the Bank shall deliver the Assets
in the Accounts. If notice of termination is given by the Bank,
the Customer shall, within sixty days following receipt of the
notice, deliver to the Bank Instructions specifying the names of
the persons to whom the Bank shall deliver the Assets. In
either case the Bank will deliver the Assets to the persons so
specified, after deducting any amounts which the Bank determines
in good faith to be owed to it under Section 13. It within
sixty days following receipt of a notice of termination by the
Bank, the Bank does not receive Instructions from the Customer
specifying the names of the persons to whom the Bank shall
deliver the Assets, the Bank, at its election, may deliver the
Assets to a bank or trust company doing business in the State of
New York to be held and disposed of pursuant to the provisions
of this Agreement, or to Authorized Persons, or may continue to
hold the Assets until Instructions are provided to the Bank.
CUSTOMER
By/S/ GERALD M. RICHARD
Title: TREASURER
THE CHASE MANHATTAN BANK, N. A.
By /S/ PETER DERRENBACHER,
TITLE: VICE PRESIDENT
<PAGE> 7
STATE OF NEW JERSEY
COUNTY OF MIDDLESEX
On this 24th day of August, 1989 , before me personally came
Gerald Richard to me known, who being by me duly sworn, did depose
and say that he/she resides in New Jersey at Belle Mead, NJ: that
he/she is Treasurer of Merrill Lynch Developing Capital Market
Fund, Inc. the Customer which executed the foregoing Agreement;
that he/she knows the seal of the customer; that the seal affixed
to the Agreement is such seal; that it was affixed by order of the
Customer, and that he/she signed his/her name thereto by like order.
Sworn to before me this 24th day of August, 1989.
On this 30th day of August, 1989, before me personally came
Peter Derrenbacher to me known,who being by me duly sworn, did
depose and say that he /she resides in New York at North Babylon;
that he/she is a Vice President of THE CHASE MANHATTAN BANK, N.A.
("Bank"), the Bank which executed the foregoing Agreement; that
he/she knows the seal of the Bank; that the seal affixed to the
Agreement is such corporate seal; that it was so affixed by order
of the Board of Directors of the Bank, and that he/she signed
his/her name thereto by like order
Sworn to before me this 30th day of August, 1989
<PAGE> 8
Mutual Fund Rider to Global Custody Agreement
Between The Chase Manhattan Bank, N.A. and
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, effective July 17, 1989
Customer represents that the Assets being placed in the
Bank's custody are subject to the Investment Company Act of 1940
(the "Act"), as the same may be amended from time to time.
Except to the extent that the Bank has specifically agreed to
comply with a condition of a rule, regulation or interpretation
promulgated by or under the authority of the SEC or the Exemptive
Order applicable to accounts of this nature issued to the Bank
(Investment Company Act of 1940, Release No. 12053, November 20,
1981), as amended, or unless the Bank has otherwise specifically
agreed, the Customer shall be solely responsible to assure that
the maintenance of Assets under this Agreement complies with such
rules, regulations, interpretations or exemptive order
promulgated by or under the authority of the Securities Exchange
Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used in
this Agreement shall mean a branch of a qualified U.S. bank, an
eligible foreign custodian or an eligible foreign securities
depository, which are further defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as
defined in Rule 17f-5 under the Act;
(b) "eligible foreign custodian" shall mean (i) a banking
institution or trust company incorporated or organized under the
laws of a country other than the United States that is regulated
as such by that country's government or an agency thereof and
that has shareholders equity in excess of $200 million in U.S.
currency (or a foreign currency equivalent thereof), (ii) a
majority owned direct or indirect subsidiary of a qualified U.S.
bank or bank holding company that is incorporated or organized
under the laws of a country other than the United States and that
has shareholders' equity in excess of $100 million in U.S.
currency (or a foreign currency equivalent thereof), (iii) a
banking institution or trust company incorporated or organized
under the laws of a country other than the United States or a
majority owned direct or indirect subsidiary of a qualified U.S.
bank or bank holding company that is incorporated or organized
under the laws of a country other than the United States which
has such other qualifications as shall be specified in
Instructions and approved by the Bank or (iv) any other entity
that shall have been so qualified by exemptive order, rule or
other appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a
securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United
States, which operates (i) the central system for handling
securities or equivalent book-entries in that country or (ii) a
transnational system for the central handling of securities or
equivalent book-entries.
The Customer represents that its Board of Directors has
approved each of the Subcustodians listed in Schedule A to this
Agreement and the terms of the subcustody agreements between the
Bank and each Subcustodian, which are attached as Exhibits I
through of Schedule A, and further represents that its
Board has determined that the use of each Subcustodian and the
terms of each subcustody agreement are consistent with the best
interests of the Customer's fund(s) and its (their)
shareholders. The Bank will supply the Customer with any
amendment to Schedule A for approval. The Customer has supplied
or will supply the Bank with certified copies of its Board of
Directors resolution(s) with respect to the foregoing prior to
placing Assets with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Account transactions made pursuant to Sections 5 and 6 of
this Agreement may be made only for the purposes listed below.
Instructions must specify the purpose for which any transaction
is to be made and the Customer shall be solely responsible to
assure that Instructions are in accord with any limitations or
restrictions applicable to the Customer by law or as may be set
forth in its prospectus.
<PAGE> 9
(a) In connection with the purchase or sale of Securities at
prices as confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or
otherwise become payable.
(c) In exchange for or upon conversion into other securities
alone or other securities and cash pursuant to any plan or
merger, consolidation, reorganization, recapitalization or
readjustment.
(d) Upon conversion of Securities pursuant to their terms
into other securities.
(e) Upon exercise of subscription, purchase or other similar
rights represented by Securities.
(f) For the payment of interest, taxes, management or
supervisory fees, distributions or operating expenses,
(g) In connection with any borrowings by the Customer
requiring a pledge of Securities, but only against receipt of
amounts borrowed.
(h) In connection with any loans, but only against receipt
of adequate collateral as specified in Instructions which shall
reflect any restrictions applicable to the Customer
(i) For the purpose of redeeming shares of the capital stock
of the Customer and the delivery to ,or the crediting to the
account of the Bank, its Subcustodian or the Customer's transfer
agent, such shares to be purchased or redeemed.
(j) For the purpose of redeeming in kind shares of the
Customer against delivery of the shares to be redeemed to the
Bank, its Subcustodian or the Customer's transfer agent.
(k) For delivery in accordance with the provisions of any
agreement among the Customer, the Bank and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of the National Association of
Securities Dealers, Inc., relating to compliance with the rules
of The Options Clearing Corporation and of any registered
national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Customer
(l) For release of Securities to designated brokers under
covered call options, provided, however, that such Securities
shall be released only upon payment to the Bank of monies for
the premium due and a receipt for the Securities which are to be
held in escrow. Upon exercise of the option, or at expiration,
the Bank will receive the Securities previously deposited from
brokers. The Bank will act strickly in accordance with
Instructions in the delivery of Securities to be held in escrow
and will have no responsibility or liability for any such
Securities which are not returned promptly when due other than
to make proper request for such return.
(m) For spot or forward foreign exchange transactions to
facilitate security trading, receipt of income from Securities
or related transactions.
(n) For other proper purposes as may be specified in
Instructions issued by an officer of the Customer which shall
include a statement of the purpose for which the delivery or
payment is to be made, the amount of the payment or specific
Securities to be delivered, the name of the person or persons to
whom delivery or payment is to be made, and a certification that
the purpose is a proper purpose under the instruments governing
the Customer.
(o) Upon the termination of this Agreement as set forth in
Section 14(i).
Section 12. Standard of Care; Liabilities.
Add the following subsection (d) to Section 12:
(d) The Bank hereby warrants to the Customer that in its
opinion, after due inquiry,the established procedures to be
followed by each of its branches, each branch of a qualified
U.S. bank, each eligible foreign custodian and each eligible
foreign securities depository holding the Customer's Securities
pursuant to this Agreement afford protection for such Securities
at least equal to that afforded by the Bank's established
procedures with respect to similar securities held by the Bank
and its securities depositories in New York.
Section 14. Access to Records.
Add the following language to the end of Section 14(c):
Upon reasonable request from the Customer, the Bank shall
furnish the Customer such reports (or portions thereof), of the
Bank's system of internal accounting controls applicable to the
Bank's duties under this Agreement. The Bank shall endeavor to
obtain and furnish the Customer with such similar reports as it
may reasonably request with respect to each Subcustodian and
securities depository holding the Customer's assets.
<PAGE> 1
Ex-99 .9 (a)
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the 19th day of June, 1989 by and
between MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. (the
"Fund") , and Financial Data Services, Inc. ("FDS") , a New Jersey
corporation.
WITNESSETH:
WHEREAS, the Fund wishes to appoint FDS to be the Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent,
for the Fund upon, and subject to, the terms and provisions of
this Agreement, and FDS is desirous of accepting such appointment
upon, and subject to, such terms and provisions:
NOW, THEREFORE, in consideration of mutual covenants con-
tained in this Agreement, the Fund and FDS agree as follows:
1. Appointment of FDS as Transfer Agent, Dividend Dis-
bursing Agent and Shareholder Servicing Agent.
(a) The Fund hereby appoints FDS to act as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund upon, and subject to, the terms and provisions of this
Agreement.
(b) FDS hereby accepts the appointment as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund, and agrees to act as such upon, and subject to, the terms
and provisions of the Agreement.
2. Definitions.
(a) In this Agreement:
(I) The term "Act" means the Investment Company Act
of 1940 as amended from time to time and any rule or
regulation thereunder;
(II) The term "Account" means any account of a Share-
holder, or, if the shares are held in an account in the name
of MLPF&S for benefit of an identified customer, such ac-
<PAGE> 2
count, including a Plan Account, any account under a plan
(by whatever name referred to in the Prospectus) pursuant to
the Self-Employed Individuals Retirement Act of 1962 ("Keogh
Act Plan") and any plan (by whatever name referred to in the
Prospectus) in conjunction with section 401 of the Internal
Revenue Code ("Corporation Master Plan");
(III) The term "application" means an application
made by a Shareholder or prospective Shareholder respecting
the opening of an Account;
(IV) The term "MLFD" means Merrill Lynch Funds
Distributor, Inc., a Delaware corporation;
(V) The term "MLPF&S" means Merrill Lynch,
Pierce, Fenner & Smith Incorporated, a Delaware corporation;
(VI) The term "Officer's Instruction" means an
instruction in writing given on behalf of the Fund to MLFDS,
and signed on behalf of the Fund by the President, any Vice
President, the Secretary or the Treasurer of the Fund;
(VII) The term "Prospectus" means the Prospectus
and the State of Additional Information of the Fund as from
time to time in effect;
(VIII) The term "Shares" means shares of stock of the
Fund, irrespective of class or series;
(IX) The term "Shareholder" means the holder of
record of Shares;
(X) The term "Plan Account" means an account
opened by a Shareholder or prospective Shareholder in
respect to an open account, monthly payment or withdrawal
plan (in each case by whatever name referred to in the
Prospectus), and may also include an account relating to any
other Plan if and when provision is made for such plan in
the Prospectus.
3. Duties of FDS as Transfer Agent, Dividend Disbursing
Agent and Shareholder servicing Agent.
(a) Subject to the succeeding provisions of the Agreement,
FDS hereby agrees to perform the following functions as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund;
2.
<PAGE> 3
(I) Issuing, transferring and redeeming Shares;
(II) Opening, maintaining, servicing and closing
Accounts;
(III) Acting as agent for the Fund Shareholders
and/or customers of MLPF&S in connection with Plan Accounts,
upon the terms and subject to the conditions contained in
the Prospectus and application relating to the specific Plan
Account;
(IV) Acting as agent of the Fund and/or MLPF&S,
maintaining such records as may permit the imposition of
such contingent deferred sales charges as may be described
in the Prospectus, including such reports as may be
reasonably requested by the Fund with respect to such Shares
as may be subject to a contingent deferred sales charge;
(V) Upon the redemption of Shares subject to
such a contingent deferred sales charge, calculating and
deducting from the redemption proceeds thereof the amount of
such charge in the manner set forth in the Prospectus. FDS
shall pay, on behalf of MLFD, to MLPF&S such deducted
contingent deferred sales charges imposed upon all Shares
maintained in the name of MLPF&S, or maintained in the name
of an account identified as a customer account of MLPF&S.
Sales charges imposed upon any other Shares shall be paid by
FDS to MLFD.
(VI) Exchanging the investment of an investor
into, or from the shares of other open-end investment
companies or other series portfolios of the Fund, if any, if
and to the extent permitted by the Prospectus at the
direction of such investor.
(VII) Processing redemptions;
(VIII) Examining and approving legal transfers;
(IX) Replacing lost, stolen or destroyed
certificates representing Shares, in accordance with, and
subject to, procedures and conditions adopted by the Fund;
(X) Furnishing such confirmations of
transactions relating to their Shares as required by
applicable law;
(XI) Acting as agent for the Fund and/or MLPF&S,
furnishing such appropriate periodic statements relating to
Accounts, together with additional enclosures, including
appropriate income tax information and income tax forms duly
completed, as required by applicable law;
3.
<PAGE> 4
(XII) Acting as agent for the Fund and/or MLPF&S,
mailing annual, semi-annual and quarterly reports prepared
by or on behalf of the Fund, and mailing new Prospectuses
upon their issue to Shareholders as required by applicable
law;
(XIII) Furnishing such periodic statements of trans-
actions effected by FDS, reconciliations, balances and
summaries as the Fund may reasonably request;
(XIV) Maintaining such books and records relating
to transactions effected by FDS as are required by the Act,
or by any other applicable provision of law, rule or
regulation, to be maintained by the Fund or its transfer
agent with respect to such transactions, and preserving, or
causing to be preserved any such books and records for such
periods as may be required by any such law, rule or
regulation and as may be agreed upon from time to time
between FDS and the Fund. In addition, FDS agrees to
maintain and preserve master files and historical computer
tapes on a daily basis in multiple separate locations a
sufficient distance apart to insure preservation of at least
one copy of such information;
(XV) Withholding taxes on non-resident alien
Accounts, preparing and filing U.S. Treasury Department Form
1099 and other appropriate forms as required by applicable
law with respect to dividends and distributions; and
(XVI) Reinvesting dividends for full and
fractional shares and disbursing cash dividends, as
applicable.
(b) FDS agrees to act as proxy agent in connection with
the holding of annual, if any, and special meetings of
Shareholders, mailing such notices, proxies and proxy statements in
connection with the holding of such meetings as may be required by
applicable law, receiving and tabulating votes cast by proxy and
communicating to the Fund the results of such tabulation accom-
panied by appropriate certificates, and preparing and furnishing to
the Fund certified lists of Shareholders as of such date, in such
form and containing such information as may be required by the
Fund.
(c) FDS agrees to deal with, and answer in a timely
manner, all correspondence and inquires relating to the functions
of FDS under this Agreement with respect to Accounts.
(d) FDS agrees to furnish to the Fund such information
and at such intervals as is necessary for the Fund to comply with
the registration and/or the reporting requirements (including
applicable escheat laws) of the Securities and Exchange commis-
sion, Blue Sky authorities or other governmental authorities.
4.
<PAGE> 5
(e) FDS agrees to provide to the Fund such information as may
reasonably be required to enable the Fund to reconcile the number of
outstanding Shares between FDS's records and the account books of the
Fund.
(f) Notwithstanding anything in the foregoing provisions of
this paragraph, FDS agrees to perform its functions thereunder
subject to such modification (whether in respect of particular cases
or in any particular class of cases) as may from time to time be
contained in an Officer's Instruction.
4. compensation.
The charges for services described in this Agreement, in-
cluding "out-of-pocket" expenses, will be set forth in the Sche-
dule of Fees attached hereto.
5. Right of Inspection.
FDS agrees that it will in a timely manner make available to,
and permit, any officer, accountant, attorney or authorized agent
of the Fund to examine and make transcripts and copies (including
photocopies and computer or other electronical information storage
media and print-outs) of any and all of its books and records
which relate to any transaction or function performed by FDS under
or pursuant to this Agreement.
6. Confidential Relationship.
FDS agrees that it will, on behalf of itself and its officers
and employees, treat all transactions contemplated by this
Agreement, and all information germane thereto, as confidential
and not to be disclosed to any person (other than the Shareholder
concerned, or the Fund, or as may be disclosed in the examination
of any books or records by any person lawfully entitled to examine
the same) except as nay be authorized by the Fund by way of an
officer's Instruction.
7. Indemnification.
The Fund shall indemnify and hold FDS harmless from any loss,
costs, damage and reasonable expenses, including reasonable
attorney's fees (provided that such attorney is appointed with the
Fund's consent, which consent shall not be unreasonably withheld),
incurred by it resulting from any claim, demand, action, or suit
in connection with the performance of its duties hereunder, pro-
vided that this indemnification shall not apply to actions or
omissions of FDS in cases of willful misconduct, failure to act in
good faith or negligence by FDS, its officers, employees or
agents, and further provided, that prior to confessing any claim
5.
<PAGE> 6
against it which may be subject to this indemnification, FDS shall
give the Fund reasonable opportunity to defend against said claim
in its own name or in the name of FDS. An action taken by FDS
upon any officer's Instruction reasonably believed by it to have
been properly executed shall not constitute willful misconduct,
failure to act in good faith or negligence under this Agreement.
8. Regarding FDS.
(a) FDS hereby agrees to hire, purchase, develop and
maintain such dedicated personnel, facilities, equipment, soft-
ware, resources and capabilities as may be reasonably determined
by the Fund to be necessary for the satisfactory performance of
the duties and responsibilities of FDS. FDS warrants and
represents that its officers and supervisory personnel charged
with carrying out its functions as Transfer Agent, Dividend Dis-
bursing Agent and Shareholder Servicing Agent for the Fund possess
the special skill and technical knowledge appropriate for that
purpose. FDS shall at all times exercise due care and diligence
in the performance of its functions as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund.
FDS agrees that, in determining whether it has exercised due care
and diligence, its conduct shall be measured by the standard
applicable to persons possessing such special skill and technical
knowledge.
(b) FDS warrants and represents that it is duly authorized
and permitted to act as Transfer Agent, Dividend Disbursing Agent,
and Shareholder Servicing Agent under all applicable laws and that
it will immediately notify the Fund of any revocation of such
authority or permission or of the commencement of any proceeding
or other action which may lead to such revocation.
9. Termination.
(a) This Agreement shall become effective as of the date
first above written and shall thereafter continue from year to
year. This Agreement may be terminated by the Fund or FDS
(without penalty to the Fund or FDS) provided that the terminating
party gives the other party written notice of such termination at
least sixty (60) days in advance, except that the Fund may
terminate this Agreement immediately upon written notice to FDS if
the authority or permission of FDS to act as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent has been
revoked or if any proceeding or other action which the Fund
reasonably believes will lead to such revocation has been com-
menced.
(b) Upon termination of this Agreement, FDS shall deliver
all unissued and cancelled stock certificates representing Shares
6.
<PAGE> 7
remaining in its possession, and all Shareholder records, books,
stock ledgers, instruments and other documents (including compu-
terized or other electronically stored information) made or accu-
mulated in the performance of its duties as Transfer Agent, Dis-
bursing Agent and Shareholder Servicing Agent for the Fund along
with a certified locator document clearly indicating the complete
contents therein, to such successor as may be specified in a
notice of termination or Officer's Instruction; and the Fund
assumes all responsibility for failure thereafter to produce any
paper, record or documents so delivered and identified in the
locator document, if and when required to be produced.
10. Amendment.
Except to the extent that the performance by FDS or its
functions under this Agreement may from time to time be modified
by an Officer's Instruction, this Agreement may be amended or
modified only by further written Agreement between the parties.
11. Governing Law.
This Agreement shall be governed by the laws of the State of
New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective duly authorized offi-
cers and their respective corporate seals hereunto duly affixed
and attested, as of the day and year above written.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
By /s/ Gerald M. Richard
FINANCIAL DATA SERVICES, INC.
By /s/ Anthony R. Mannciano Jr.
7.
<PAGE> 8
Schedule of Fees
The Fund will pay to FDS an annual fee of $11.00 per
Class A and Class D Shareholder Account and $14.00 per Class B
and Class C Shareholder Account in addition to reimbursement
for the out- of-pocket expenses incurred by FDS pursuant to
this Agreement.
<PAGE> 1
EX-99. 9(b)
LICENSE AGREEMENT RELATING TO USE OF NAME
AGREEMENT made as of the day of 1989 by and
between MERRILL LYNCH & CO., INC. ("ML&Co."), a Delaware
corporation and MERRILL LYNCH ECONOMIC DEVELOPMENT FUND, INC., a
Maryland corporation (the "Fund");
W I T N E S S E T H
WHEREAS, ML&CO. was incorporated under the laws of the State
of Delaware on March 27, 1973 under the corporate name "Merrill
Lynch & Co., Inc." and has used such name at all times
thereafter;
WHEREAS, ML&CO. was duly qualified as a foreign corporation
under the laws of the State of New York April 25, 1973 and has
remained so qualified at all times thereafter;
WHEREAS, the Fund was incorporated under the laws of the
State of Maryland on April 14, 1989; and
WHEREAS, the Fund desires to qualify as a foreign
corporation under the laws of the State of New York and has
requested ML&CO. to give its consent to the use of the name
"Merrill Lynch" in the Fund's corporate name.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and of the
covenants hereinafter contained, ML&CO. and the Fund hereby agree
as follows:
1. ML&CO. hereby grants the Fund a non-exclusive license to
use the words "Merrill Lynch" in its corporate name.
2. ML&CO. hereby consents to the qualification of the Fund
as a foreign corporation under the laws of the State of New York
with the words "Merrill Lynch" in its corporate name and agrees
to execute such formal consents as may be necessary in connection
with such filing.
3. The non-exclusive license hereinabove referred to has
been given and is given by ML&CO. on the condition that it may at
any time, in its sole and absolute discretion, withdraw the non-
exclusive license to the use of the words "Merrill Lynch" in the
name of the Fund; and, as soon as practicable after receipt by
the Fund of written notice of the withdrawal of such non-
exclusive license, and in no event later than ninety days
thereafter, the Fund will change its name so that such name will
not thereafter include the words "Merrill Lynch" or any variation
thereof.
4. ML&CO. reserves and shall have the right to grant to any
other company, including without limitation, any other investment
company, the right to use the words "Merrill Lynch" or variations
thereof in its name and no consent or permission of the Fund
shall be necessary; but, if required by an applicable law of any
state, the Fund will forthwith grant all requisite consents.
2.
<PAGE> 3
5. The Fund will not grant to any other company the right
to use a name similar to that of the Fund or ML&Co. without the
written consent of ML&Co.
6. Regardless of whether the Fund should hereafter change
its name and eliminate the words "Merrill Lynch" or any variation
thereof from such name, the Fund hereby grants to ML&C0. the
right to cause the incorporation of other corporations or the
organization of voluntary associations which may have names
similar to that of the Fund or to that to which the Fund may
change its name and to own all or any portion of the shares of
such other Corporations or associations and to enter into
contractual relationships with such other corporations or
associations, subject to any requisite approval of a majority of
the Fund's shareholders and the Securities and Exchange
Commission and subject to the payment of a reasonable amount to
be determined at the time of use, and the Fund agrees to give and
execute any such formal consents or agreements as may be
necessary in connection therewith.
7. This Agreement may be amended at any time by a writing
signed by the parties hereto.
3.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH & Co., INC.
By
Vice President
MERRILL LYNCH ECONOMIC DEVELOPMENT FUND, INC.
By
President
4.
<PAGE> 1
EX-99 .13
CERTIFICATE OF SOLE STOCKHOLDER
Merrill Lynch Asset Management, Inc., the holder of 10,417
shares of common stock, par value $0.10 per share of Merrill Lynch
Developing Capital Markets Fund, Inc., a Maryland corporation (the
"Fund"), does hereby confirm to the Fund its representation that
it purchased such shares for investment purposes, with no present
intention of redeeming or reselling any portion thereof, and does
further agree that if it redeems any portion of such shares prior
to the amortization of the Fund's organizational expenses, the
proceeds thereof will be reduced by the proportionate amount of
the unamortized organizational expenses which the number of shares
being redeemed bears to the number of shares initially purchased.
MERRILL LYNCH ASSET MANAGEMENT, INC.
By /s/ Mark B. Goldfus
Dated: July 12, 1989
<PAGE> 1
Ex-99.16(a)
Merrill Lynch Developing Capital Markets; Fund, Inc.
Total Return
<TABLE>
<CAPTION>
Period from
09/01/89 Annual
(Inception) Total
to 12/31/89 Return*
----------- ----------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by
maximum Offering Price 10.00
-----------
Divided by Not Asset Value 9.60
----------
Equals Shares Purchased 100.00 104.17
Plus Shares Acquired through
Dividend Reinvestment 1.32 1.29
----------- ----------
Equals Shares Held
at 12/31/89 101.32 105.46
Multiplied by Net Asset
Value at 12/31/89 10.13 10.13
----------- ----------
$1,026.40 $1,068.30
Less 2% Redeemtion Fee (20.00) (20.00)
----------- ----------
Equals Ending Redeemable
Value at $1,000
Investment (ERV) at 12/31/89 $1,006.40 $1,048.30
Divided by $1,000 (P) 1.0064 1.0483
Subtract 1 0.0064 0.0483
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 0.64%
===========
Expressed as a percentage
equals the Aggregate Total
Return for the Period 4.83%
==========
ERV divided by P
1.0064
Raise to the power of 1/.3260
Equals 0.1987
Subtract I 0.0198
Expressed as a percentage
equals the Average
Annualized Total Return 1.98%
===========
</TABLE>
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Developing Capital Markets Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 9 to Registration
Statement No. 33-28248 of our report dated August 3, 1995 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.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
Princeton, New Jersey
October 24, 1995
<PAGE> 1
EXHIBIT 16(B)
Merrill Lynch Developing Capital Markets Fund, Inc. - Class B
07/01/94 - 06/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 14.54 14.54
--------- ---------
Equals Shares Purchased 68.776 68.776
Plus Shares Acquired through
Dividend Reinvestment 5.077 5.077
--------- ---------
Equals Shares Held at 06/30/95 73.853 73.853
Multiplied by Net Asset Value at 06/30/95 13.24 13.24
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 977.82 977.82
Less deferred sales charge (36.18) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 06/30/95 941.64 977.82
--------- ---------
Divided by $1,000 (P) 0.9416 0.9778
Subtract 1 -0.0584 -0.0222
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -5.84%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -2.22%
=========
ERV divided by P 0.9416
Raise to the power of 1.0027
Equals 0.9415
Subtract 1 -0.0585
Expressed as a percentage equals the
Average Annualized Total Return -5.85%
=========
* Does not include sales charge for the period.
</TABLE>
<PAGE> 1
EXHIBIT 16(C)
Merrill Lynch Developing Capital Markets Fund, Inc. - Class C
10/21/94 - 06/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 16.71 16.71
--------- ---------
Equals Shares Purchased 59.844 59.844
Plus Shares Acquired through
Dividend Reinvestment 4.476 4.476
--------- ---------
Equals Shares Held at 06/30/95 64.320 64.320
Multiplied by Net Asset Value at 06/30/95 13.22 13.22
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 850.32 850.32
Less deferred sales charge (7.86) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 06/30/95 842.46 842.46
--------- ---------
Divided by $1,000 (P) 0.8425 0.8503
Subtract 1 -0.1575 -0.1497
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -15.75%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -14.97%
=========
ERV divided by P 0.8425
Raise to the power of 1.4484
Equals 0.7801
Subtract 1 -0.2199
Expressed as a percentage equals the
Average Annualized Total Return -21.99%
=========
* Does not include sales charge for the period.
</TABLE>
<PAGE> 1
EXHIBIT 16(D)
Merrill Lynch Developing Capital Markets Fund, Inc. - Class D
10/21/94 - 06/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 17.70
---------
Divided by Net Asset Value 16.77
---------
Equals Shares Purchased 56.500 59.630
Plus Shares Acquired through
Dividend Reinvestment 4.279 4.516
--------- ---------
Equals Shares Held at 06/30/95 60.779 64.147
Multiplied by Net Asset Value at 06/30/95 13.33 13.33
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 06/30/95 810.18 855.07
Divided by $1,000 (P) 0.8102 0.8551
Subtract 1 -0.1892 -0.1449
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -18.98%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -14.49%
=========
ERV divided by P 0.8102
Raise to the power of 1.4484
Equals 0.7372
Subtract 1 -0.2628
Expressed as a percentage equals the
Average Annualized Total Return -26.28%
=========
* Does not include sales charge for the period.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<NAME> MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 573,323,357
<INVESTMENTS-AT-VALUE> 548,460,422
<RECEIVABLES> 10,540,409
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<PAYABLE-FOR-SECURITIES> 10,080,006
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<OTHER-ITEMS-LIABILITIES> 4,518,244
<TOTAL-LIABILITIES> 14,598,250
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 588,027,292
<SHARES-COMMON-STOCK> 26,225,174
<SHARES-COMMON-PRIOR> 27,513,862
<ACCUMULATED-NII-CURRENT> 3,689,081
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 13,589,754
<ACCUM-APPREC-OR-DEPREC> (24,799,464)
<NET-ASSETS> 350,081,400
<DIVIDEND-INCOME> 8,249,878
<INTEREST-INCOME> 9,190,848
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<EXPENSES-NET> 9,820,625
<NET-INVESTMENT-INCOME> 7,620,101
<REALIZED-GAINS-CURRENT> (8,597,447)
<APPREC-INCREASE-CURRENT> (27,448,282)
<NET-CHANGE-FROM-OPS> (28,425,628)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 987,487
<DISTRIBUTIONS-OF-GAINS> 29,559,968
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<NUMBER-OF-SHARES-SOLD> 5,308,700
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<SHARES-REINVESTED> 1,836,555
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<ACCUMULATED-NII-PRIOR> 564,507
<ACCUMULATED-GAINS-PRIOR> 30,521,564
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,820,625
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<PER-SHARE-NAV-BEGIN> 14.61
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> (.40)
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> 1.06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.35
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<NAME> MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> CLASS B SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 573,323,357
<INVESTMENTS-AT-VALUE> 548,460,422
<RECEIVABLES> 10,540,409
<ASSETS-OTHER> 8,924,574
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 567,925,405
<PAYABLE-FOR-SECURITIES> 10,080,006
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,518,244
<TOTAL-LIABILITIES> 14,598,250
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 588,027,292
<SHARES-COMMON-STOCK> 12,297,981
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,689,081
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 13,589,754
<ACCUM-APPREC-OR-DEPREC> (24,799,464)
<NET-ASSETS> 162,773,938
<DIVIDEND-INCOME> 8,249,878
<INTEREST-INCOME> 9,190,848
<OTHER-INCOME> 0
<EXPENSES-NET> 9,820,625
<NET-INVESTMENT-INCOME> 7,620,101
<REALIZED-GAINS-CURRENT> (8,597,447)
<APPREC-INCREASE-CURRENT> (27,448,282)
<NET-CHANGE-FROM-OPS> (28,425,628)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 8,425,721
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14,365,857
<NUMBER-OF-SHARES-REDEEMED> 2,598,808
<SHARES-REINVESTED> 530,932
<NET-CHANGE-IN-ASSETS> 151,331,408
<ACCUMULATED-NII-PRIOR> 564,507
<ACCUMULATED-GAINS-PRIOR> 30,521,564
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,240,621
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,820,625
<AVERAGE-NET-ASSETS> 102,207,830
<PER-SHARE-NAV-BEGIN> 14.54
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> (.32)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.24
<EXPENSE-RATIO> 2.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<NAME> MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> CLASS C SHARES
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 573,323,357
<INVESTMENTS-AT-VALUE> 548,460,422
<RECEIVABLES> 10,540,409
<ASSETS-OTHER> 8,924,574
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 567,925,405
<PAYABLE-FOR-SECURITIES> 10,080,006
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,518,244
<TOTAL-LIABILITIES> 14,598,250
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 588,027,292
<SHARES-COMMON-STOCK> 1,404,635
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,689,081
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<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 13,589,754
<ACCUM-APPREC-OR-DEPREC> (24,799,464)
<NET-ASSETS> 18,572,768
<DIVIDEND-INCOME> 8,249,878
<INTEREST-INCOME> 9,190,848
<OTHER-INCOME> 0
<EXPENSES-NET> 9,820,625
<NET-INVESTMENT-INCOME> 7,620,101
<REALIZED-GAINS-CURRENT> (8,597,447)
<APPREC-INCREASE-CURRENT> (27,448,282)
<NET-CHANGE-FROM-OPS> (28,425,628)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,936
<DISTRIBUTIONS-OF-GAINS> 477,867
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,551,655
<NUMBER-OF-SHARES-REDEEMED> 178,022
<SHARES-REINVESTED> 31,002
<NET-CHANGE-IN-ASSETS> 151,331,408
<ACCUMULATED-NII-PRIOR> 564,507
<ACCUMULATED-GAINS-PRIOR> 30,521,564
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,240,621
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,820,625
<AVERAGE-NET-ASSETS> 11,189,798
<PER-SHARE-NAV-BEGIN> 16.71
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> (2.50)
<PER-SHARE-DIVIDEND> .01
<PER-SHARE-DISTRIBUTIONS> 1.06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.22
<EXPENSE-RATIO> 2.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<NAME> MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<SERIES>
<NUMBER> 004
<NAME> CLASS D SHARES
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 573,323,357
<INVESTMENTS-AT-VALUE> 548,460,422
<RECEIVABLES> 10,540,409
<ASSETS-OTHER> 8,924,574
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<TOTAL-ASSETS> 567,925,405
<PAYABLE-FOR-SECURITIES> 10,080,006
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,518,244
<TOTAL-LIABILITIES> 14,598,250
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 588,027,292
<SHARES-COMMON-STOCK> 1,642,796
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,689,081
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 13,589,754
<ACCUM-APPREC-OR-DEPREC> (24,799,464)
<NET-ASSETS> 21,899,049
<DIVIDEND-INCOME> 8,249,878
<INTEREST-INCOME> 9,190,848
<OTHER-INCOME> 0
<EXPENSES-NET> 9,820,625
<NET-INVESTMENT-INCOME> 7,620,101
<REALIZED-GAINS-CURRENT> (8,597,447)
<APPREC-INCREASE-CURRENT> (27,448,282)
<NET-CHANGE-FROM-OPS> (28,425,628)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,439
<DISTRIBUTIONS-OF-GAINS> 537,034
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,528,342
<NUMBER-OF-SHARES-REDEEMED> 921,739
<SHARES-REINVESTED> 36,193
<NET-CHANGE-IN-ASSETS> 151,331,408
<ACCUMULATED-NII-PRIOR> 564,507
<ACCUMULATED-GAINS-PRIOR> 30,521,564
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 5,240,621
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,820,625
<AVERAGE-NET-ASSETS> 12,412,594
<PER-SHARE-NAV-BEGIN> 16.77
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> (2.48)
<PER-SHARE-DIVIDEND> .03
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<PER-SHARE-NAV-END> 13.33
<EXPENSE-RATIO> 2.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
