As filed with the Securities and Exchange Commission on October 28, 1996
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. 10 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 12 [x]
(Check appropriate box or boxes)
Merrill Lynch
Developing Capital Markets Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road 08536
Plainsboro, New Jersey (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code (609) 282-2800
Arthur Zeikel
Merrill Lynch Developing Capital Markets Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
Copies to:
Counsel for the Fund: Philip L. Kirstein, Esq.
BROWN & WOOD LLP 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
Frank P. Bruno, Esq. 08543-9011
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 23, 1996.
<PAGE>
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. Consolidated Financial Highlights; Performance
Condensed Financial Information Data
Item 4. Special and Risk Considerations; Investment
Objective and Policies; Additional
General Description of Registrant Information
Item 5. Fee Table; Investment Objective and Policies;
Management of the Fund; Inside
Management of the Fund 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. Cover Page; Fee Table; Merrill Lynch Select
Pricing(SM) System; Purchase of Shares;
Shareholder Services; Additional Information;
Purchase of Securities Being Offered Inside Back Cover Page
Item 8. Fee Table; Merrill Lynch Select Pricing(SM)
System; Shareholder Services; Purchase of
Redemption or Repurchase 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. Management of the Fund; Purchase of Shares;
Investment Advisory and Other Services General Information
Item 17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
Item 18. General Information--Description of
Capital Stock and Other Securities Shares
Item 19. Determination of Net Asset Value; Purchase of
Shares; Redemption of Shares; Shareholder
Purchase, Redemption and Pricing of Securities Services; General
Being Offered Information
Item 20. Tax Status Taxes
Item 21. Underwriters Purchase of Shares
Item 22. Calculation of Performance Data Performance Data
Item 23. Financial Statements Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C
to this Registration Statement.
</TABLE>
<PAGE>
PROSPECTUS
October 28, 1996
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, open-end management investment company 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 12. 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 PricingSM System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select PricingSM System
permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances. See "Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081
[(609) 282-2800], 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 28, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission
(the "Commission") and is available, without charge, by calling or by writing
the Fund at the above telephone number or address. The Statement of
Additional Information is hereby incorporated by reference into this
Prospectus.
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to 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 4.0% during the first year
percentage of original purchase decreasing 1.0% annually
price or redemption proceeds, thereafter to 0.0% after the 1.0% for
whichever is lower) None(d) fourth year(e) one year(f) None(d)
Exchange Fee None None None None
Annual Fund Operating Expenses
(as a percentage of average net
assets):
Investment Advisory Fees(g) 1.00% 1.00% 1.00% 1.00%
Rule 12b-l Fees(h):
Account Maintenance Fees None 0.25% 0.25% 0.25%
Distribution Fees None 0.75% 0.75% None
(Class B shares convert to Class D
shares automatically after
approximately eight years and cease
being subject to distribution fees)
Other Expenses:
Custodial Fees 0.22% 0.22% 0.22% 0.22%
Shareholder Servicing Costs(i) 0.18% 0.21% 0.22% 0.17%
Other 0.14% 0.13% 0.12% 0.12%
---- ---- ---- ----
Total Other Expenses 0.54% 0.56% 0.56% 0.51%
---- ---- ---- ----
Total Fund Operating Expenses 1.54% 2.56% 2.56% 1.76%
==== ==== ==== ====
</TABLE>
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, certain retirement plans and certain
participants in fee-based programs. See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares"--page 25 and
"Shareholder Services"--page 33.
(b) Class B shares convert to Class D shares automatically approximately
eight years after initial purchase. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares"--page 27.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based 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 25.
(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 after
purchase. Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder
Services"--page 33.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder
Services"--page 33.
(f) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder
Services"--page 33.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
22.
(h) See "Purchase of Shares--Distribution Plans"--page 30.
(i) See "Management of the Fund--Transfer Agency Services"--page 23.
2
<PAGE>
Example:
<TABLE>
<CAPTION>
Cumulative Expenses Paid
for the Period of:
------------------------------------------
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 2;
(2) a 5% annual return throughout the periods; and (3)
redemption at the end of the period:
Class A $67 $ 99 $132 $226
Class B $66 $100 $136 $271*
Class C $36 $ 80 $136 $290
Class D $69 $105 $143 $249
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A $67 $ 99 $132 $226
Class B $26 $ 80 $136 $271*
Class C $26 $ 80 $136 $290
Class D $69 $105 $143 $249
</TABLE>
*Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. The example should not be considered a representation
of past or future expenses or annual rates of return, and actual expenses or
annual rates of return may be more or less than those assumed for purposes of
the example. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under
the Conduct Rules of the National Association of Securities Dealers, Inc.
(the "NASD"). Merrill Lynch may charge its customers a processing fee
(presently $4.85) 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 PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM 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 PricingSM System is used
by more than 50 registered investment companies advised by Merrill Lynch
Asset Management, L.P. ("MLAM" or the "Manager") or its affiliate, Fund Asset
Management, L.P. ("FAM"). Funds advised by MLAM or FAM which utilize the
Merrill Lynch Select PricingSM System 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
3
<PAGE>
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on 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 any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used
to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM 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 PricingSM System that the
investor believes is most beneficial under his or her particular
circumstances. More detailed information as to each class of shares is set
forth under "Purchase of Shares".
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution
Class Sales Charge(1) Fee Fee Conversion Feature
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales charge(2)(3) No No No
- -------------------------------------------------------------------------------------------------------------
B CDSC for a period of four years, at a B shares convert to
rate of 4.0% during the first year, D shares automatically
decreasing 1.0% annually to 0.0%(4) after approximately
0.25% 0.75% eight years(5)
- -------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 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 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 and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. A 0.75% sales charge for 401(k) purchases
over $1,000,000 will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
4
<PAGE>
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class
A shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Other eligible investors
include certain retirement plans and participants in certain
fee-based programs. In addition, Class A shares will be offered at
net asset value to Merrill Lynch & Co., Inc. ("ML & Co.") and its
subsidiaries (the term "subsidiaries", when used herein with respect
to ML & Co., includes MLAM, FAM and certain other entities directly
or indirectly wholly-owned and controlled by ML & Co.) and to their
directors and employees and to members of the Boards of MLAM-advised
mutual funds. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 and over, and waived for purchases by
certain retirement plans and participants 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 may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with redemptions to fund participation in
certain fee- based programs. 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. The CDSC may be modified in
connection with redemptions to fund certain fee-based programs.
Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are
subject to an account maintenance fee but no distribution fee; Class
B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert 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 average net
assets attributable to Class C shares. Class C shares are also
subject to a CDSC of 1.0% if they are
5
<PAGE>
redeemed within one year of purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain
fee-based programs. Although Class C shares are subject to a CDSC
for only one year (as compared to four years for Class B), Class C
shares have no conversion feature and, accordingly, an investor that
purchases Class C shares will be subject to distribution fees that
will be imposed on Class C shares for an indefinite period subject
to annual approval by the Fund's Board of Directors and regulatory
limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of
the Fund's average net assets attributable to Class D shares. Class
D shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. Purchases of $1,000,000 or more may not be
subject to an initial sales charge but if the initial sales charge
is waived such purchases may be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with redemptions to fund participation in
certain fee-based programs. The schedule of initial sales charges
and reductions for Class D shares is the same as the schedule for
Class A shares, except that there is no waiver for purchases in
connection with certain fee-based programs. Class D shares also will
be issued upon conversion of Class B shares as described above under
"Class B". See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares".
The following is a discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select PricingSM System that the investor believes is most beneficial
under his or her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection
with purchases of Class B and Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time also may elect to purchase Class A or Class D shares,
because over time the accumulated ongoing account maintenance and
distribution fees on Class B or Class C shares may exceed the initial sales
charge and, in the case of Class D shares, the account maintenance fee.
Although some investors that previously purchased Class A shares may no
longer be eligible to purchase Class A shares of other MLAM- advised mutual
funds, those previously purchased Class A shares, together with Class B,
Class C and Class D share holdings, will count toward a right of accumulation
which may qualify the investor for reduced initial sales charges on new
initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C
shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be
particularly appealing to investors who do not qualify for a reduction in
initial sales charges. Both Class B and Class C shares are subject to ongoing
account maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C
6
<PAGE>
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".
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, 1996, are included in the Statement of Additional
Information. Further information about the performance of the Fund is
contained in the Fund's most recent annual report to shareholders which may
be obtained, without charge, by calling or by writing the Fund at the
telephone number or address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited consolidated financial statements.
<TABLE>
<CAPTION>
Class A Shares
---------------------------------------------------------------------------------
For the Period
For the Year Ended June 30, September 1,
----------------------------------------------------------------- 1989+ to
June 30, 1990
1996++ 1995 1994 1993++ 1992 1991 --------------
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period $ 13.35 $ 14.61 $ 11.62 $ 11.92 $ 10.43 $ 11.58 $ 9.60
-------- -------- -------- -------- -------- -------- --------
Investment income--net .23 .24 .11 .12 .15 .24 .24
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.71 (.40) 3.23 .42 1.59 (.75) 1.88
-------- -------- -------- -------- -------- -------- --------
Total from investment operations 1.94 (.16) 3.34 .54 1.74 (.51) 2.12
-------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.24) (.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 (.24) (1.10) (.35) (.84) (.25) (.64) (.14)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.05 $ 13.35 $ 14.61 $ 11.62 $ 11.92 $ 10.43 $ 11.58
======== ======== ======== ======== ======== ======== ========
Total Investment Return:**
Based on net asset value per share 14.82% (1.67)% 28.73% 5.17% 17.02% (4.45)% 22.29%#
======== ======== ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses 1.54% 1.62% 1.46% 1.71% 1.64% 1.77% 1.71%*
======== ======== ======== ======== ======== ======== ========
Investment income (loss)--net 1.66% 1.56% .63% (.04)% 1.73% 1.98% 2.69%*
======== ======== ======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands) $342,884 $350,081 $401,996 $142,285 $126,417 $111,947 $104,033
======== ======== ======== ======== ======== ======== ========
Portfolio turnover 71.01% 63.37% 66.85% 91.72% 71.05% 84.74% 64.53%
======== ======== ======== ======== ======== ======== ========
Average commission rate paid## $ .0012 -- -- -- -- -- --
======== ======== ======== ======== ======== ======== ========
</TABLE>
(Table continues on following page)
7
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Class C Shares Class D Shares
------------------------- ----------------------- ------------------------
For the For the For the
For the Period For the Period For the Period
Year July 1, Year October 21, Year October 21,
Ended 1994+ Ended 1994+ Ended 1994+
June 30, to June 30, June 30, to June 30, June 30, to June 30,
1996++ 1995 1996++ 1995 1996++ 1995
----------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period $ 13.24 $ 14.54 $ 13.22 $ 16.71 $ 13.33 $ 16.77
-------- -------- ------- ------- ------- -------
Investment income--net .09 .08 .09 .08 .21 .13
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.69 (.32) 1.70 (2.50) 1.69 (2.48)
-------- -------- ------- ------- ------- -------
Total from investment operations 1.78 (.24) 1.79 (2.42) 1.90 (2.35)
-------- -------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.12) -- (.14) (.01) (.21) (.03)
Realized gain on investments--net -- (.60) -- (.60) -- (.60)
In excess of realized gain on
investments--net -- (.46) -- (.46) -- (.46)
-------- -------- ------- ------- ------- -------
Total dividends and distributions (.12) (1.06) (.14) (1.07) (.21) (1.09)
-------- -------- ------- ------- ------- -------
Net asset value, end of period $ 14.90 $ 13.24 $ 14.87 $ 13.22 $ 15.02 $ 13.33
======== ======== ======= ======= ======= =======
Total Investment Return:**
Based on net asset value per share 13.63% (2.22)%# 13.68% (14.97)%# 14.55% (14.49)%#
======== ======== ======= ======= ======= =======
Ratios to Average Net Assets:
Expenses 2.56% 2.79%* 2.56% 2.96%* 1.76% 2.19%*
======== ======== ======= ======= ======= =======
Investment income--net .65% 1.01%* .67% 1.32%* 1.48% 2.10%*
======== ======== ======= ======= ======= =======
Supplemental Data:
Net assets, end of period (in thousands) $302,183 $162,774 $46,983 $18,573 $57,821 $21,899
======== ======== ======= ======= ======= =======
Portfolio turnover 71.01% 63.37% 71.01% 63.37% 71.01% 63.37%
======== ======== ======= ======= ======= =======
Average commission rate paid## $ .0012 -- $ .0012 -- $ .0012 --
======== ======== ======= ======= ======= =======
</TABLE>
+Commencement of operations.
++Based on average number of shares outstanding during the period.
*Annualized.
**Total investment returns exclude the effects of sales loads.
#Aggregate total investment return.
##For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
8
<PAGE>
SPECIAL AND RISK CONSIDERATIONS
Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as the Fund. As
illustrations, certain countries require governmental approval prior to
investments by foreign persons, or limit the amount of investment by foreign
persons in a particular company, or limit the investment by foreign persons
to only a specific class of securities of a company which may have less
advantageous terms than securities of the company available for purchase by
nationals. 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 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.
9
<PAGE>
Most of the securities held by the Fund are not registered with the
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 holding custody of 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 laws intended to protect
investors 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 in
seeking to hedge its portfolio against movements in the equity markets,
interest rates and exchange rates between currencies by the use of options,
futures and options on futures. Utilization of options and futures
transactions involves the risk of imperfect correlation in movements in the
price of options and futures and movements in the price of the securities,
interest rates or currencies which are the subject of the hedge. Options and
futures transactions in foreign markets are also subject to the risk factors
associated with foreign investments generally, as discussed above. There can
be no assurance that a liquid secondary market for options and futures
contracts will exist at any specific time.
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest, and such securities
may not be rated at all for creditworthiness. Securities rated in the medium
to lower rating categories of nationally recognized statistical rating
organizations and unrated securities of comparable quality are predominately
speculative with respect to the capacity to pay interest and repay principal
in accordance with the terms of the security and generally involve a greater
volatility of price than securities in
10
<PAGE>
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 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 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.
11
<PAGE>
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, 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.
12
<PAGE>
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. High yield/high risk securities are predominantly
speculative with respect to the capacity to pay interest and repay principal
in accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. See
"Investment Objective and Policies" in the Statement of Additional
Information for additional information regarding ratings of debt securities.
In purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer of
such securities. The Manager will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The Fund does not intend to purchase debt
securities that are in default or which the Manager believes will be in
default.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country where the primary trading market
of its securities is located. The Fund, however, may consider a company to be
located in countries having smaller capital markets, without reference to its
domicile or to the primary trading market of its securities, when at least
50% of its non-current assets, capitalization, gross revenues or profits in
any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such
countries. The Fund also may consider closed-end investment companies to be
located in the country or countries in which they primarily make their
portfolio investments.
The Fund reserves the right, as a temporary defensive measure or to
provide for redemptions or in anticipation of investment in countries having
smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or
foreign currencies) and short-term securities, including money market
securities ("Temporary Investments"). The Fund may invest in the securities
of foreign issuers in the form of American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") or
other securities convertible into securities of foreign issuers. The Fund may
invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated
to disclose material information in the United States, and therefore, there
may not be a correlation between such information and the market value of
such ADRs.
Portfolio Strategies Involving Options and Futures
The Fund may engage in various portfolio strategies to hedge its portfolio
against adverse movements in equity, debt and currency markets. The Fund has
authority to purchase and write (i.e., sell) covered put and call options on
its portfolio securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund may also
deal in
13
<PAGE>
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 liquid securities
denominated in U.S. dollars or non-U.S. currencies with a securities
depository with a value equal to or greater than the exercise price of the
underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the
market value of that security at the time of exercise for as long as the
option is outstanding. The Fund may engage in closing transactions in order
to terminate put options that it has written. The Fund will not write put
options if the aggregate value of the obligations underlying puts shall
exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a
put option the Fund has a right to sell the underlying security at the stated
exercise price, thus limiting the Fund's risk of loss through a decline in
the market value of the security until the put option expires. The amount of
any appreciation in the value of the underlying security will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. In certain circumstances, the Fund may purchase call
options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund will not
purchase options on securities (including stock index options discussed
below) if as a result of
14
<PAGE>
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, e.g., the S&P
500 Index, or based on a narrow index representing an industry or market
segment, e.g., the AMEX Oil & Gas Index.
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 is authorized to sell futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
the Fund's securities portfolio that might otherwise result. When the Fund is
not fully invested in the securities markets and anticipates a significant
market advance, it may purchase futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, an
equivalent amount of futures contracts will be terminated by offsetting
sales. The Manager does not consider purchases of futures contracts to be a
speculative practice under these circumstances. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a 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 is also authorized to engage in options and futures transactions
on U.S. and foreign exchanges and in options in the over-the-counter markets
("OTC options"). In general, exchange-traded contracts are third-party
contracts (i.e., performance of the parties' obligations is guaranteed by an
exchange or clearing corporation) with
15
<PAGE>
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.
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 liquid 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
("OTC") foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to
be purchased by the Fund. As an illustration, the Fund may use such
techniques to hedge the stated value in U.S. dollars of an investment in a
franc denominated security. In such circumstances, for example, the Fund may
purchase a foreign currency put option enabling it to sell a specified amount
of francs for dollars at a specified price by a future date. To the extent
the hedge is successful, a loss in the value of the franc relative to the
dollar will tend to be offset by an increase in the value of the put option.
To offset, in whole or in part, the cost of acquiring such a put option, the
Fund may also sell a call option which, if exercised, requires it to sell a
specified amount of francs for dollars at a specified price by a future date
(a technique called a "spread"). By selling such a call option in this
illustration, the Fund gives up the opportunity to profit without limit from
increases in the relative value of the franc to the dollar. The Manager
believes that "spreads" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies
described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. 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
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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 OTC stock index options, OTC foreign currency options and options
on foreign currency futures, only with member banks of the Federal Reserve
System and primary dealers in U.S. Government securities or with affiliates
of such banks or dealers that have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50
million or any other bank or dealer having capital of at least $150 million
or whose obligations are guaranteed by an entity having capital of at least
$150 million. The Fund will acquire only those OTC options for which the
Manager believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option) or which can be sold at a formula price provided for in
the OTC option agreement.
The staff of the 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% 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
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<PAGE>
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 OTC market, only if there appears to be a liquid secondary
market for such options or futures, or in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option) or which can be sold at a formula price provided for in
the OTC option agreement. As a result, it is expected that the Fund will
enter into exchange traded options and futures transactions only in the
relatively mature smaller capital markets such as Australia, Hong Kong or
Sweden, which have liquid secondary markets for such instruments. There can
be no assurance, however, that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions also could
have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom the Fund has an
open position in an option, a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call
or put options on the same underlying security or currency (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts that any person may trade on a particular trading day.
The Manager does not believe that these trading and position limits will have
any adverse impact on the portfolio strategies for hedging the Fund's
portfolio.
Other Investment Policies and Practices
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act of 1940 (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 (the "Code"). 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. Foreign government securities (unlike U.S. Government
securities) are not exempt from the diversification requirements of the Code
and the securities of each foreign government issuer are considered to be the
obligations 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.
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Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Special and Risk Considerations" above. Where
possible, the Fund will deal directly with the dealers who make a market in
the securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve either brokerage commissions or
transfer taxes. Securities firms may receive brokerage commissions on certain
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon exercise
of options. The Fund has no obligation to deal with any broker in the
execution of transactions in portfolio securities. Under the Investment
Company Act, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as a principal in the purchase and sale
of securities unless a permissive order allowing such transactions is
obtained from the Commission. Affiliated persons of the Fund may serve as its
broker in transactions conducted on an exchange and in OTC transactions
conducted on an agency basis. In addition, consistent with the Conduct Rules
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 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. 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 liquid 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 or a
stated number of shares of equity securities 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% 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
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its custodian of cash, cash equivalents, U.S. Government securities or other
liquid securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. Government) at a mutually agreed upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed yield for the Fund insulated from fluctuations in the
market value of the underlying security during such period, although, to the
extent the repurchase agreement is not denominated in U.S. dollars, the
Fund's return may be affected by currency fluctuations. Repurchase agreements
may be entered into only with financial institutions which (i) have, in the
opinion of the Manager, substantial capital relative to the Fund's exposure,
or (ii) have provided the Fund with a third-party guaranty or other credit
enhancement. 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% 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.
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Investment Restrictions
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company
Act means the lesser of (a) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (b) more
than 50% of the outstanding shares). Among its fundamental policies, the Fund
may not invest more than 25% of its total assets, taken at market value at
the time of each investment, in the securities of issuers 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 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 its affiliate, FAM; President
and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of the Distributor.
Donald Cecil--Special Limited Partner of Cumberland Partners (an
investment partnership).
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Edward H. Meyer--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
* Interested person, as defined in the Investment Company Act, of the Fund.
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 130 registered investment companies and offers
portfolio management and portfolio analysis services to individuals and
institutions. As of September 30, 1996, the Manager and FAM had a total of
approximately $214.1 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the
Fund, the Manager is responsible for the actual management 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, 1996, the fee
paid by the Fund to the Manager was $6,265,747 (based upon average net assets
of approximately $630.0 million). At September 30, 1996, the net assets of
the Fund aggregated approximately $741.6 million. At this asset level, the
annual management fee would aggregate approximately $7.4 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 day-to-day management of the Fund's investment
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
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in connection with such services. For the fiscal year ended June 30, 1996,
the Fund reimbursed the Manager $168,938 for accounting services. For the
fiscal year ended June 30, 1996, the ratio of total expenses to average net
assets for Class A, Class B, Class C, and Class D shares was 1.54%, 2.56%,
2.56% and 1.76%, 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, 1996, the Fund paid the
Transfer Agent $1,207,381 pursuant to the Transfer Agency Agreement for
providing transfer agency services. At September 30, 1996, the Fund had
36,470 Class A shareholder accounts, 44,848 Class B shareholder accounts,
7,994 Class C shareholder accounts and 5,449 Class D shareholder accounts. At
this level of shareholder accounts, the annual fee payable to the Transfer
Agent would aggregate approximately $1.2 million, plus out-of-pocket
expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and Merrill Lynch, acts
as the Distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the 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
PricingSM 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
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to the close of business on the New York Stock Exchange (the "NYSE")
(generally, 4:00 p.m., New York time), which includes orders received after
the close of business on the previous day, the applicable offering price will
be based on the net asset value determined as of 15 minutes after the close
of business on the NYSE on that day, provided the Distributor in turn
receives the order from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business
on the NYSE 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
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares
of Class B and Class C are sold to investors choosing the deferred sales
charge alternatives. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund with
the investment thereafter being subject to a CDSC and ongoing distribution
fees. A discussion of the factors that investors should consider in
determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System is set forth under "Merrill Lynch Select PricingSM System"
on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as
those of the deferred sales charges with respect to Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used
to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
24
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution Conversion
Class Sales Charge(1) Fee Fee Feature
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2),(3)
- ---------------------------------------------------------------------------------------------------------
B CDSC for a period of four years, at a 0.25% 0.75% B shares convert to
rate of 4.0% during the D shares automatically
first year, decreasing 1.0% annually after approximately
to 0.0%(4) eight years(5)
- ---------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. A 0.75% sales charge for 401(k) purchases
over $1,000,000 will apply.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
Initial Sales Charge Alternatives--Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
Sales Load as Discount to
Sales Load as Percentage* of Selected Dealers
Percentage of the Net Amount as Percentage of
Amount of Purchase Offering Price Invested the Offering Price
- ------------------ -------------- ---------------- --------------------
<S> <C> <C> <C>
Less than $25,000 5.25% 5.54% 5.00%
$25,000 but less than $50,000 4.75 4.99 4.50
$50,000 but less than $100,000 4.00 4.17 3.75
$100,000 but less than $250,000 3.00 3.09 2.75
$250,000 but less than $1,000,000 2.00 2.04 1.80
$1,000,000 and over** 0.00 0.00 0.00
</TABLE>
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with
25
<PAGE>
certain fee-based programs. If the sales charge is waived in connection
with a purchase of $1,000,000 or more, such purchases may be subject to a
CDSC of 1.0% if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. 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
employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
During the fiscal year ended June 30, 1996, the Fund sold 2,735,667 Class A
shares for aggregate net proceeds of $38,556,805. The gross sales charges for
the sale of Class A shares of the Fund for that year were $285,264, of which
$18,510 and $266,754 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended June 30, 1996, the Distributor
received no CDSCs with respect to redemptions within one year after purchase
of Class A shares purchased subject to a front-end sales charge waiver.
During the fiscal year ended June 30, 1996 the Fund sold 4,465,997 Class D
shares for aggregate net proceeds of $63,170,949. The gross sales charges for
the sale of Class D shares of the Fund for that year were $487,134, of which
$32,695 and $454,439 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended June 30, 1996, the Distributor
received no CDSCs with respect to redemptions within one year after purchase
of Class D shares purchased subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of
the Fund in a shareholder account 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 TMASM Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition,
Class A shares 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 in their initial
offerings who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of
the Fund and certain other MLAM-advised mutual funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and,
if certain conditions set forth in the Statement of Additional Information
are met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the
net proceeds from a sale of certain of their shares of common stock pursuant
to a tender offer conducted by such funds in shares of the Fund and certain
other MLAM- advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment
of dividends or capital gains distributions. Class A and Class D sales
charges also may be reduced under a Right of Accumulation and a Letter of
Intention. Class A shares are offered at net asset value to certain eligible
Class A investors as set forth above under "Eligible Class A Investors". See
"Shareholder Services."
26
<PAGE>
Class A and Class D shares are offered at net asset value to certain
employer-sponsored retirement or savings plans, and to Employee Access
AccountsSM available through qualified employers which provide such plans.
Class A and Class D shares are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest in shares of the Fund the net
proceeds from a sale of certain of their shares of common stock, pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect
to those shares, are automatically converted into Class D shares of the Fund
and thereafter will be subject to lower continuing fees. See "Conversion of
Class B Shares to Class D Shares" below. Both Class B and Class C shares are
subject to an account maintenance fee of 0.25% of net assets and a
distribution fee of 0.75% of net assets as discussed below under
"Distribution Plans".
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.
27
<PAGE>
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See
"Limitations on the Payment of Deferred Sales Charges" below. The proceeds
from the ongoing account maintenance fee are used to compensate Merrill Lynch
for providing continuing account maintenance activities. Class B shareholders
of the Fund exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the
Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
Class B CDSC
as a Percentage
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>
During the fiscal year ended June 30, 1996, the Distributor received CDSCs of
$440,116 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).
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
28
<PAGE>
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 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. The terms of the
CDSC may be modified in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services."
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. No Class C CDSC
will be assessed in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services." During the fiscal year
ended June 30, 1996, the Distributor received CDSCs of $21,166 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
29
<PAGE>
convert approximately ten years after initial purchase. If, during the
Conversion Period, a shareholder exchanges Class B shares with an eight-year
Conversion Period for Class B shares with a ten-year Conversion Period, or
vice versa, the Conversion Period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised
mutual funds held in that Class B Retirement Plan will be converted into
Class D shares of the appropriate funds. Subsequent to such conversion, that
Class B Retirement Plan will be sold Class D shares of the appropriate funds
at net asset value.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder Services."
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.
For the fiscal year ended June 30, 1996, the Fund paid the Distributor
$2,248,222 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $226.1
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection
with Class B shares. For the fiscal year ended June 30, 1996, the Fund paid
the Distributor $305,504 pursuant to the Class C Distribution Plan (based on
average net assets subject to such Class C Distribution
30
<PAGE>
Plan of approximately $30.7 million), all of which was paid to Merrill Lynch
for providing account maintenance and distribution-related activities and
services in connection with Class C shares. For the fiscal year ended June
30, 1996, the Fund paid the Distributor $93,209 pursuant to the Class D
Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of approximately $37.5 million), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
Class D shares. At September 30, 1996, the net assets of the Fund subject to
the Class B Distribution Plan aggregated approximately $306.3 million. At
this asset level, the annual fees payable pursuant to such Class B
Distribution Plan would aggregate approximately $3.1 million. At September
30, 1996, the net assets of the Fund subject to the Class C Distribution Plan
aggregated approximately $48.9 million. At this asset level, the annual fees
payable pursuant to such Class C Distribution Plan would aggregate
approximately $488,994. At September 30, 1996, the net assets of the Fund
subject to the Class D Distribution Plan aggregated approximately $57.9
million. At this asset level, the annual fees payable pursuant to such Class
D Distribution Plan would aggregate approximately $144,750.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount
of expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year
on a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist
of the account maintenance fees, distribution fees, the CDSCs and certain
other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs, and the expenses consist of financial consultant
compensation.
As of December 31, 1995, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues by
approximately $4,396,000 (2.23% of Class B net assets at that date). Similar
fully allocated accrual data for Class C shares is not presented because such
revenues and expenses for the period October 21, 1994 (commencement of
operations) to December 31, 1995 are de minimis. As of June 30, 1996, direct
cash revenues for the period since the commencement of operations of Class B
shares exceeded direct cash expenses by $559,640 (.19% of Class B net assets
at that date). As of June 30, 1996, direct cash revenues for the period since
the commencement of operations of Class C shares exceeded direct cash
expenses by $196,777 (.42% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to
seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or
distribution of each class of shares separately. The initial sales charges,
the account maintenance fee, the distribution fee and/or the CDSCs received
with respect to one class will not be used to subsidize the sale of shares of
another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares".
31
<PAGE>
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the 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 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 redemption request 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.
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At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed
the mailing of a redemption check until such time as it has assured itself
that good payment (e.g., cash or certified check drawn on a U.S. bank) has
been collected for the purchase of such shares. Normally, this delay will not
exceed 10 days.
Repurchase
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of
business on the NYSE (generally, 4:00 P.M., New York time) on the day
received and that such request is received by the Fund from such dealer not
later than 30 minutes after the close of business on the NYSE, on the same
day. Dealers have the responsibility of submitting such repurchase requests
to the Fund not later than 30 minutes after the close of business on the
NYSE, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms which do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge on
the shareholder for transmitting the notice of repurchase to the Fund.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a repurchase of shares to such customers. Repurchases directly
through the Transfer Agent are not subject to the processing fee. The Fund
reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
Reinstatement Privilege--Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount
to be reinstated to the Transfer Agent within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
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
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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 or her Investment Account at any time
by mailing a check directly to the Transfer Agent. Shareholders also may
maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge,
at the Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or Class D
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account
at the new firm, or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained
for such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage
firm for the benefit of the shareholder at the Transfer Agent. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of
the Fund, a shareholder must either redeem the shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the new
firm, or such shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds.
There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Commission.
Under the Merrill Lynch Select PricingSM 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 or her account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares for
shares of a second MLAM-advised mutual fund, and the shareholder does not
hold Class A shares of the second fund in his or her account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the
time of the exchange, the shareholder holds Class A shares of the second fund
in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values 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.
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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.
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are automatically reinvested in full and
fractional shares of the Fund, without sales charge, at the net asset value
per share next determined after the close of business on the NYSE on the
ex-dividend date of such dividend or distribution. A shareholder may at any
time, by written notification 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 or about the payment
date. Cash payments can also be directly deposited to the shareholder's bank
account. No CDSC will be imposed on redemption of shares issued as a result
of the automatic reinvestment of dividends or capital gains distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his or her Investment Account in
the form of payments by check or through automatic payment by direct deposit
to his or her bank account on either a monthly or quarterly basis. A Class A
or Class D shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the 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 or her 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.
Fee-Based Programs. Certain Merrill Lynch fee-based programs, including
pricing alternatives for securities transactions, (each referred to in this
paragraph as a "Program") may permit the purchase of Class A shares at net
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asset value. Under specified circumstances, participants in certain Programs
may deposit other classes of shares which will be exchanged for Class A
shares. Initial or deferred sales charges otherwise due in connection with
such exchanges may be waived or modified, as may the Conversion Period
applicable to the deposited shares. Termination of participation in a Program
may result in the redemption of shares held therein or the automatic exchange
thereof to another class at net asset value, which may be shares of a money
market fund. In addition, upon termination of participation in a Program,
shares that have been held for less than specified periods within such
Program may be subject to a fee based upon the current value of such shares.
These Programs also generally prohibit such shares from being transferred to
another account at Merrill Lynch, to another broker-dealer or to the Transfer
Agent. Except in limited circumstances (which may also involve an exchange as
described above), such shares must be redeemed and another class of shares
purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information
regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND or (800) 637-3863.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance
with a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any capital gains or losses on portfolio
investments over such periods) that would equate the initial amount invested
to the redeemable value of such investment at the end of each period. Average
annual total return will be computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and
nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such
as in the case of Class B and Class C shares and the maximum sales charge in
the case of Class A and Class D shares. Dividends paid by the Fund with
respect to all shares, to the extent any dividends are paid, will be
calculated in the same manner at the same time on the same day and will be in
the same amount, except that account maintenance and distribution fees and
any incremental transfer agency costs relating to each class of shares will
be borne exclusively by that class. The Fund will include performance data
for all classes of shares of the Fund in any advertisement or information
including performance data of the Fund.
The Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return, and (2) the maximum
applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average annual rates of return reflect compounding; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time. In
advertisements directed to investors whose purchases are subject to reduced
sales charges in the case of Class A and Class D shares or waiver of the CDSC
in the case of Class B or Class C 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
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<PAGE>
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.
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 transfer agency fees applicable to that
class. See "Determination of Net Asset Value". Dividends and distributions
will be reinvested automatically in shares of the Fund, at net asset value
without sales load. However, a shareholder whose account is maintained at the
Transfer Agent or whose account is maintained through Merrill Lynch may elect
in writing to receive any such dividends or distributions or both 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.
Gains or losses attributable to foreign currency 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) all or a portion of
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.
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 NYSE
(generally, 4:00 P.M., New York time) on each day during which the NYSE
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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.
The net asset value per share is computed by dividing the sum of the value
of the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at
such time, rounded to the nearest cent. Expenses, including the management
fees payable to the Manager and any account maintenance and/or distribution
fees payable to the Distributor, are accrued daily. The per share net asset
value of Class A 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; in addition, 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 OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Securities which are traded both in the OTC market and on a stock exchange
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 OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last bid price. Any assets or liabilities expressed in terms
of foreign currencies are translated into U.S. dollars at the prevailing
market rates as obtained from one or more dealers. Other investments,
including futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund.
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-
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term capital losses (including gains or losses 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 of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under
existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may
be able to claim U.S. foreign tax credits with respect to such taxes, subject
to certain conditions and limitations contained in the Code. For example,
certain retirement accounts cannot claim foreign tax credits on investments
in foreign securities held in the Fund. If more than 50% in value of the
Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which shareholders of
the Fund will be required to include their proportionate shares of such
withholding taxes 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
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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.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses
will generally increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not
be able to make any ordinary income dividend distributions, and all or a
portion of distributions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital to shareholders,
thereby reducing the basis of each shareholder's Fund shares and resulting in
a capital gain for any shareholder who received a distribution greater than
such shareholder's 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.
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Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisors 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 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 if such request is in compliance with applicable
Maryland law. 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.
41
<PAGE>
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.)
1. ............................... 4. ..................................
2. ............................... 5. ..................................
3. ............................... 6. ..................................
Name ........................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ...................................................
First Name Initial Last Name
Address .....................................................................
............................. Date ................................
(Zip Code)
Occupation ....................... Name and Address of Employer .............
.........................................
.........................................
................................ .........................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship
will be presumed unless otherwise specified.)
_____________________________________________________________________________
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-Term Capital Gains
Select [ ] Reinvest Select [ ] Reinvest
One: [ ] Cash One: [ ] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you: [ ] Check
or [ ] Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Developing Capital Markets Fund,
Inc. Authorization Form.
Specify type of account (check one): [ ] checking [ ] savings
Name on your account ........................................................
Bank Name ...................................................................
Bank Number ............................ Account Number .....................
Bank Address ................................................................
I agree that this authorization will remain in effect until I provide written
notification to 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.
42
<PAGE>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.--AUTHORIZATION FORM
(PART 1) -- (Continued)
______________________________________________________________________________
3. Social Security Number or Taxpayer Identification Number
[open box approximately 3 inches wide]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Additional Information--Taxes") either because I have not been
notified that I am subject thereto as a result of a failure to report all
interest or dividends, or the Internal Revenue Service ("IRS") has notified
me that I am no longer subject thereto.
Instruction: You must strike out the language in (2) above if you have been
notified that you are subject to backup withholding due to underreporting and
if you have not received a notice from the IRS that backup withholding has
been terminated. The undersigned authorizes the furnishing of this
certification to other Merrill Lynch sponsored mutual funds.
........................... .................................................
Signature of Owner Signature of Co-Owner (if any)
______________________________________________________________________________
4. Letter of Intention--Class A and Class D shares only (See terms and
conditions in the Statement of Additional Information)
...................................................................... 19....
Date of Initial Purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Developing Capital Markets Fund, Inc. or any other investment company
with an initial sales charge or deferred sales charge for which Merrill Lynch
Funds Distributor, Inc. acts as distributor over the next 13 month period
which will equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Developing
Capital Markets Fund, Inc. Prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Developing Capital Markets Fund, Inc. held as
security.
By ........................... ............................................
Signature of Owner Signature of Co-Owner (If registered in
joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name ........................... (2) Name .............................
Account Number ..................... Account Number .......................
_____________________________________________________________________________
5. For Dealer Only
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 or sales made under a Letter of
Intention, Automatic Investment Plan or Systematic Withdrawal Plan. We
guarantee the shareholder's signature.
.............................................................................
Dealer Name and Address
By: .........................................................................
Authorized Signature of Dealer
[3 boxes] [4 boxes] .................................................
Branch-Code F/C No. F/C Last Name
{3 boxes} [5 boxes]
Dealer's Customer Account No.
43
<PAGE>
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
Name of Owner ........................ [box approximately 3 inches long]
Social Security No.
Name of Co-Owner (if any) ............. or Taxpayer Identification No.
Address ..............................
Account Number ....................
....................................... (if existing account)
______________________________________________________________________________
2. Systematic Withdrawal Plan--Class A and D Shares Only (See terms and
conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Developing
Capital Markets Fund, Inc. at cost or current offering price. Withdrawals to
be made either (check one) [ ] Monthly on the 24th day of each month, or
[ ] Quarterly on the 24th day of March, June, September and December. If the
24th falls on a weekend or holiday, the next succeeding business day will be
utilized. Begin systematic 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 shares 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.
44
<PAGE>
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 crediting 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 Number Signature of Depositor
(If joint account, both must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this application.
45
<PAGE>
Manager
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
No person has been authorized to give any information or to make any
representations, other than those 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
Page
---------
Fee Table 2
Merrill Lynch Select PricingSM System 3
Consolidated Financial Highlights 7
Special and Risk Considerations 9
Investment Objective and Policies 12
Portfolio Strategies Involving Options and Futures 13
Other Investment Policies and Practices 18
Investment Restrictions 21
Management of the Fund 21
Board of Directors 21
Management and Advisory Arrangements 22
Code of Ethics 23
Transfer Agency Services 23
Purchase of Shares 23
Initial Sales Charge Alternatives--Class A and
Class D Shares 25
Deferred Sales Charge Alternatives--Class B and
Class C Shares 27
Distribution Plans 30
Limitations on the Payment of Deferred Sales
Charges 32
Redemption of Shares 32
Redemption 32
Repurchase 33
Reinstatement Privilege--Class A and Class
D Shares 33
Shareholder Services 33
Performance Data 36
Additional Information 37
Dividends and Distributions 37
Determination of Net Asset Value 37
Taxes 38
Organization of the Fund 41
Shareholder Reports 41
Shareholder Inquiries 41
Authorization Form 42
Code # 10893-1096
Merrill Lynch
Developing
Capital Markets
Fund, Inc.
Prospectus
October 28, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Developing Capital Markets Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
(bullet) Phone No. (609) 282-2800
Merrill Lynch Developing Capital Markets Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company 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 PricingSM System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select PricingSM System
permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances.
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 28, 1996 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without
charge, by calling or by writing the Fund at the above telephone number or
address. This Statement of Additional Information has been incorporated by
reference into the Prospectus.
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
The date of this Statement of Additional Information is October 28, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing in securities, principally equities, of issuers in
countries having smaller capital markets. Reference is made to "Investment
Objective and Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. (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. 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, 1995 and 1996, the Fund's portfolio turnover rates were 63.37% and
71.01%, respectively. The Fund is subject to the Federal income tax
requirement that less than 30% of the Fund's gross income must be derived
from gains from the sale or other disposition of securities held for less
than three months.
The U.S. Government has from time to time in the past imposed
restrictions, through taxation and otherwise, on foreign investments by U.S.
investors such as the Fund. If such restrictions should be reinstituted, it
might become necessary for the Fund to invest all or substantially all of its
assets in U.S. securities. In such event, the Fund would review its
investment objective and investment policies to determine whether changes are
appropriate. Any changes in the investment objective or fundamental policies
set forth under "Investment Restrictions" below would require the approval of
the holders of a majority of the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. See "Redemption of Shares". Under present
conditions, the Manager does not believe that these considerations will have
any significant effect on its portfolio strategy, although there can be no
assurance in this regard.
Portfolio Strategies Involving Options and Futures
Reference is made to the discussion under the caption "Investment
Objective and Policies--Portfolio Strategies Involving Options and Futures"
in the Prospectus for information with respect to various portfolio
strategies involving options and futures. The Fund may seek to hedge its
portfolio against movements in the equity, debt and currency markets. The
Fund has authority to write (i.e., sell) covered put and call options on its
portfolio securities, purchase put and call options on securities and engage
in transactions in stock index options, stock index futures and stock futures
and financial futures, and related options on such futures. The Fund may also
deal in forward foreign exchange transactions, foreign currency options and
futures and related options on such futures. Each of such portfolio
strategies is described in the Prospectus. Although certain risks are
involved in options and futures transactions (as discussed in the Prospectus
and below), the Manager believes that, 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.
2
<PAGE>
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 or she may
be required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her 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 liquid securities
denominated in U.S. dollars or non-U.S. currencies with a securities
depository with a value equal to or greater than the exercise price of the
underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the
market value of that security at the time of exercise for as long as the
option is outstanding. The Fund may engage in closing transactions in order
to terminate put options that it has written. The Fund will not write put
options if the aggregate value of the obligations underlying the put options
shall exceed 50% of the Fund's net assets.
Options referred to herein and in the Fund's Prospectus may be options
traded on foreign securities exchanges such as the Amsterdam Stock Exchange,
the Stock Exchange of Singapore or the Sydney Stock Exchange. An option
position may be closed out only on an exchange which provides a secondary
market for an option of the same series. If a secondary market does not
exist, it might not be possible to effect closing transactions in particular
options, with the result, in the case of a covered call option, that the Fund
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise. Reasons for the absence of
a liquid secondary market on an exchange include the following: (i) there may
be insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed
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
3
<PAGE>
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 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 is authorized to purchase put options to
hedge against a decline in the market value of its securities. 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 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 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 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
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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
("OTC") foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to
be purchased by the Fund. As an illustration, the Fund may use such
techniques to hedge the stated value in U.S. dollars of an investment in a
franc denominated security. In such circumstances, for example, the Fund may
purchase a foreign currency put option enabling it to sell a specified amount
of francs for dollars at a specified price by a future date. To the extent
the hedge is successful, a loss in the value of the francs relative to the
dollar will tend to be offset by an increase in the value of the put option.
To offset, in 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
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prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions involves the risk of imperfect correlation in
movements in the prices of options and futures contracts and movements in the
prices of the securities or currencies which are the subject of the hedge. If
the prices of the options and futures contract move more or less than the
prices of the hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the prices
of the securities or currencies which are the subject of the hedge. The
successful use of options and futures also depends on the Manager's ability
to correctly predict price movements in the market involved in a particular
options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid secondary
market for such options or futures. As a result, it is expected that the Fund
will enter into exchange traded options and futures transactions only in the
relatively mature smaller capital markets such as Australia, Hong Kong or
Sweden, which have liquid secondary markets for such instruments. However,
there can be no assurance that a liquid secondary market will exist for any
particular call or put option or futures contract at any specific time. Thus,
it may not be possible to close an option or futures position. The Fund will
acquire only OTC options for which management believes the Fund can receive
on each business day at least two independent bids or offers (one of which
will be from an entity other than a party to the option) or which can be sold
at a formula price provided for in the OTC option agreement. In the case of a
futures position or an option on a futures position written by the Fund in
the event of adverse price movements, the Fund would continue to be required
to make daily cash payments of variation margin. In such situations, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous
to do so. In addition, the Fund may be required to take or make delivery of
the securities and currencies underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge its portfolio effectively. There is
also the risk of loss by the Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a futures
contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
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
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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 liquid 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 or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the
agreement the Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price that
is considered advantageous to the Fund. The Fund will not enter into a
standby commitment with a remaining term in excess of 45 days and will limit
its investment in such commitments so that the aggregate purchase price of
the securities subject to such commitments, together with the value of
portfolio securities subject to legal restrictions on resale, will not exceed
15% 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
liquid 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.
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<PAGE>
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements and purchase and sale
contracts. Repurchase agreements may be entered into only with financial
institutions which (i) have, in the opinion of the Manager, substantial
capital relative to the Fund's exposure, or (ii) have provided the Fund with
a third-party guaranty or other credit enhancement. Under a repurchase
agreement or a purchase and sale contract, the counterparty 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. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral
if the market value of the securities falls below the repurchase price at any
time during the term of the repurchase agreement; the Fund does not have the
right to seek additional collateral in the case of purchase and sale
contracts. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not
owned by the Fund but 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. In the event of a default under such a repurchase agreement or
under a purchase and sale contract, instead of the contractual fixed rate of
return, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such securities and the accrued interest
on the securities. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform.
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
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if such issuers are highly leveraged. During such periods, such issuers may
not have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely
affected by specific issuer developments or the issuer's inability to meet
specific projected business forecasts or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield securities because such securities may
be unsecured and may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability
to dispose of particular issues when necessary to meet the Fund's liquidity
needs or in response to a specific economic event such as a deterioration in
the creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely
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 at the time
of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities).
2. Make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under
the laws of certain countries will not be deemed the making of investments
for the purpose of exercising control or management.
3. Purchase 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
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<PAGE>
of portfolio securities may be made only in accordance with applicable law
and the guidelines set forth in the Fund's Prospectus and Statement of
Additional Information, as they may be amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33-1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, 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.
Securities purchased in accordance with Rule 144A under the Securities Act
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its 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 (the "NYSE") 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.
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<PAGE>
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of
the Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than
one-half of one percent of the securities of such issuer own in the
aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 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 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% 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 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.
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MANAGEMENT OF THE FUND
Directors and Officers
Information about the Directors and executive officers of the Fund,
including their ages and their principal occupations for at least the last
five years, is 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 (64)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
Donald Cecil (69)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer (69)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (65)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self- employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; former
Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia University Graduate School of Business since
1990; Adjunct Professor, Wharton School, University of Pennsylvania, 1990;
Partner, Small Cities Cablevision, Inc.
Richard R. West (58)--Director(2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984, Dean from 1984 to 1993, and currently Dean Emeritus of
New York University Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real
estate holding company), Smith-Corona Corporation (manufacturer of
typewriters and word processors), and Alexander's Inc. (real estate company).
Edward D. Zinbarg (61)--Director(2)--5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; former Director of Prudential
Reinsurance Company and former Trustee of The Prudential Foundation.
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
Norman R. Harvey (63)--Senior Vice President (1)(2)--Senior Vice President
of the Manager and FAM since 1982.
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990.
Grace Pineda (39)--Vice President(1)(2)--Vice President of the Manager and
Senior Portfolio Manager since 1989.
12
<PAGE>
Gerald M. Richard (47)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer since 1984.
Mark B. Goldfus (50)--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, 1996, 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.
Compensation of Directors
The Fund pays each Director not affiliated with the Manager (each a
"non-affiliated Director") a fee of $3,500 per year plus $500 per Board
meeting attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. The Fund also compensates members of its
Audit and Nominating Committee (the "Committee"), which consists of all of
the non-affiliated Directors, at a rate of $500 per Committee meeting
attended. The Chairman of the Committee receives an additional fee of $250
per Committee meeting attended. For the fiscal year ended June 30, 1996, fees
and expenses paid to non-affiliated Directors aggregated $38,828.
The following table sets forth for the fiscal year ended June 30, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
investment companies advised by the Manager and its affiliate, FAM ("MLAM/FAM
Advised Funds"), to the non-affiliated Directors: Aggregate
Compensation
Pension or Retirement from Fund and
Benefits Accrued as Other MLAM/FAM
Compensation Part of Fund's Advised Funds Paid
Name of Director from Fund Expenses to Directors(1)
------------------ -------------- --------------------- ------------------
Donald Cecil $8,500 None $271,850
Edward H. Meyer $7,500 None $239,225
Charles C. Reilly $7,500 None $269,600
Richard R. West $7,500 None $294,600
Edward D. Zinbarg $7,500 None $155,063
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Cecil (36 registered investment companies consisting of 36
portfolios); Mr. Meyer (36 registered investment companies consisting of
36 portfolios); Mr. Reilly (41 registered investment companies consisting
of 54 portfolios); Mr. West (41 registered investment companies
consisting of 54 portfolios) and Mr. Zinbarg (18 registered investment
companies consisting of 18 portfolios).
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
13
<PAGE>
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, 1994, 1995 and 1996, the management fees paid by the Fund to the Manager
aggregated $3,033,147, $5,240,621 and $6,265,747, respectively.
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 or its
affiliates. 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,
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, 1994,
1995 and 1996, the amount of such reimbursement was $101,404, $138,938 and
$168,938, 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.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class
14
<PAGE>
C are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C and Class D share of the Fund represents identical
interests in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such
class pursuant to which account maintenance and/or distribution fees are
paid. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM which utilize the Merrill Lynch Select
PricingSM 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, 1994, 1995, and 1996, 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,
1996, the Fund sold its Class D shares through the Distributor and Merrill
Lynch, as a dealer. The gross sales charges for the sale of Class A shares
for the fiscal year ended June 30, 1994 were $10,184,184, of which $9,594,931
was received by Merrill Lynch and $589,253 was received by the Distributor.
The gross sales charges for the sale of Class A shares for the fiscal year
ended June 30, 1995 were $1,132,905, of which $1,060,335 was received by
Merrill Lynch and $72,570 was received by the Distributor. The gross sales
charges for the sale of Class A shares for the fiscal year ended June 30,
1996 were $285,264, of which $266,754 was received by Merrill Lynch and
$18,510 was received by the Distributor. The gross sales charges for the sale
of Class D shares for the period October 21, 1994 (commencement of
operations) to June 30, 1995 were $390,764 of which $366,818 was received by
Merrill Lynch and $23,946 was received by the Distributor. The gross sales
charges for the sale of Class D shares for the fiscal year ended June 30,
1996 were $487,134, of which $454,439 was received by Merrill Lynch and
$32,695 was received by the Distributor. For the fiscal years ended June 30,
1994, 1995 and 1996, the Distributor received no CDSCs with respect to
redemptions within one year after purchase of Class A shares purchased
subject to a front-end sales charge waiver. For the period October 21, 1994
(commencement of operations) to June 30, 1995 and for the fiscal year ended
June 30, 1996, the Distributor received no CDSCs with respect to redemptions
within one year after purchase of Class D shares purchased subject to a
front-end sales charge waiver.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for
a single trust estate or single fiduciary account (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code of 1986, as amended
(the "Code"))
15
<PAGE>
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 of shares of the Fund by employees or by
employers on behalf of employees, by means of a payroll deduction plan or
otherwise. 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 PricingSM System
commenced operations), and wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in Eligible Class A Shares, if
the conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994, and wish
to reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares
of the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares"),
if the following conditions are met. First, the sale of the closed-end fund
shares must be made through Merrill Lynch, and the net proceeds therefrom
must be immediately reinvested in Eligible Class A or Class D Shares. Second,
the closed-end fund shares must either have been acquired in the initial
public offering or be shares representing dividends from shares of common
stock acquired in such offering. Third, the closed-end fund shares must have
been continuously maintained in a Merrill Lynch securities account. Fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option.
Shareholders of certain MLAM-advised continuously offered closed-end
funds may reinvest at net asset value the net proceeds from a sale of certain
shares of common stock of such funds in shares of the Fund. Upon exercise of
this investment option, shareholders of Merrill Lynch Senior Floating Rate
Fund, Inc. will receive Class A shares of the Fund and shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. will receive Class D shares of the Fund, except
that shareholders already owning Class A shares of the Fund will be eligible
to purchase additional Class A shares pursuant to this option, if such
additional Class A shares will be held in the same account as the existing
Class A shares and the other requirements pertaining to the reinvestment
privilege are met. In order to exercise this investment option, a shareholder
of one of the above-referenced continuously offered closed-end funds (an
"eligible fund") must sell his or her shares of common stock of the eligible
fund (the "eligible shares") back to the eligible fund in connection with a
tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or Contingent Deferred Sales Charge (each as defined in the
eligible fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at
the net asset value of the designated class of the Fund on such day.
16
<PAGE>
Reduced Initial Sales Charges
Right of Accumulation. The Fund offers a right of accumulation under which
eligible 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 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, but
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant
to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and of other MLAM-advised mutual funds
presently held, at cost or maximum offering price (whichever is higher), on
the date of the first purchase under the Letter of Intention, may be included
as a credit toward completion of such Letter but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in
the Letter of Intention (minimum of $25,000), the investor will be notified
and must pay, within 20 days of the expiration of such Letter, the difference
between the sales charge on the Class A or Class D shares purchased at the
reduced rate and the sales charge applicable to the shares actually purchased
through the Letter. Class A or Class D shares equal to five percent of the
intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The
first purchase under the Letter of Intention must be at least five percent of
the dollar amount of such Letter. If a purchase during the term of such
Letter would otherwise be subject to a further reduced sales charge based on
the right of accumulation, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would
be applicable to a single purchase equal to the total dollar value of the
Class A or Class D shares then being purchased under such Letter, but there
will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will
be deducted from the total purchases made under such Letter. An exchange from
a MLAM-advised money market fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention from the
Fund.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net
asset value, based on the number of employees or number of employees eligible
to participate in the plan, the
17
<PAGE>
aggregate amount invested by the plan in specified investments and/or the
services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the contingent deferred sales charge
("CDSC") upon redemption, based on similar criteria. Such Class B shares will
convert into Class D shares approximately ten years after the plan purchases
the first share of any MLAM-advised mutual fund. Minimum purchase
requirements may be waived or varied for such plans. Additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at (800) 237-7777.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through qualified 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, ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees
and any trust, pension, profit-sharing or other benefit plan for such persons
may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption
of a mutual fund that was sponsored by the financial consultant's previous
firm and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds
from a redemption of shares of 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 funds 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
18
<PAGE>
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the
realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall
at all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
Distribution Plans
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under
the Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account 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 shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to
the discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is 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 Conduct Rules 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),
19
<PAGE>
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.
The following table sets forth comparative information as of June 30,
1996, 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 with respect to Class B shares the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
Data Calculated as of June 30, 1996
-------------------------------------------------------------------------------------------
(in thousands)
Annual
Allowable Allowable Amounts Distribution
Eligible Aggregate Interest Maximum Previously Aggregate Fee at 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,
1996:
Under NASD Rule as
Adopted $221,865 $13,867 $1,337 $15,204 $3,096 $12,108 $2,266
Under Distributor's
Voluntary Waiver $221,865 $13,867 $1,109 $14,976 $3,096 $11,880 $2,266
Class C shares, for the
period October 21, 1994
(commencement of
operations) to June 30,
1996:
Under NASD Rule as
Adopted $ 47,878 $ 2,992 $ 238 $ 3,230 $ 311 $ 2,919 $ 352
</TABLE>
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
20
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for a period of up to seven days. Suspensions of
more than seven days may not be made except (1) for any period (a) during
which the NYSE is closed other than customary weekend and holiday closings or
(b) during which trading on the NYSE is restricted; (2) for any period during
which an emergency exists as a result of which (a) disposal by the Fund of
securities owned by it is not reasonably practicable or (b) it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets; or (3) for such other periods as the Commission may by order permit
for the protection of security holders of the Fund. The Commission shall by
rules and regulations determine the conditions under which (i) trading shall
be deemed to be restricted and (ii) an emergency shall be deemed to exist
within the meaning of clause (2) above.
Deferred Sales Charges--Class B and Class C Shares
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived 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 tax-free 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, and for the fiscal year ended
June 30, 1996, the Distributor received CDSCs with respect to redemptions of
Class B shares of $203,346 and $440,116, respectively, all of which were paid
to Merrill Lynch. For the fiscal period October 21, 1994 (commencement of
operations) to June 30, 1995, and for the fiscal year ended June 30, 1996,
the Distributor received CDSCs with respect to redemptions of Class C shares
of $3,082 and $21,166, respectively, all of which were paid to Merrill Lynch.
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. While the
Manager generally seeks reasonably competitive commission rates, the Fund
does not necessarily pay the lowest commission or spread available. The Fund
has no obligation to deal with any broker or group of brokers in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, brokers who provide supplemental investment
research to the Manager
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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 may invest in securities traded in the OTC markets and intends,
where possible, to deal directly with the dealers who make markets in the
securities involved, except in those circumstances where 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 OTC
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 OTC transactions conducted on an agency basis provided that,
among other things, the fee or commission received by such affiliated broker
is reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable transactions. See
"Investment Objective and Policies--Investment Restrictions". For the fiscal
year ended June 30, 1996, the Fund paid total brokerage commissions of
$4,562,760, of which $214,282 or 4.7% was paid to Merrill Lynch for effecting
6.5% of the aggregate dollar amount of transactions on which the Fund paid
brokerage commissions. For the fiscal year ended June 30, 1995, the Fund paid
total brokerage commissions of $3,053,465, of which $97,749 or 3.2% was paid
to Merrill Lynch for effecting 5.59% of the aggregate dollar 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 dollar 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
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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 Board of Directors has considered the possibility of seeking to
recapture for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio
transactions through affiliated entities. For example, brokerage commissions
received by affiliated brokers could be offset against the advisory fee paid
by the Fund. After considering all factors deemed relevant, the Board of
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 NYSE
(generally 4:00 P.M., New York time), on each day the NYSE is open for
trading. The NYSE 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 Class
B, Class C and Class D shares generally will be lower than the per share net
asset value of Class A shares reflecting the daily expense accruals of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to Class B and Class C shares and the daily expense accruals of
the account maintenance fees applicable with respect to Class D shares;
moreover, the per share net asset value of Class B and Class C shares
generally will be lower than the per share net asset value of Class D shares
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C shares of
the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will
differ by approximately the amount of the expense accrual differentials
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 OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Portfolio securities which are traded both in the OTC 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 OTC
market, the last asked price. Options purchased by the Fund are valued at
their last sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last bid price. Other investments,
including futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily
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<PAGE>
available are valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund. Such valuations and
procedures will be reviewed periodically by the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund by calling the
telephone number on the cover page hereof or from the Distributor or Merrill
Lynch.
Investment Account
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the previous statement.
Shareholders also will receive separate confirmations for each purchase or
sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the transfer agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing
all or only part of the full shares in an Investment Account may be requested
by a shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm
or such shareholder must continue to maintain an Investment Account at the
transfer agent for those Class A or Class D shares. Shareholders interested
in transferring their Class B or Class C shares from Merrill Lynch and who do
not wish to have an Investment Account maintained for such shares at the
transfer agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the transfer agent. If the new brokerage firm is willing
to accommodate the shareholder in this manner, the shareholder must request
that he be issued certificates for his shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an IRA from Merrill Lynch to another brokerage
firm or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of
the Fund, a shareholder must either redeem the shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the new
firm, or such shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.
Automatic Investment Plans
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
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<PAGE>
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
business on the NYSE 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.
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 NYSE
(generally 4:00 P.M., New York time) on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on such date, the shares will be redeemed at
the net asset value next determined after the close of business on the NYSE
on the following business day. The check for the withdrawal payment will be
mailed, or the direct deposit of the withdrawal payment will be made, on the
next business day following redemption. When a 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.
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A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. 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 CMA(R) or CBA(R)
Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch Financial Consultant.
Exchange Privilege
Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under
the Merrill Lynch Select PricingSM 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 or
her account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, but does not hold Class A shares of the second fund
in his or her account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class
D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the
shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of
the second fund. Class B, Class C and Class D shares 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 as follows: Class A shares may be exchanged
for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Reserves Money Fund (available only for exchanges within certain retirement
plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S.
Treasury Money Fund; Class B, Class C and Class D shares may be exchanged for
shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for
the exchange privilege, and any shares utilized in an exchange must have been
held by the shareholder for at least 15 days. It is contemplated that the
exchange privilege may be applicable to other new mutual funds whose shares
may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A
or Class D shares") for Class A or Class D shares of another MLAM-advised
mutual fund ("new Class A or Class D shares") are transacted on the basis of
relative net asset value per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the outstanding Class A or Class D shares and the sales charge
payable at the time of the exchange on the new Class A or Class D shares.
With respect to outstanding Class A or Class D shares as to which previous
exchanges have taken place, the "sales charge previously paid" shall include
the aggregate of the sales charges paid with respect to such Class A or Class
D shares in the initial purchase and
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<PAGE>
any subsequent exchange. Class A or Class D shares issued pursuant to
dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares of the other funds or
into shares of certain money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through
use of the exchange privilege. In addition, Class B shares of the Fund
acquired through use of the exchange privilege will be subject to the Fund's
CDSC schedule if such schedule is higher than the CDSC schedule relating to
the Class B shares of the fund from which the exchange has been made. For
purposes of computing the sales charge that may be payable on a disposition
of the new Class B or Class C shares, the holding period for the outstanding
Class B or Class C shares is "tacked" to the holding period 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.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively,
of any fund offering such shares, in which event the holding period for Class
B or Class C shares of that fund will be aggregated with previous holding
periods for purposes of reducing the CDSC. Thus, for example, an investor may
exchange Class B shares of the Fund for shares of Merrill Lynch Institutional
Fund ("Institutional Fund") after having held the Fund Class B shares for two
and a half years and three years later decide to redeem the shares of
Institutional Fund for cash. At the time of this redemption, the 2% CDSC that
would have been due had the Class B shares of the Fund been redeemed for cash
rather than exchanged for shares of Institutional Fund will be payable. If
instead of such redemption the shareholder exchanged such shares for Class B
shares of a fund which the shareholder continued to hold for an additional
two and a half years, any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their
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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.
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 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 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 Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short- term capital losses (including gains
or losses from certain transactions in 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,
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whether from ordinary income or capital gains, generally will not be eligible
for the dividends received deduction allowed to corporations under the Code.
If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date
in one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under
existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
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 Commission rule permitting the issuance and
sale of multiple classes of stock) that is based on the gross income
allocable to the Class A, Class B, Class C and Class D shareholders during
the taxable year or such other method as the Internal Revenue Service may
prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis
in the Class B shares converted, and the holding period of the acquired Class
D shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase
29
<PAGE>
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 minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the
Prospectus. Some of these high yield securities may be purchased at a
discount and may therefore cause the Fund to accrue and distribute income
before amounts due under the obligations are paid. In addition, a portion of
the interest payments on such high yield securities may be treated as
dividends for Federal income tax purposes; in such case, if the issuer of
such high yield/high risk securities is a domestic corporation, dividend
payments by the Fund will be eligible for the dividends received deduction to
the extent of the deemed dividend portion of such interest payments.
The Fund may invest up to 10% of its total assets in securities of other
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
30
<PAGE>
alter the timing and character of distributions to shareholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will
be marked to market, as described above. However, the character of gain or
loss from such a contract will generally be ordinary under Code Section 988.
The Fund may, nonetheless, elect to treat the gain or loss from certain
forward foreign exchange contracts as capital. In this case, gain or loss
realized in connection with a forward foreign exchange contract that is a
Section 1256 contract will be characterized as 60% long-term and 40%
short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options,
futures and forward foreign exchange contracts. Under Section 1092, the Fund
may be required to postpone recognition for tax purposes of losses incurred
in certain sales of securities and certain closing transactions in options,
futures and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30%
of the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
stock, securities or foreign currencies will be qualifying income for
purposes of determining whether the Fund qualifies as a RIC. It is currently
unclear, however, who will be treated as the issuer of a foreign currency
instrument or how foreign currency options, foreign currency futures and
forward foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain
transactions in a currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will be treated
as ordinary income or loss under Code Section 988. In certain circumstances,
the Fund may elect capital gain or loss treatment for such transactions.
Regulated futures contracts, as described above, will be taxed under Code
Section 1256 unless application of Section 988 is elected by the Fund. In
general, however, Code Section 988 gains or losses will increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other investment company taxable income during a taxable
year, the Fund would not be able to make any ordinary income dividend
distributions, and all or a portion of distributions made before the losses
were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's basis in Fund
shares (assuming the shares were held as a capital asset). These rules and
the mark-to-market rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain developing Asia-Pacific and Latin American countries in
which the Fund intends to invest. No such regulations have been issued.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
31
<PAGE>
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
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 advisors regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period in
the case of Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment for various periods
other than those noted below. Such data will be computed as described above,
except that (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included with
respect to annual or annualized rates of return calculations. Aside from the
impact on the performance data calculations of including or excluding the
maximum applicable sales charges, actual annual or annualized total return
data generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
32
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------------------------------------------------------
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
- ---------------------------------------------- ----------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charges)
One Year Ended June 30, 1996 8.79% $1,087.90 9.63% $1,096.30
Five Years Ended June 30, 1996 11.13% $1,694.80 -- --
Inception (September 1, 1989) to June 30, 1996 10.52% $1,980.30 -- --
Inception (July 1, 1994) to June 30, 1996 -- -- 3.97% $1,081.00
Annual Total Return
(excluding maximum applicable sales charges)
Year ended June 30, 1996 14.82% $1,148.20 13.63% $1,136.30
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
Aggregate Total Return
(including maximum applicable sales charges)
Inception (September 1, 1989) to June 30, 1996 98.03% $1,980.30 -- --
Inception (July 1, 1994) to June 30, 1996 -- -- 8.10% $1,081.00
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Class D Shares
-------------------------------------------------------------------------
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
- ------------------------------------------------- ------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charges)
Year ended June 30, 1996 12.68% $1,126.80 8.54% $1,085.40
Inception (October 21, 1994) to June 30, 1996 (1.98)% $ 966.70 (4.31)% $ 928.10
Annual Total Return
(excluding maximum applicable sales charges)
Year ended June 30, 1996 13.68% $1,136.80 14.55% $1,145.50
Inception (October 21, 1994) to June 30, 1995 (14.97)% $ 850.30 (14.49)% $ 855.10
Aggregate Total Return
(including maximum applicable sales charges)
Inception (October 21, 1994) to June 30, 1996 (3.33)% $ 966.70 (7.19)% $ 928.10
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B 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.
33
<PAGE>
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 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. In addition, 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, if such request is in compliance with applicable
Maryland law. Voting rights for Directors are not cumulative. Shares issued
are fully paid and non-assessable and have no preemptive rights. Redemption
and conversion rights are discussed elsewhere herein and in the Prospectus.
Each share is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
are issued by the transfer agent only on specific request. Certificates for
fractional shares are not issued in any case. Shareholders may, in accordance
with Maryland law, cause a meeting of shareholders to be held for the purpose
of voting on the removal of Directors at the request of 25% of the
outstanding shares of the Fund. A Director may be removed at a special
meeting of shareholders by a vote of a majority of the votes entitled to be
cast for the election of Directors.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A,
Class B, Class C and Class D shares of the Fund based on the value of the
Fund's net assets on June 30, 1996, and its shares outstanding on June 30,
1996 is calculated as set forth below:
<TABLE>
<CAPTION>
Class A Class B Class C Class D
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Assets $342,883,581 $302,182,872 $46,983,229 $57,821,016
============ ============ =========== ===========
Number of Shares Outstanding 22,780,723 20,281,969 3,159,986 3,849,221
============ ============ =========== ===========
Net Asset Value Per Share (net assets divided by
number of shares outstanding) $15.05 $14.90 $14.87 $15.02
Sales Charge (for Class A and Class D shares:
5.25% of offering price (5.54% of net asset
value per share))* .83 ** ** .83
------------ ------------ ----------- -----------
Offering Price $15.88 $14.90 $14.87 $15.85
============ ============ =========== ===========
</TABLE>
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
34
<PAGE>
** 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
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02119 (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.
Legal Counsel
Brown & Wood llp, One World Trade Center, New York, New York 10048-0557,
is counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on 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 September 30, 1996.
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Developing Capital Markets Fund, Inc.:
We have audited the accompanying consolidated statement of assets and
liabilities, including the consolidated schedule of investments, of Merrill
Lynch Developing Capital Markets Fund, Inc. and its subsidiary as of June 30,
1996, 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, 1996 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, 1996, 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 2, 1996
36
<PAGE>
[This page is intentionally left blank.]
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (in US Dollars)
Value Percent of
AFRICA Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Morocco Banking 130,000 Wafa Bank $ 5,035,551 $ 6,001,145 0.8%
Building Materials 8,000 ++Les Ciments de l'Oriental 272,020 284,078 0.0
Multi-Industry 161,154 Groupe Omnium Nord Africain 6,606,902 7,383,918 1.0
Total Investments in Morocco 11,914,473 13,669,141 1.8
South Beverage 231,100 South African Breweries Ltd. 5,616,303 6,781,354 0.9
Africa 57,093 South African Breweries Ltd.
(ADR) (a) 1,306,189 1,669,970 0.2
------------ ------------ ------
6,922,492 8,451,324 1.1
Entertainment 2,054,900 Sun International, Ltd. 2,874,458 2,207,783 0.3
Financial Services 884,200 First National Bank Holdings Ltd. 8,540,288 6,384,300 0.9
Mining 369,100 Beatrix Mines Ltd. 3,247,494 2,963,546 0.4
95,000 De Beers Consolidated
Mines Ltd. (ADR) (a) 2,201,328 3,206,250 0.4
518,900 Driefontein Consolidated Ltd.
(ADR) (a) 7,581,381 6,745,700 0.9
362,900 Kinross Mines Ltd. 3,840,151 3,857,070 0.5
27,900 Vaal Reefs Exploration &
Mining Co. Ltd. 2,579,177 2,278,801 0.3
32,000 Western Areas Gold Mining
Company Ltd. 464,817 499,076 0.1
185,140 Western Areas Gold Mining
Company Ltd. (ADR) (a) 2,518,063 2,846,528 0.4
------------ ------------ ------
22,432,411 22,396,971 3.0
Multi-Industry 845,634 Malbak Ltd. (GDR) (b) 4,870,860 3,805,353 0.5
Steel 323,408 South Africa Iron & Steel
Industrial Corp., Ltd. 290,725 253,316 0.0
Total Investments in South Africa 45,931,234 43,499,047 5.8
Zimbabwe Beverage & 2,993,648 Delta Corporation Ltd. 4,761,184 7,582,695 1.0
Tobacco
Total Investments in Zimbabwe 4,761,184 7,582,695 1.0
Total Investments in Africa 62,606,891 64,750,883 8.6
38
<PAGE>
EUROPE
France Merchandising 8,100 Carrefour S.A. (Ordinary) 5,924,651 4,540,408 0.6
8,100 Carrefour S.A. (Rights) (c) 0 2,238,717 0.3
------------ ------------ ------
5,924,651 6,779,125 0.9
Utilities--Water 120,500 Compagnie Generale des Eaux S.A. 12,943,162 13,466,958 1.8
Total Investments in France 18,867,813 20,246,083 2.7
Greece Banking 222,900 Ergo Bank S.A. (Ordinary) 9,402,129 12,277,801 1.6
Beverage 122,660 Hellenic Bottling Co. S.A. 2,854,032 4,074,219 0.5
Food 45,287 Delta Dairy S.A. (Preferred) 1,170,377 365,233 0.1
Telecommunications 88,000 Hellenic Telecommunication
Organization S.A. 1,457,617 1,459,655 0.2
Total Investments in Greece 14,884,155 18,176,908 2.4
Hungary Health/Personal Care 67,580 Gedeon Richter Ltd. (GDR) (b) 2,068,280 3,395,895 0.5
67,000 Gedeon Richter Ltd. (GDR) (b)(d) 2,159,888 3,366,750 0.4
------------ ------------ ------
4,228,168 6,762,645 0.9
Oil & Related 76,000 Mol Magyar Olay-es Gazipari
Reszvenytarsasag (GDR) (b) 807,500 839,800 0.1
419,000 Mol Magyar Olay-es Gazipari
Reszvenytarsasag (GDR) (b)(d) 4,733,894 4,629,950 0.6
------------ ------------ ------
5,541,394 5,469,750 0.7
Telecommunications 12,000 Magyar TavKozlesi
Reszvenytarsasag (Ordinary) 2,338,938 1,798,441 0.3
Total Investments in Hungary 12,108,500 14,030,836 1.9
Poland Automotive 216,768 ++T.C. Debica 3,520,427 5,263,682 0.7
Electrical & 238,000 Elektrim Towarzystow Handlowe S.A. 2,442,163 1,952,686 0.2
Electronics
Financial Services 132,880 Bank Rozwoju Eksportu S.A. 3,249,915 3,471,111 0.5
Multi-Industry 385,032 ++Mostostal-Export S.A. 995,772 1,317,438 0.2
385,032 Mostostal-Export S.A. (Rights) 0 0 0.0
------------ ------------ ------
995,772 1,317,438 0.2
Total Investments in Poland 10,208,277 12,004,917 1.6
39
<PAGE>
Portugal Multi-Industry 314,150 Sonae Investimentos-SGPS S.A. 6,802,343 8,169,907 1.1
Total Investments in Portugal 6,802,343 8,169,907 1.1
Russia Multi-Industry 158,700 Templeton Russia Fund, Inc. 2,309,085 4,146,038 0.6
Total Investments in Russia 2,309,085 4,146,038 0.6
Turkey Beverage & Tobacco 796,000 Erciyas Biracilik Ve Malt
Sanayii A.S. (Class A) (GDR) (b) 10,706,200 8,955,000 1.2
Merchandising 10,503,900 Migros Turk A.S. 3,813,901 9,222,937 1.2
Metal Fabricating 62,677,000 Eregli Demir Ve Celik
Fabrikalari T.A.S. 7,220,626 6,955,618 0.9
Total Investments in Turkey 21,740,727 25,133,555 3.3
Total Investments in Europe 86,920,900 101,908,244 13.6
LATIN
AMERICA
Argentina Banking 386,200 Banco Frances del Rio de la
Plata S.A. (ADR) (a) 10,572,083 11,103,250 1.5
293,120 ++Bansud S.A. (Class B) 3,371,412 3,431,048 0.5
------------ ------------ ------
13,943,495 14,534,298 2.0
Oil & Related 885,350 Companhia Naviera Perez Companc
S.A.C.F.I.M.F.A. (Class B) 4,798,054 5,801,653 0.8
Real Estate 172,824 Inversiones y Representaciones S.A. 495,217 579,221 0.1
31,611 Inversiones y Representaciones S.A.
(GDR) (b) 781,929 1,066,871 0.1
------------ ------------ ------
1,277,146 1,646,092 0.2
Telecommunications 208,700 Telefonica de Argentina S.A.
(Class B) 509,721 618,030 0.1
467,400 Telefonica de Argentina S.A.
(ADR) (a) 13,378,216 13,846,725 1.8
------------ ------------ ------
13,887,937 14,464,755 1.9
Total Investments in Argentina 33,906,632 36,446,798 4.9
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US Dollars)
LATIN AMERICA Value Percent of
(concluded) Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Brazil Banking 1,322,979,735 Banco Bradesco S.A. (Preferred) $ 6,935,066 $ 10,805,213 1.4%
42,567,626 Banco Nacional S.A. (Preferred) 892,993 0 0.0
------------ ------------ ------
7,828,059 10,805,213 1.4
Beverage 20,858,513 Companhia Cervejaria Brahma S.A.
PN (Preferred) 7,428,182 12,444,471 1.7
Mining 29,544 Companhia Vale do Rio Doce S.A.
(Preferred) 666,931 572,341 0.1
Oil & Related 29,963,333 Petroleo Brasileiro S.A. (Preferred) 3,705,777 3,685,729 0.5
Steel 113,350,000 Companhia Siderurgica Nacional S.A. 3,241,454 2,890,199 0.4
7,456,900,000 Usinas Siderurgicas de Minas
Gerais--Usiminas S.A. (Preferred) 7,041,371 7,872,824 1.0
------------ ------------ ------
10,282,825 10,763,023 1.4
Telecommunications 411,000 Telecomunicacoes Brasileiras
S.A.--Telebras (ADR) (a) 17,481,759 28,615,875 3.8
58,731,403 Telecomunicacoes Brasileiras
S.A.--Telebras ON 1,935,582 3,451,347 0.5
133,742,256 Telecomunicacoes Brasileiras
S.A.--Telebras PN (Preferred) 5,978,192 9,337,980 1.2
105,160,500 Telecomunicacoes de Minas Gerais
S.A.--TELEMIG (Class B) (Preferred) 7,035,638 10,841,796 1.5
------------ ------------ ------
32,431,171 52,246,998 7.0
Utilities 17,753,900 Light Participacoes S.A. 1,616,186 3,354,497 0.4
Utilities-- 216,740 Companhia Energetica de Minas Gerais
Electrical S.A. (CEMIG) (ADR) (a) (d) 5,141,012 5,797,795 0.8
& Gas 92,500,000 Companhia Energetica de Minas
Gerais S.A. (CEMIG) (Preferred) 2,527,304 2,459,910 0.3
------------ ------------ ------
7,668,316 8,257,705 1.1
Total Investments in Brazil 71,627,447 102,129,977 13.6
Chile Apparel 5,818,250 Bata Chile S.A. 1,648,171 722,500 0.1
Broadcasting & 5,072,871 Editorial Lord Cochrane S.A. 2,830,178 1,655,137 0.2
Publishing
Telecommunications 21,000 Compania de Telecomunicaciones
de Chile S.A. (ADR) (a) 2,198,800 2,060,625 0.3
Total Investments in Chile 6,677,149 4,438,262 0.6
Mexico Beverage and 180,050 Panamerican Beverages, Inc.
41
<PAGE>
Tobacco (Class A) 6,247,726 8,057,238 1.1
Building & 1,605,200 Apasco, S.A. de C.V. 6,657,894 8,882,404 1.2
Construction
Financial Services 129,250 ++Banca Quadrum, S.A. de C.V. (ADR) (a) 1,726,895 646,250 0.1
Health/Personal 21,000 Kimberly-Clark de Mexico,
Care S.A. de C.V. (ADR) (a) 548,375 758,625 0.1
936,000 Kimberly-Clark de Mexico,
S.A. de C.V. (Series A) 12,775,944 17,078,937 2.3
------------ ------------ ------
13,324,319 17,837,562 2.4
Multi-Industry 2,171,787 ++Grupo Carso, S.A. de C.V. 'A' 15,417,630 15,449,179 2.1
348,900 ++Grupo Carso, S.A. de C.V.
(ADR) (a) (d) 4,028,200 4,884,600 0.6
------------ ------------ ------
19,445,830 20,333,779 2.7
Retail 3,227,000 Cifra, S.A. de C.V. 'C' 5,644,060 4,616,705 0.6
Telecommunications 212,901 Telefonos de Mexico, S.A.
de C.V. (ADR) (a) 10,562,836 7,132,184 0.9
Total Investments in Mexico 63,609,560 67,506,122 9.0
Venezuela Building Materials 15,930 Venezolana de Cementos S.A.C.A.
(Vencemos) 28,303 30,400 0.0
Steel 1,561,472 Siderurgica Venezolana SIVENSA,
S.A.I.C.A.--S.A.C.A. 573,061 1,032,103 0.1
200,000 Siderurgica Venezolana SIVENSA,
S.A.I.C.A.--S.A.C.A. (ADR) (a) 390,000 640,000 0.1
------------ ------------ ------
963,061 1,672,103 0.2
Textiles 1,023,882 Mantex S.A.C.A. 118,975 135,353 0.0
Utilities-- 3,328,669 C.A. La Electricidad de
Electrical & Gas Caracas S.A.I.C.A.--S.A.C.A. 3,572,081 2,767,976 0.4
Total Investments in Venezuela 4,682,420 4,605,832 0.6
Total Investments in Latin America 180,503,208 215,126,991 28.7
MIDDLE
EAST
Egypt Banking 15,159 Commercial International Bank
(Egypt) S.A.E. 1,992,666 1,876,446 0.3
Total Investments in Egypt 1,992,666 1,876,446 0.3
42
<PAGE>
Israel Banking 3,043,266 ++Bank Hapoalim Ltd. 4,838,495 4,489,940 0.6
3,843,099 ++Bank Leumi Israel 5,460,273 4,564,821 0.6
------------ ------------ ------
10,298,768 9,054,761 1.2
Merchandising 76,873 ++Blue Square Chain Stores
Properties & Investments Ltd. 438,729 536,804 0.1
Multi-Industry 26,308 ++Koor Industries Ltd. 2,291,571 2,230,490 0.3
64,100 Koor Industries Ltd. (ADR) (a) 1,217,796 1,105,725 0.1
------------ ------------ ------
3,509,367 3,336,215 0.4
Total Investments in Israel 14,246,864 12,927,780 1.7
Total Investments in the
Middle East 16,239,530 14,804,226 2.0
PACIFIC
BASIN/ASIA
Australia Leisure & 1,724,871 ++Crown Casino Ltd. 2,319,645 3,853,755 0.5
Tourism
Merchandising 240,950 Amway Asia Pacific Ltd. 7,459,370 7,288,737 1.0
Total Investments in Australia 9,779,015 11,142,492 1.5
Hong Kong Automotive 5,134,000 Sime Darby (Hong Kong) Ltd. 6,061,900 5,538,260 0.7
Banking 6,915,666 JCG Holdings, Ltd. 5,141,460 5,628,667 0.7
Food 21,787,000 C.P. Pokphand Co. Ltd. (Ordinary) 6,214,254 8,655,129 1.2
50,947,000 Tingyi (Cayman Islands) Holdings, Co. 14,192,540 13,986,483 1.9
------------ ------------ ------
20,406,794 22,641,612 3.1
Industrial 17,110,000 Sinocan Holdings Ltd. 6,335,353 7,515,535 1.0
Total Investments in Hong Kong 37,945,507 41,324,074 5.5
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
PACIFIC BASIN/
ASIA Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
India Banking 1,889,000 State Bank of India $ 12,935,036 $ 16,191,043 2.2%
Energy Sources 995,500 Bombay Suburban Electric Supply
Co. Ltd. 5,290,246 5,541,607 0.7
60,000 Bombay Suburban Electric Supply
Co. Ltd. (GDR) (b) 993,000 1,155,000 0.1
500 Cochin Refinery Ltd. 3,764 2,569 0.0
------------ ------------ ------
6,287,010 6,699,176 0.8
Financial Services 123,750 Housing Development Finance Corp. 10,160,668 10,379,032 1.4
3,145,850 Industrial Credit & Investment
Corporation of India Ltd. 11,154,057 8,082,401 1.1
------------ ------------ ------
21,314,725 18,461,433 2.5
Leisure & Tourism 250,000 East India Hotels Ltd. 4,272,543 5,138,453 0.7
Recreation & 580,000 Suraj Diamonds Ltd. 1,522,715 705,338 0.1
Consumer Goods
Telecommunications 1,617,000 Mahanagar Telephone Nigam Ltd. 8,143,975 11,713,210 1.6
Textiles 130,300 Grasim Industries Ltd. 2,326,978 2,128,581 0.3
3,600 JCT Ltd. 5,877 1,572 0.0
40,100 Reliance Industries Ltd. 254,289 242,683 0.0
------------ ------------ ------
2,587,144 2,372,836 0.3
Total Investments in India 57,063,148 61,281,489 8.2
Indonesia Banking 2,790,500 P.T. Bank Bali 'Foreign' 7,645,923 5,995,918 0.8
Broadcasting & US$ 4,645,000 P.T. Surya Citra Television,
Publishing 4% due 7/01/1997 (Convertible) (d) 4,856,085 4,646,858 0.6
Building Materials 1,272,500 P.T. Mulia Industrindo 1,060,019 1,886,603 0.2
Energy Equipment 2,980,800 P.T. Kabelmetal Indonesia 4,943,526 1,345,011 0.2
& Services
Real Estate 3,528,000 P.T. Ciputra Development 7,328,623 7,163,644 1.0
Total Investments in Indonesia 25,834,176 21,038,034 2.8
Malaysia Banking 615,000 Malayan Banking BHD 5,758,655 5,918,204 0.8
2,712,000 Public Bank BHD 'Foreign' 7,311,962 7,503,128 1.0
------------ ------------ ------
13,070,617 13,421,332 1.8
Broadcasting & 2,181,000 New Straits Times Press BHD 9,509,820 11,368,484 1.5
Publishing 5,410,000 Sistem Televisyen Malaysia BHD 8,775,565 11,062,951 1.5
------------ ------------ ------
18,285,385 22,431,435 3.0
44
<PAGE>
Chemicals 757,000 Nylex (Malaysia) BHD 3,000,783 2,913,873 0.4
Multi-Industry 3,556,000 Renong BHD 6,035,265 5,674,771 0.7
Telecommunications 1,222,000 Leader Universal Holdings BHD
(Class A) 3,654,882 3,454,330 0.5
5,394,000 ++Technology Resources Industries BHD 18,467,460 18,816,279 2.5
------------ ------------ ------
22,122,342 22,270,609 3.0
Total Investments in Malaysia 62,514,392 66,712,020 8.9
Pakistan Chemicals-- 591,500 Fauji Fertilizer Co. Ltd. 1,493,469 1,520,783 0.2
Fertilizers
Electrical 1,446,227 ++Karachi Electric Supply Corp. Ltd. 1,121,386 1,518,321 0.2
Components
Telecommunications 14,050 ++Pakistan Telecommunications Corp. 1,489,569 1,605,485 0.2
Total Investments in Pakistan 4,104,424 4,644,589 0.6
South Automotive 66,214 ++Dong Ah Tire Industries 3,636,388 5,184,450 0.7
Korea
Telecommunications 57,764 Korea Mobile Telecommunications
Corp. 22,101,808 35,783,766 4.8
1,025,606 Korea Mobile Telecommunications
Corp. (ADR) (a) 16,549,141 17,358,382 2.3
------------ ------------ ------
38,650,949 53,142,148 7.1
Utilities-- 97,100 Korea Electric Power Corp. 3,821,975 3,922,313 0.5
Electrical & Gas
Total Investments in South Korea 46,109,312 62,248,911 8.3
Sri Appliances & 155,500 Lankan Tiles 151,066 105,200 0.0
Lanka Household Durables
Total Investments in Sri Lanka 151,066 105,200 0.0
Thailand Banking 1,456,000 Krung Thai Bank Public Co. Ltd. 6,874,574 6,824,104 0.9
690,800 Phatra Thanakit Public Co. Ltd. 7,324,993 4,815,739 0.7
117,000 Siam Commercial Bank Public Co.
Ltd. 'Foreign' 1,862,717 1,695,786 0.2
1,210,700 Thai Farmers Bank, Ltd. 12,946,596 13,256,188 1.8
------------ ------------ ------
29,008,880 26,591,817 3.6
Financial Services 1,216,000 Finance One Public Company Ltd.
'Foreign' 8,846,979 7,854,431 1.0
45
<PAGE>
Telecommunications 558,000 Advanced Info Service Public
Company Ltd. 'Foreign' 10,457,207 8,746,908 1.2
Total Investments in Thailand 48,313,066 43,193,156 5.8
Total Investments in the Pacific
Basin/Asia 291,814,106 311,689,965 41.6
SHORT-TERM Face
SECURITIES Amount
Commercial US$ 32,750,000 General Electric Capital Corp.,
Paper* 5.56% due 7/01/1996 32,739,884 32,739,884 4.3
Commercial CLP 206,366,080 Central Bank of Chile, 7.58%
Paper-- due 9/24/1996 493,983 493,129 0.1
Foreign*
Total Investments in Short-Term
Securities 33,233,867 33,233,013 4.4
Total Investments $671,318,502 741,513,322 98.9
============
Other Assets Less Liabilities 8,357,376 1.1
------------ ------
Net Assets $749,870,698 100.0%
============ ======
</TABLE>
*Commercial Paper and Commercial Paper--Foreign are traded on a
discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
++Non-income producing security.
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
(c)The rights may be exercised until 7/15/1996.
(d)Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $23,326,000,
representing 3.11% of net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Dates Cost (Note 1a)
<S> <C> <C> <C>
Companhia Energetica de Minas
Gerais S.A. (CEMIG) (ADR) 9/22/1994--8/01/1995 $ 5,141,012 $ 5,797,795
Gedeon Richter Ltd. (GDR) 3/11/1996--3/12/1996 2,159,888 3,366,750
Grupo Carso, S.A. de C.V. (ADR) 2/10/1995--12/14/1995 4,028,200 4,884,600
Mol Magyar Olay-es Gazipari
Reszvenytarsasag (GDR) 1/18/1996--2/22/1996 4,733,894 4,629,950
P.T. Surya Citra Television, 4%
due 7/01/1997 (Convertible) 6/24/1994--2/27/1996 4,856,085 4,646,858
Total $ 20,919,079 $23,325,953
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$671,318,502)
(Note 1a) $741,513,322
Cash 2,999,737
Foreign cash (Note 1c) 563,297
Receivables:
Securities sold $ 23,206,800
Dividends 3,841,626
Capital shares sold 1,171,623
Interest 184,785 28,404,834
------------
Prepaid expenses and other assets (Note 1f) 36,187
------------
Total assets 773,517,377
------------
Liabilities: Payables:
Securities purchased 21,118,080
Capital shares redeemed 1,077,638
Investment adviser (Note 2) 567,587
Distributor (Note 2) 273,344 23,036,649
------------
Accrued expenses 610,030
------------
Total liabilities 23,646,679
------------
Net Assets: Net assets $749,870,698
============
47
<PAGE>
Net Assets Class A Shares of Common Stock, $.10 par value,
Consist of: 100,000,000 shares authorized $ 2,278,072
Class B Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 2,028,197
Class C Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 315,999
Class D Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 384,922
Paid-in capital in excess of par 704,575,865
Undistributed investment income--net 2,661,403
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 6) (18,915,354)
Accumulated distributions in excess of realized gains on
investments and foreign currency transactions--net (13,589,754)
Unrealized appreciation on investments and foreign
currency transactions--net 70,131,348
------------
Net assets $749,870,698
============
Net Asset Class A--Based on net assets of $342,883,581 and 22,780,723
Value: shares outstanding $ 15.05
============
Class B--Based on net assets of $302,182,872 and 20,281,969
shares outstanding $ 14.90
============
Class C--Based on net assets of $46,983,229 and 3,159,986
shares outstanding $ 14.87
============
Class D--Based on net assets of $57,821,016 and 3,849,221
shares outstanding $ 15.02
============
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1996
<S> <C> <C> <C>
Investment Income Dividends (net of $1,151,105 foreign withholding tax) $ 16,003,219
(Notes 1d & 1e): Interest and discount earned 4,132,654
------------
Total income 20,135,873
------------
Expenses: Investment advisory fees (Note 2) $ 6,265,747
Account maintenance and distribution fees--Class B (Note 2) 2,248,222
Custodian fees 1,386,014
Transfer agent fees--Class A (Note 2) 592,028
Transfer agent fees--Class B (Note 2) 485,525
Account maintenance and distribution fees--Class C (Note 2) 305,504
Printing and shareholder reports 205,114
Accounting services (Note 2) 168,938
Registration fees (Note 1f) 166,516
Professional fees 106,978
Account maintenance fees--Class D (Note 2) 93,209
Transfer agent fees--Class C (Note 2) 66,833
Transfer agent fees--Class D (Note 2) 62,995
Directors' fees and expenses 38,828
Pricing fees 9,146
Other 150,061
------------
Total expenses 12,351,658
------------
Investment income--net 7,784,215
------------
Realized & Realized loss from:
Unrealized Gain Investments--net (18,915,354)
48
<PAGE>
(Loss) on Foreign currency transactions--net (694,388) (19,609,742)
Investments & ------------
Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net 95,057,755
Transactions--Net Foreign currency transactions--net (126,943) 94,930,812
(Notes 1b, ------------ ------------
1c, 1e & 3): Net realized and unrealized gain on investments and
foreign currency transactions 75,321,070
------------
Net Increase in Net Assets Resulting from Operations $ 83,105,285
============
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended June 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 7,784,215 $ 7,620,101
Realized loss on investments and foreign currency
transactions--net (19,609,742) (8,597,447)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net 94,930,812 (27,448,282)
------------ ------------
Net increase (decrease) in net assets resulting from operations 83,105,285 (28,425,628)
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (5,561,685) (987,487)
Shareholders Class B (1,835,760) --
(Note 1g): Class C (257,907) (5,936)
Class D (462,153) (15,439)
Realized gain on investments--net:
Class A -- (16,617,087)
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 (8,117,505) (40,009,452)
------------ ------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 121,555,763 219,766,488
(Note 4): ------------ ------------
49
<PAGE>
Net Assets: Total increase in net assets 196,543,543 151,331,408
Beginning of year 553,327,155 401,995,747
------------ ------------
End of year* $749,870,698 $553,327,155
============ ============
*Undistributed investment income--net (Note 1i) $ 2,661,403 $ 3,689,081
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL HIGHLIGHTS
The following per share data and ratios Class A
have been derived from information provided
in the financial statements. For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1996++ 1995 1994 1993++ 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.35 $ 14.61 $ 11.62 $ 11.92 $ 10.43
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .23 .24 .11 .12 .15
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.71 (.40) 3.23 .42 1.59
-------- -------- -------- -------- --------
Total from investment operations 1.94 (.16) 3.34 .54 1.74
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.24) (.04) (.07) (.14) (.17)
Realized gain on investments--net -- (.60) (.28) (.70) (.08)
In excess of realized gain on
investments--net -- (.46) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.24) (1.10) (.35) (.84) (.25)
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.05 $ 13.35 $ 14.61 $ 11.62 $ 11.92
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 14.82% (1.67%) 28.73% 5.17% 17.02%
Return:* ======== ======== ======== ======== ========
Ratios to Expenses 1.54% 1.62% 1.46% 1.71% 1.64%
Average ======== ======== ======== ======== ========
Net Assets: Investment income (loss)--net 1.66% 1.56% .63% (.04%) 1.73%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $342,884 $350,081 $401,996 $142,285 $126,417
Data: ======== ======== ======== ======== ========
50
<PAGE>
Portfolio turnover 71.01% 63.37% 66.85% 91.72% 71.05%
======== ======== ======== ======== ========
Average commission rate paid++++ $ .0012 -- -- -- --
======== ======== ======== ======== ========
</TABLE>
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the period.
++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL HIGHLIGHTS (concluded)
Class B Class C Class D
The following per share data and For the For the For the
ratios have been derived from For the Period For the Period For the Period
information provided in the. Year July 1, Year Oct. 21, Year Oct. 21,
financial statements Ended 1994++++ to Ended 1994++++ to Ended 1994++++ to
June 30, June 30, June 30, June 30, June 30, June 30,
Increase (Decrease) in Net Asset Value: 1996++ 1995 1996++ 1995 1996++ 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.24 $ 14.54 $ 13.22 $ 16.71 $ 13.33 $ 16.77
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income--net .09 .08 .09 .08 .21 .13
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net 1.69 (.32) 1.70 (2.50) 1.69 (2.48)
-------- -------- -------- -------- -------- --------
Total from investment operations 1.78 (.24) 1.79 (2.42) 1.90 (2.35)
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.12) -- (.14) (.01) (.21) (.03)
Realized gain on investments--net -- (.60) -- (.60) -- (.60)
In excess of realized gain on
investments--net -- (.46) -- (.46) -- (.46)
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.12) (1.06) (.14) (1.07) (.21) (1.09)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 14.90 $ 13.24 $ 14.87 $ 13.22 $ 15.02 $ 13.33
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.63% (2.22%)+++ 13.68% (14.97%)++ 14.55% (14.49%)+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses 2.56% 2.79%* 2.56% 2.96%* 1.76% 2.19%*
Net Assets: ======== ======== ======== ======== ======== ========
51
<PAGE>
Investment income--net .65% 1.01%* 0.67% 1.32%* 1.48% 2.10%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $302,183 $162,774 $ 46,983 $ 18,573 $ 57,821 $ 21,899
======== ======== ======== ======== ======== ========
Portfolio turnover 71.01% 63.37% 71.01% 63.37% 71.01% 63.37%
======== ======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0012 -- $ .0012 -- $ .0012 --
======== ======== ======== ======== ======== ========
</TABLE>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the period.
++++Commencement of Operations.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
+++Aggregate total investment return.
See Notes to Consolidated Financial Statements.
52
<PAGE>
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 options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market 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 counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
53
<PAGE>
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 market 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
future date and 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
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
54
<PAGE>
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
required. 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) Prepaid registration fees--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 components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $694,388 have been reclassified 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
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
a 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.
For the year ended June 30, 1996, MLFD earned underwriting discounts
and commissions and MLPF&S earned dealer concessions on sales of the
56
<PAGE>
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $18,510 $266,754
Class D $32,695 $454,439
For the year ended June 30, 1996, MLPF&S received contingent
deferred sales charges of $440,116 and $21,166 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $214,282 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended June 30, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, 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, 1996 were $598,397,356 and $414,230,012,
respectively.
Net realized and unrealized gains (losses) as of June 30, 1996
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $(19,139,559) $70,195,674
Short-term investments 224,205 (854)
Foreign currency transactions (694,388) (63,472)
------------ -----------
Total $(19,609,742) $70,131,348
============ ===========
As of June 30, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $69,119,503, of which $112,694,490 related
to appreciated securities and $43,574,987 related to depreciated
securities. The aggregate cost of investments at June 30, 1996 for
Federal income tax purposes was $672,393,819.
57
<PAGE>
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $121,555,763 and $219,766,488 for the years ended June 30, 1996
and 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 2,735,667 $ 38,556,805
Shares issued to shareholders
in reinvestment of dividends 372,866 4,809,974
------------ ------------
Total issued 3,108,533 43,366,779
Shares redeemed (6,552,984) (89,771,385)
------------ ------------
Net decrease (3,444,451) $(46,404,606)
============ ============
Class A Shares for the Year Dollar
Ended June 30, 1995 Shares Amount
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)
============= ============
Class B Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 12,840,731 $179,107,988
Shares issued to shareholders
in reinvestment of dividends 128,947 1,655,685
------------ ------------
Total issued 12,969,678 180,763,673
Shares redeemed (4,893,284) (67,373,581)
Automatic conversion of shares (92,406) (1,275,022)
------------ ------------
Net increase 7,983,988 $112,115,070
============= ============
58
<PAGE>
Class B Shares for the Period Dollar
July 1, 1994++ to June 30, 1995 Shares Amount
Shares sold 14,365,857 $217,255,334
Shares issued to shareholders
in reinvestment of dividends &
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
============ ============
++Commencement of Operations.
Class C Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 2,350,884 $ 32,960,409
Shares issued to shareholders
in reinvestment of dividends 18,269 234,019
------------ ------------
Total issued 2,369,153 33,194,428
Shares redeemed (613,802) (8,506,773)
------------ ------------
Net increase 1,755,351 $ 24,687,655
============ ============
Class C Shares for the Period Dollar
October 21, 1994++ to June 30, 1995 Shares Amount
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
============= ============
++Commencement of Operations.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
Class D Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 4,465,997 $ 63,170,949
Automatic conversion of shares 91,700 1,275,022
Shares issued to shareholders
in reinvestment of dividends 31,584 407,120
------------ ------------
Total issued 4,589,281 64,853,091
Shares redeemed (2,382,856) (33,695,447)
------------ ------------
Net increase 2,206,425 $ 31,157,644
============ ============
Class D Shares for the Period Dollar
October 21, 1994++ to June 30, 1995 Shares Amount
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
============= ============
++Commencement of Operations.
5. Commitments:
At June 30, 1996, the Fund entered into forward exchange contracts
under which it had agreed to purchase and sell various foreign
currencies with approximate values of $2,506,000 and $19,105,000,
respectively.
6. Capital Loss Carryforward:
At June 30, 1996, the Fund had a net capital loss carryforward of
approximately $16,986,000, all of which expires in 2004. This amount
will be available to offset like amounts of any future taxable
gains.
60
<PAGE>
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<PAGE>
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<PAGE>
TABLE OF CONTENTS
Page
---------
Investment Objective and Policies 2
Portfolio Strategies Involving Options and Futures 2
Other Investment Policies and Practices 6
Investment Restrictions 9
Management of the Fund 12
Directors and Officers 12
Compensation of Directors 13
Management and Advisory Arrangements 13
Purchase of Shares 14
Initial Sales Charge Alternatives--Class A and Class
D Shares 15
Reduced Initial Sales Charges 17
Distribution Plans 19
Limitations on the Payment of Deferred Sales Charges 19
Redemption of Shares 21
Deferred Sales Charges--Class B and Class C Shares 21
Portfolio Transactions and Brokerage 21
Determination of Net Asset Value 23
Shareholder Services 24
Investment Account 24
Automatic Investment Plans 24
Automatic Reinvestment of Dividends and Capital Gains
Distributions 25
Systematic Withdrawal Plans--Class A and Class D
Shares 25
Exchange Privilege 26
Dividends, Distributions and Taxes 28
Dividends and Distributions 28
Taxes 28
Performance Data 32
General Information 34
Description of Shares 34
Computation of Offering Price Per Share 34
Independent Auditors 35
Custodian 35
Transfer Agent 35
Legal Counsel 35
Reports to Shareholders 35
Additional Information 35
Security Ownership of Certain Beneficial Owners 35
Independent Auditors' Report 36
Financial Statements 38
Code # 10894-1096
Merrill Lynch
Developing Capital
Markets Fund, Inc.
Statement of
Additional
Information
October 28, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
Contained in Part A:
Consolidated Financial Highlights for each of the years in the six-year
period ended June 30, 1996 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, 1996.
Consolidated Statement of Assets and Liabilities as of June 30, 1996.
Consolidated Statement of Operations for the fiscal year ended June 30,
1996.
Consolidated Statements of Changes in Net Assets for each of the years
in the two-year period ended June 30, 1996.
Consolidated Financial Highlights for each of the years in the five-year
period ended June 30, 1996.
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number
- -----------
<S> <C>
1(a) --Articles of Incorporation of the Registrant, dated April 13, 1989.(a)
(b) --Articles of Amendment to Articles of Incorporation of the Registrant, dated May 17, 1989.(a)
(c) --Articles of Amendment to Articles of Incorporation of the Registrant, dated June 16, 1989.(a)
(d) --Form of Articles Supplementary to Articles of Incorporation of the Registrant, dated June 29,
1994.(b)
(e) --Articles of Amendment to Articles of Incorporation of the Registrant, dated October 17, 1994.(c)
(f) --Articles Supplementary to Articles of Incorporation of the Registrant, dated October 17, 1994.(c)
2 --By-Laws of the Registrant.(c)
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.(d)
5(a) --Management Agreement between the Registrant and Merrill Lynch Asset Management, Inc.(e)
(b) --Supplement to Management Agreement between Registrant and Merrill Lynch Asset Management, L.P.
dated January 3, 1994.(a)
6(a) --Form of Class A Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(b)
(b) --Class B Shares Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc.(a)
(c) --Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc. with respect to
the Merrill Lynch Mutual Fund Adviser program.(e)
(d) --Form of Class C Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(b)
(e) --Form of Class D Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(b)
7 --None.
8 --Custodian Agreement between the Registrant and Brown Brothers Harriman & Co.
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between the
Registrant and Merrill Lynch Financial Data Services, Inc.(c)
(b) --Form of Agreement relating to use of name. (c)
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, Inc.(c)
14 --None.
15(a) --Class B Shares Distribution Plan and Class B Shares Distribution Plan Sub-Agreement of the
Registrant.(a)
(b) --Form of Class C Shares Distribution Plan and Class C Shares Distribution Plan Sub-Agreement of the
Registrant.(b)
(c) --Form of Class D Shares Distribution Plan and Class D Shares Distribution Plan Sub-Agreement of the
Registrant.(b)
16(a) --Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class A Shares.(c)
C-1
<PAGE>
Exhibit
Number
- -----------
(b) --Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class B Shares.(c)
(c) --Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class C Shares.(c)
(d) --Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class D Shares.(c)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(f)
</TABLE>
(a) Filed on May 13, 1994 as an Exhibit to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, as amended (File No. 33-28248)(the "Registration Statement").
(b) Filed on October 17, 1994 as an Exhibit to Post-Effective Amendment No. 8
to the Registration Statement.
(c) Filed on October 25, 1995 as an Exhibit to Post-Effective Amendment No. 9
to the Registration Statement.
(d) 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.
(e) Filed on October 28, 1993 as an Exhibit to Post-Effective Amendment No. 6
to the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No.
13 to the Registration Statement on Form N-1A of Merrill Lynch New York
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
(File No. 2-99473), filed on January 25, 1996.
Item 25. Persons Controlled by or Under Common Control with Registrant.
The Registrant is not controlled by or under common control with any other
person. The Registrant owns all of the stock of Merrill Lynch DCM, Inc., a
Delaware corporation formed specifically to facilitate investment in
accordance with the applicable investment restrictions of a particular
foreign country. Such subsidiary is included in the Registrant's consolidated
financial statements.
Item 26. Number of Holders of Securities.
Number of
Holders at
Title of Class September 30, 1996
- --------------------------------------------------- ------------------
Class A Common Stock, par value $0.10 per share 36,470
Class B Common Stock, par value $0.10 per share 44,848
Class C Common Stock, par value $0.10 per share 7,994
Class D Common Stock, par value $0.10 per share 5,449
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.
C-2
<PAGE>
Item 27. Indemnification.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class
C and Class D Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent
permitted under the General Laws of the State of Maryland, except that such
indemnity shall not protect any such person against any liability to the
Registrant or any stockholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office, the decision by the Registrant to
indemnify such person must be based upon the reasonable determination of
independent counsel or non-party independent directors, after review of the
facts, that such officer or director is not guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office.
Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-Laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses incurred by him or
her in connection with proceedings to which he or she 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 or her 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; or (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 or her 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
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (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 "Manager"), acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch
C-3
<PAGE>
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 Lunch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch 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., Merrill Lynch Senior Floating Rate
Fund, Inc. and Merrill Lynch Municipal Strategy 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 Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., and The
Municipal Fund Accumulation Program, Inc.; and for the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy
Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund,
Inc., MuniVest Fund, 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 Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia Holdings,
Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate
Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646.
The address of MLAM, FAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators L.P., is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill
Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250
Vesey Street, New York, New York 10281. The address of Merrill Lynch
Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
July 1, 1994 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the 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 Manager 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
C-4
<PAGE>
Position(s) with Other Substantial Business,
Name Manager Profession, Vocation or Employment
------------------------------------------------------------ --------------------------------------------------------
Arthur Zeikel President President of FAM; President and Director of Princeton
Services; Director of MLFD; Executive Vice President
of ML & Co.
Terry K. Glenn Executive Vice 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
Michael J. Hennewinkel 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, General Senior Vice President, General Counsel and Secretary of
Counsel and Secretary FAM; Senior Vice President, General Counsel, Director
and Secretary of Princeton Services; Director of MLFD
Ronald M. Kloss Senior Vice President and Senior Vice President and Controller of FAM; Senior Vice
Controller President and Controller of Princeton Services
Stephen M.M. Miller Senior Vice President Executive Vice President of Princeton Administrators,
L.P.; Senior Vice President of Princeton Services
Joseph T. Monagle, Jr. Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Michael L. Quinn Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Managing Director and First Vice
President of Merrill Lynch from 1989 to 1995
Richard L. Reller Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Gerald M. Richard Senior Vice President and Senior Vice President and Treasurer of FAM; Senior Vice
Treasurer President and Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Anthony Wiseman Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
</TABLE>
Item 29. Principal Underwriters.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs
of Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., and The
Municipal Fund Accumulation Program, Inc., and MLFD also acts as the
principal underwriter for the following closed-end investment companies:
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
C-5
<PAGE>
<TABLE>
<CAPTION>
Position(s) and Office(s) Position(s) and Office(s)
Name with MLFD with Registrant
- ----------------------------- ---------------------------------- ------------------------------
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Arthur Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Kevin P. Boman Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Mark A. DeSario Vice President None
James T. Fatseas Vice President None
Debra W. Landsman-Yaros Vice President None
Michelle T. Lau Vice President None
Gerald M. Richard Vice President and Treasurer Treasurer
Salvatore Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules thereunder will be maintained at the offices of the Registrant, 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and 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.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this 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 25th day of October
1996.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
(Registrant)
By /s/Gerald M. Richard
---------------------------------------
(Gerald M. Richard, Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons
in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date(s)
--------- ----- -------
<S> <C> <C>
ARTHUR ZEIKEL* President and Director (Principal
----------------------------------- Executive Officer)
(Arthur Zeikel)
/s/GERALD M. RICHARD Treasurer (Principal Financial
----------------------------------- and Accounting Officer) October 25, 1996
(Gerald M. Richard) and Accounting Officer)
DONALD CECIL* Director
-----------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director
-----------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director
-----------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director
-----------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Director
-----------------------------------
(Edward D. Zinbarg)
*By: /s/GERALD M. RICHARD
-----------------------------------
(Gerald M. Richard, Attorney-in-Fact) October 25, 1996
</TABLE>
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------- ---------------------------------------------------------------------------------------
<S> <C>
8 -- Custodian Agreement between the Registrant and Brown Brothers Harriman & Co.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made this 23rd day of July, 1996, between MERRILL LYNCH
DEVELOPING CAPITAL MARKETS FUND, INC. (the "Fund") and Brown Brothers Harriman &
Co. (the "Custodian").
WITNESSETH: That in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. The Fund hereby employs and appoints the Custodian as custodian for the
term and subject to the provisions of this Agreement. The Custodian shall not be
under any duty or obligation to require the Fund to deliver to it any securities
or funds owned by the Fund and shall have no responsibility or liability for or
on account of securities or funds not so delivered. The Fund will deposit with
the Custodian copies of the Certificate of Incorporation and By-Laws (or
comparable documents) of the Fund and all amendments thereto, and copies of such
votes and other proceedings of the Fund as may be necessary for or convenient to
the Custodian in the performance of its duties.
2. Except for securities and funds held by subcustodians appointed pursuant
to the provisions of Section 3 hereof, the Custodian shall have and perform the
following powers and duties:
A. Safekeeping - To keep safely the securities of the Fund that have been
delivered to the Custodian and from time to time to receive delivery of
securities for safekeeping.
1
<PAGE>
B. Manner of Holding Securities - To hold securities of the Fund (1) by
physical possession of the share certificates or other instruments representing
such securities in registered or bearer form, or (2) in book-entry form by a
Securities System (as said term is defined in Section 2S).
C. Registered Name; Nominee - To hold registered securities of the Fund (1)
in the name or any nominee name of the Custodian or the Fund, or in the name or
any nominee name of any agent appointed pursuant to Section 5E, or (2) in street
certificate form, so-called, and in any case with or without any indication of
fiduciary capacity.
D. Purchases - Upon receipt of Proper Instructions, as defined in Section V
on Page 14, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities (1) by the Custodian, or (2) by a clearing
corporation of a national securities exchange of which the Custodian is a
member, or (3) by a Securities System. However, (i) in the case of repurchase
agreements entered into by the Fund, the Custodian may release funds to a
Securities System or to a Subcustodian prior to the receipt of advice from the
Securities System or Subcustodian that the securities underlying such repurchase
agreement have been transferred by book entry into the Account (as defined in
Section 2S) of the Custodian maintained with such Securities System or
Subcustodian, so long as such payment instructions to Securities
2
<PAGE>
System or Subcustodian include a requirement that delivery is only against
payment of securities, and (ii) in the case of time deposits, call account,
deposits, currency deposits, and other deposits, contracts or options pursuant
to Sections 2K, 2L and 2M, the Custodian may make payment therefor without
receiving an instrument evidencing said deposit so long as such payment
instructions detail specific securities to be acquired.
E. Exchanges - Upon receipt of proper instructions, to exchange securities
held by it for the account of the Fund for other securities in connection with
any reorganization, recapitalization, split-up of shares, change of par value,
conversion or other event, and to deposit any such securities in accordance with
the terms of any reorganization or protective plan. Without such instructions,
the Custodian may surrender securities in temporary form for definitive
securities, may surrender securities for transfer into a name or nominee name as
permitted in Section 2C, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided the securities to be issued are to be
delivered to the Custodian and further provided custodian shall at the time of
surrendering securities or instruments receive a receipt or other evidence of
ownership thereof.
F. Sales of Securities - Upon receipt of proper instructions, to make
delivery of securities which have been sold
3
<PAGE>
for the account of the Fund, but only against payment therefor (1) in cash, by a
certified check, bank cashier's check, bank credit, or bank wire transfer, or
(2) by credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member, or (3) by
credit to the account of the Custodian or an Agent of the Custodian with a
Securities System.
G. Depositary Receipts - Upon receipt of proper instructions, to instruct a
subcustodian appointed pursuant to Section 3 hereof (a "Subcustodian") or an
agent of the Custodian appointed pursuant to Section 5E hereof (an "Agent") to
surrender securities to the depositary used by an issuer of American Depositary
Receipts or International Depositary Receipts (hereinafter collectively referred
to as "ADRs") for such securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to the Subcustodian
or Agent that the depositary has acknowledged receipt of instructions to issue
with respect to such securities ADRs in the name of the Custodian, or a nominee
of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at
such other place as the Custodian may from time to time designate.
Upon receipt of proper instructions, to surrender ADRs to the issuer
thereof against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged
4
<PAGE>
receipt of instructions to cause its depositary to deliver the securities
underlying such ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of proper
instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants, puts, calls, rights or similar securities for the purpose of
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and, upon receipt
of proper instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Borrowings - Upon receipt of proper instructions, to deliver securities
of the Fund to lenders or their agents as collateral for borrowings effected by
the Fund, provided that such borrowed money is payable to or upon the
Custodian's order as Custodian for the Fund.
K. Demand Deposit Bank Accounts - To open and operate an account or
accounts in the name of the Fund on the Custodian's books subject only to draft
or order by the Custodian. All funds received by the Custodian from or for the
account of the Fund shall
5
<PAGE>
be deposited in said account(s). The responsibilities of the Custodian to the
Fund for deposits accepted on the Custodian's books shall be that of a U.S. bank
for a similar deposit.
If and when authorized by proper instructions, the Custodian may open and
operate an additional account(s) in such other banks or trust companies as may
be designated by the Fund in such instructions (any such bank or trust company
so designated by the Fund being referred to hereafter as a "Banking
Institution"), provided that such account(s) shall be in the name of the
Custodian for account of the Fund and subject only to the Custodian's draft or
order. Such accounts may be opened with Banking Institutions in the United
States and in other countries and may be denominated in either U.S. Dollars or
other currencies as the Fund may determine. All such deposits shall be deemed to
be portfolio securities of the Fund and accordingly the responsibility of the
Custodian therefore shall be the same as and neither lesser nor greater than the
Custodian's responsibility in respect of other portfolio securities of the Fund.
L. Interest Bearing Call or Time Deposits - To place interest bearing fixed
term and call deposits with such banks and in such amounts as the Fund may
authorize pursuant to proper instructions. Such deposits may be placed with the
Custodian or with Subcustodians or other Banking Institutions as the Fund may
determine. Deposits may be denominated in U.S. Dollars or other currencies and
need not be evidenced by the issuance or delivery of
6
<PAGE>
a certificate to the Custodian, provided that the Custodian shall include in its
records with respect to the assets of the Fund, appropriate notation as to the
amount and currency of each such deposit, the accepting Banking Institution, and
other appropriate details. Such deposits, other than those placed with the
Custodian, shall be deemed portfolio securities of the Fund and the
responsibilities of the Custodian therefor shall be the same as those for demand
deposit bank accounts placed with other banks, as described in Section K of this
Agreement. The responsibility of the Custodian for such deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
M. Foreign Exchange Transactions and Futures Contracts - Pursuant to proper
instructions, to enter into foreign exchange contracts or options to purchase
and sell foreign currencies for spot and future delivery on behalf and for the
account of the Fund. Such transactions may be undertaken by the Custodian with
such Banking Institutions, including the Custodian and Subcustodian(s) as
principals, as approved and authorized by the Fund. Foreign exchange contracts
and options other than those executed with the Custodian, shall be deemed to be
portfolio securities of the Fund and the responsibilities of the Custodian
therefor shall be the same as those for demand deposit bank accounts placed with
other banks as described in Section 2K of this Agreement. Upon receipt of proper
instructions, to receive and retain confirmations evidencing the purchase or
sale of a futures
7
<PAGE>
contract or an option on a futures contract by the Fund; to deposit and maintain
in a segregated account, for the benefit of any futures commission merchant or
to pay to such futures commission merchant, assets designated by the Fund as
initial, maintenance or variation "margin" deposits intended to secure the
Fund's performance of its obligations under any futures contracts purchased or
sold or any options on futures contracts written by the Fund, in accordance with
the provisions of any agreement or agreements among any of the Fund, the
Custodian and such futures commission merchant, designated to comply with the
rules of the Commodity Futures Trading Commission and/or any contract market, or
any similar organization or organizations, regarding such margin deposits; and
to release and/or transfer assets in such margin accounts only in accordance
with any such agreements or rules.
N. Stock Loans - Upon receipt of proper instructions to deliver securities
of the Fund, in connection with loans of securities by the Fund, to the borrower
thereof upon the receipt of the cash collateral, if any, for such borrowing. In
the event U.S. Government securities are to be used as collateral, the Custodian
will not release the securities to be loaned until it has received confirmation
that such collateral has been delivered to the Custodian. The Custodian and Fund
understand that the timing of receipt of such confirmation will normally require
that the delivery of securities to be loaned will be made one day after receipt
of the U.S. Government collateral.
8
<PAGE>
O. Collections - To collect, receive and deposit in said
account or accounts all income and other payments with respect to the securities
held hereunder, and to execute ownership and other certificates and affidavits
for all federal and state tax purposes in connection with receipt of income or
other payments with respect to securities of the Fund or in connection with
transfer of securities, and pursuant to proper instructions to take such other
actions with respect to collection or receipt of funds or transfer of securities
which involve an investment decision.
P. Dividends, Distributions and Redemptions - Upon receipt of proper
instructions from the Fund, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities to the Shareholder Servicing Agent
or otherwise apply funds or securities, insofar as available, for the payment of
dividends or other distributions to Fund shareholders. Upon receipt of proper
instructions from the Fund, or upon receipt of instructions from the Shareholder
Servicing Agent (given by such person or persons and in such manner on behalf of
the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities, insofar as available, to the
Shareholder Servicing Agent or as such Agent shall otherwise instruct for
payment to Fund shareholders who
9
<PAGE>
have delivered to such Agent a request for repurchase or redemption of their
shares of capital stock of the Fund.
Q. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund all
forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, and upon receipt of proper instructions, to execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominee shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper instructions.
R. Bills - Upon receipt of proper instructions from the Administrator, to
pay or cause to be paid, insofar as funds are available for the purpose, bills,
statements, or other obligations of the Fund.
S. Deposit of Fund Assets in Securities Systems - The Custodian may deposit
and/or maintain securities owned by the Fund in (i) The Depository Trust
Company, (ii) any book-entry system as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350 or the book-entry
regulations of federal agencies substantially in the form of Subpart O, or (iii)
any other domestic clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities
10
<PAGE>
Exchange Act of 1934 which acts as a securities depository and whose use the
Fund has previously approved in writing (each of the foregoing being referred to
in this Agreement as a "Securities System"). Utilization of a Securities System
shall be in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may deposit and/or maintain Fund securities, either
directly or through one or more Agents appointed by the Custodian (provided that
any such agent shall be qualified to act as a custodian of the Fund pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder), in
a Securities System provided that such securities are represented in an account
("Account") of the Custodian or such Agent in the Securities System which shall
not include any assets of the Custodian or Agent other than assets held as a
fiduciary, custodian, or otherwise for customers;
(2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-entry those
securities belonging to the Fund;
(3) The Custodian shall pay for securities purchased for the account of the
Fund upon (i) receipt of advice from the Securities System that such securities
have been transferred to the Account, and (ii) the making of an entry on the
records of the
11
<PAGE>
Custodian to reflect such payment and transfer for the account of the Fund. The
Custodian shall Transfer securities sold for the account of the Fund upon (i)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and payment for the account of
the Fund. Copies of all advices from the Securities System of transfers of
securities for the account of the Fund shall identify the Fund, be maintained
for the Fund by the Custodian or an Agent as referred to above, and be provided
to the Fund at its request. The Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form of a written advice
or notice and shall furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the Securities System for the account of
the Fund on the next business day;
(4) The Custodian shall provide the Fund with any report obtained by the
Custodian or any Agent as referred to above on the Securities System's
accounting system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System; and the Custodian and such Agents
shall send to the Fund such reports on their own systems of internal accounting
control as the Fund may reasonably request from time to time;
(5) At the written request of the Fund, the Custodian will terminate the
use of any such Securities System on behalf of the Fund as promptly as
practicable.
12
<PAGE>
T. Other Transfers - Upon receipt of Proper Instructions, to deliver
securities, funds and other property of the Fund to a Subcustodian or another
custodian of the Fund; and, upon receipt of proper instructions, to make such
other disposition of securities, funds or other property of the Fund in a manner
other than or for purposes other than as enumerated elsewhere in this Agreement,
provided that the instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
securities to be delivered and the name of the person or persons to whom
delivery is to be made.
U. Investment Limitations - In performing its duties generally, and more
particularly in connection with the purchase, sale and exchange of securities
made by or for the Fund, the Custodian may assume unless and until notified in
writing to the contrary that proper instructions received by it are not in
conflict with or in any way contrary to any provisions of the Fund's Certificate
of Incorporation or By-Laws (or comparable documents) or votes or proceedings of
the shareholders or Directors of the Fund. The Custodian shall in no event be
liable to the Fund and shall be indemnified by the Fund for any violation which
occurs in the course of carrying out instructions given by the Fund of any
investment limitations to which the Fund is subject or other limitations with
respect to the Fund's powers to make expenditures,
13
<PAGE>
encumber securities, borrow or take similar actions affecting its portfolio.
V. Proper Instructions - Proper instructions shall mean a tested telex from
the Fund or a written request, direction, instruction or certification signed or
initialled on behalf of the Fund by two or more persons as the Board of
Directors of the Fund shall have from time to time authorized, provided, however
that no such instructions directing the delivery of securities or the payment of
funds to an authorized signatory of the Fund shall be signed by such person.
Those persons authorized to give proper instructions may be identified by the
Board of Directors by name, title or position and will include at least one
officer empowered by the Board to name other individuals who are authorized to
give proper instructions on behalf of the Fund. Telephonic or other oral
instructions given by any one of the above persons will be considered proper
instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. Oral instructions will be confirmed by tested telex or in writing in
the manner set forth above but the lack of such confirmation shall in no way
affect any action taken by the Custodian in reliance upon such oral
instructions. The Fund authorizes the Custodian to tape record any and all
telephonic or other oral instructions given to the Custodian by or on behalf of
the Fund (including any of its officers, Directors, employees or agents) and
will deliver to the
14
<PAGE>
Custodian a similar authorization from any investment manager or adviser or
person or entity with similar responsibilities which is authorized to give
proper instructions on behalf of the Fund to the Custodian. Proper instructions
may relate to specific transactions or to types or classes of transactions, and
may be in the form of standing instructions.
Proper instructions may include communications effected directly between
electro-mechanical or electronic devices or systems, in addition to tested
telex, provided that the Fund and the Custodian agree to the use of such device
or system.
3. Securities, funds and other property of the Fund may be held by
subcustodians appointed pursuant to the provisions of this Section 3 (a
"Subcustodian"). The Custodian may, at any time and from time to time, appoint
any bank or trust company (meeting the requirements of a custodian or a foreign
custodian under the Investment Company Act of 1940 and the rules and regulations
thereunder) to act as a Subcustodian for the Fund, provided that the Fund shall
have approved in writing (1) any such bank or trust company and the subcustodian
agreement to be entered into between such bank or trust company and the
Custodian, and (2) if the subcustodian is a bank organized under the laws of a
country other than the United States, the holding of securities, cash and other
property of the Fund in the country in which it is proposed to utilize the
services of such subcustodian. Upon such approval by the Fund, the Custodian is
authorized on behalf of the Fund to
15
<PAGE>
notify each Subcustodian of its appointment as such. The Custodian may, at any
time in its discretion, remove any bank or trust company that has been appointed
as a Subcustodian but will promptly notify the Fund of any such action.
Those Subcustodians, their offices or branches which the Fund has approved
to date are set forth on Appendix A hereto. Such Appendix shall be amended from
time to time as Subcustodians, branches or offices are changed, added or
deleted. The Fund shall be responsible for informing the Custodian sufficiently
in advance of a proposed investment which is to be held at a location not listed
on Appendix A, in order that there shall be sufficient time for the Fund to give
the approval required by the preceding paragraph and for the Custodian to put
the appropriate arrangements in place with such Subcustodian pursuant to such
subcustodian agreement.
Although the Fund does not intend to invest in a country before the
foregoing procedures have been completed, in the event that an investment is
made prior to approval, if practical, such security shall be removed to an
approved location or if not practical such security shall be held by such agent
as the Custodian may appoint. In such event, the Custodian shall be liable to
the Fund for the actions of such agent if and only to the extent the Custodian
shall have recovered from such agent for any damages caused the Fund by such
agent and provided that the Custodian shall pursue its rights against such
agent.
16
<PAGE>
In the event that any Subcustodian appointed pursuant to the provisions of
this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to perform fully
its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian and, if necessary or desirable, appoint
another subcustodian in accordance with the provisions of this Section 3. At the
election of the Fund, it shall have the right to enforce, to the extent
permitted by the subcustodian agreement and applicable law, the Custodian's
rights against any such Subcustodian for loss or damage caused the Fund by such
Subcustodian.
At the written request of the Fund, the Custodian will terminate any
subcustodian appointed pursuant to the provisions of this Section 3 in
accordance with the termination provisions under the applicable subcustodian
agreement. The Custodian will not amend any subcustodian agreement or agree to
change or permit any changes thereunder except upon the prior written approval
of the Fund.
In the event the Custodian receives a claim from a Subcustodian under the
indemnification provisions of any subcustodian agreement, the Custodian shall
promptly give written notice to the Fund of such claim. No more than thirty days
after
17
<PAGE>
written notice to the Fund of the Custodian's intention to make such payment,
the Fund will reimburse the Custodian the amount of such payment except in
respect of any negligence or misconduct of the Custodian.
4. The Custodian may assist generally in the preparation of reports to Fund
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
5. A. The Custodian shall not be liable for any action taken or omitted in
reliance upon proper instructions believed by it to be genuine or upon any other
written notice, request, direction, instruction, certificate or other instrument
believed by it to be genuine and signed by the proper party or parties.
The Chairman of the Board of the Fund shall certify to the Custodian the
names, signatures and scope of authority of all persons authorized to give
proper instructions or any other such notice, request, direction, instruction,
certificate or instrument on behalf of the Fund, the names and signatures of the
officers of the Fund, the name and address of the Shareholder Servicing Agent,
and any resolution, notes, instructions or directions Of the Fund's Board of
Directors or shareholders. Such certificate may be accepted and relied upon by
the Custodian as conclusive evidence of the facts set forth therein and may be
considered in full force and effect until receipt of a similar certificate to
the contrary.
18
<PAGE>
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement.
The Custodian shall be entitled, at the expense of the Fund (but only to
the extent such expenses are reasonable) to receive and act upon advice of
counsel (who may be counsel for the Fund) on all matters, and the Custodian
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
B. With respect to the portfolio securities, cash and other property of the
Fund held by a Securities System, the Custodian shall be liable to the Fund only
for any loss or damage to the Fund resulting form use of the Securities System
if caused by any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from any failure of the
Custodian or any such agent to enforce effectively such rights as it may have
against the Securities System.
C. The Custodian shall be liable to the Fund for any loss or damage to the
Fund caused by or resulting from the acts or omissions of any Subcustodian if
such acts or omissions would be deemed to be negligence, gross negligence or
willful misconduct hereunder if such acts or omissions were those of the
Custodian taken or omitted by the Custodian in the country in which the
Subcustodian is operating. The Custodian shall also be liable to
19
<PAGE>
the Fund for its own negligence in transmitting any instructions received by it
from the Fund and for its own negligence in connection with the delivery of any
securities or funds held by it to any Subcustodian.
D. Except as may otherwise be set forth in this Agreement with respect to
particular matters, the Custodian shall be held only to the exercise of
reasonable care and diligence in carrying out the provisions of this Agreement,
provided that the Custodian shall not thereby be required to take any action
which is in contravention of any applicable law. However, nothing herein shall
exempt the Custodian from liability due to its own negligence or willful
misconduct. The Fund agrees to indemnify and hold harmless the Custodian and its
nominees from all claims and liabilities (including reasonable counsel fees)
incurred or assessed against it or its nominees in connection with the
performance of this Agreement, except such as may arise from its or its
nominee's breach of the relevant standard of conduct set forth in this
Agreement. Without limiting the foregoing indemnification obligation of the
Fund, the Fund agrees to indemnify the Custodian and its nominees against any
liability the Custodian or such nominee may incur by reason of taxes assessed to
the Custodian or such nominee or other costs, liability or expense incurred by
the Custodian or such nominee resulting directly or indirectly from the fact
that portfolio securities or other property of the Fund is registered in the
name of the Custodian or such nominee.
20
<PAGE>
In order that the indemnification provisions contained in this Paragraph 5C
shall apply, however, it is understood that if in any case the Fund may be asked
to indemnify or hold the Custodian harmless, the Fund shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the Custodian will use all reasonable care to
identify and notify the Fund promptly concerning any situation which presents or
appears likely to present the probability of such a claim for indemnification
against the Fund. The Fund shall have the option to defend the Custodian against
any claim which may be the subject of this indemnification, and in the event
that the Fund so elects it will so notify the Custodian, and thereupon the Fund
shall take over complete defense of the claim, and the Custodian shall in such
situation initiate no further legal or other expenses for which it shall seek
indemnification under this Paragraph 5C. The Custodian shall in no case confess
any claim or make any compromise in any case in which the Fund will be asked to
indemnify the Custodian except with the Fund's prior written consent.
It is also understood that the Custodian shall not be liable for any loss
involving any securities, currencies, deposits or other property of the Fund,
whether maintained by it, a Subcustodian, an agent of the Custodian or a
Subcustodian, a Securities System, or a Banking Institution, or a loss arising
from a foreign currency transaction or contract, resulting from a Sovereign
Risk. A "Sovereign Risk" shall mean nationalization,
21
<PAGE>
expropriation, devaluation, revaluation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Fund's property; or acts of war,
terrorism, insurrection or revolution; or any other similar act or event beyond
the Custodian's control.
E. The Custodian shall be entitled to receive reimbursement from the Fund
on demand, in the manner provided in Section 6, for its cash disbursements,
expenses and charges (including the fees and expenses of any Subcustodian or any
Agent) in connection with this Agreement, but excluding salaries and usual
overhead expenses.
F. The Custodian may at any time or times in its discretion appoint (and
may at any time remove) any other bank or trust company as its agent (an
"Agent") to carry out such of the provisions of this Agreement as the Custodian
may from time to time direct, provided, however, that the appointment of such
Agent (other than an Agent appointed pursuant to the third paragraph of Section
3) shall not relieve the Custodian of any of its responsibilities under this
Agreement.
G. Upon request, the Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the
22
<PAGE>
performance by the Custodian or any Subcustodian of their respective obligations
under this Agreement or any applicable subcustodian agreement.
6. The Fund shall pay the Custodian a custody fee based on such fee
schedule as may from time to time be agreed upon in writing by the Custodian and
the Fund. Such fee, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 5D, shall be billed to the Fund in such a
manner as to permit payment by a direct cash payment to the Custodian.
7. This Agreement shall continue in full force and effect until terminated
by either party by an instrument in writing delivered or mailed, postage
prepaid, to the other party, such termination to take effect not sooner than
seventy five (75) days after the date of such delivery or mailing. In the event
of termination the Custodian shall be entitled to receive prior to delivery of
the securities, funds and other property held by it all accrued fees and
unreimbursed expenses the payment of which is contemplated by Sections 5D and 6,
upon receipt by the Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed that
the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions
23
<PAGE>
necessary or desirable in order to substitute the successor custodian for the
Custodian under this Agreement.
8. This Agreement constitutes the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof. No provision of this
Agreement may be amended or terminated except by a statement in writing signed
by the party against which enforcement of the amendment or termination is
sought.
In connection with the operation of this Agreement, the Custodian and the
Fund may agree in writing from time to time on such provisions interpretative of
or in addition to the provisions of this Agreement as may in their joint opinion
be consistent with the general tenor of this Agreement. No interpretative or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Agreement.
9. This instrument is executed and delivered in The Commonwealth of
Massachusetts and shall be governed by and construed according to the laws of
said Commonwealth.
10. Notices and other writings delivered or mailed postage prepaid to the
Fund addressed to the Fund in care of Merrill Lynch Asset Management, Inc., 800
Scudders Mill Road, Plainsboro, New Jersey 08536, Mailing address: Post Office
Box 9011, Princeton, New Jersey 08543, Attention: Mr. Gerald M. Richard, Senior
Vice President/Treasurer, or to such other address as the Fund may have
designated to the Custodian in writing, or to
24
<PAGE>
the Custodian at 40 Water Street, Boston, Massachusetts 02109, Attention:
Manager, Securities Department, or to such other address as the Custodian may
have designated to the Fund in writing, shall be deemed to have been properly
delivered or given hereunder to the respective addressee.
11. This Agreement shall be binding on and shall inure to the benefit of
the Fund and the Custodian and their respective successors and assigns, provided
that neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
12. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original. This Agreement shall become effective when
one or more counterparts have been signed and delivered by each of the parties.
25
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
MERRILL LYNCH DEVELOPING
CAPITAL MARKETS FUND, INC. BROWN BROTHERS HARRIMAN & CO.
By ---------------------------------- /s/ Stokley P. Towles
-------------------------------
Stokley P. Towles, Partner
26
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Developing Capital Markets, Inc.:
We consent to the use in Post-Effective Amendment No. 10 to Registration
Statement No. 33-28248 of our report dated August 2, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Consolidated Financial
Highlights" appearing in the Prospectus, which also is a part of such
Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 24, 1996
[ARTICLE] 6
[CIK] 0000849402
[NAME] MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
[SERIES]
[NUMBER] 001
[NAME] CLASS A
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-START] JUL-01-1995
[PERIOD-END] JUN-30-1996
[INVESTMENTS-AT-COST] 671318502
[INVESTMENTS-AT-VALUE] 741513322
[RECEIVABLES] 28404834
[ASSETS-OTHER] 3599221
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 773517377
[PAYABLE-FOR-SECURITIES] 21118080
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2528599
[TOTAL-LIABILITIES] 23646679
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 709583055
[SHARES-COMMON-STOCK] 22780723
[SHARES-COMMON-PRIOR] 26225174
[ACCUMULATED-NII-CURRENT] 2661403
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (18915354)
[OVERDISTRIBUTION-GAINS] (13589754)
[ACCUM-APPREC-OR-DEPREC] 70131348
[NET-ASSETS] 342883581
[DIVIDEND-INCOME] 16003219
[INTEREST-INCOME] 4132654
[OTHER-INCOME] 0
[EXPENSES-NET] (12351658)
[NET-INVESTMENT-INCOME] 7784215
[REALIZED-GAINS-CURRENT] (19609742)
[APPREC-INCREASE-CURRENT] 94930812
[NET-CHANGE-FROM-OPS] 83105285
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (5561685)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2735667
[NUMBER-OF-SHARES-REDEEMED] (6552984)
[SHARES-REINVESTED] 372866
[NET-CHANGE-IN-ASSETS] 196543543
[ACCUMULATED-NII-PRIOR] 3689081
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (13589754)
[GROSS-ADVISORY-FEES] 6265747
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 12351658
[AVERAGE-NET-ASSETS] 335753378
[PER-SHARE-NAV-BEGIN] 13.35
[PER-SHARE-NII] .23
[PER-SHARE-GAIN-APPREC] 1.71
[PER-SHARE-DIVIDEND] (.24)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 15.05
[EXPENSE-RATIO] 1.54
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000849402
[NAME] MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
[SERIES]
[NUMBER] 002
[NAME] CLASS B
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-START] JUL-01-1995
[PERIOD-END] JUN-30-1996
[INVESTMENTS-AT-COST] 671318502
[INVESTMENTS-AT-VALUE] 741513322
[RECEIVABLES] 28404834
[ASSETS-OTHER] 3599221
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 773517377
[PAYABLE-FOR-SECURITIES] 21118080
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2528599
[TOTAL-LIABILITIES] 23646679
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 709583055
[SHARES-COMMON-STOCK] 20281969
[SHARES-COMMON-PRIOR] 12297981
[ACCUMULATED-NII-CURRENT] 2661403
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (18915354)
[OVERDISTRIBUTION-GAINS] (13589754)
[ACCUM-APPREC-OR-DEPREC] 70131348
[NET-ASSETS] 302182872
[DIVIDEND-INCOME] 16003219
[INTEREST-INCOME] 4132654
[OTHER-INCOME] 0
[EXPENSES-NET] (12351658)
[NET-INVESTMENT-INCOME] 7784215
[REALIZED-GAINS-CURRENT] (19609742)
[APPREC-INCREASE-CURRENT] 94930812
[NET-CHANGE-FROM-OPS] 83105285
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (1835760)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 12840731
[NUMBER-OF-SHARES-REDEEMED] (4985690)
[SHARES-REINVESTED] 128947
[NET-CHANGE-IN-ASSETS] 196543543
[ACCUMULATED-NII-PRIOR] 3689081
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (13589754)
[GROSS-ADVISORY-FEES] 6265747
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 12351658
[AVERAGE-NET-ASSETS] 226057471
[PER-SHARE-NAV-BEGIN] 13.24
[PER-SHARE-NII] .09
[PER-SHARE-GAIN-APPREC] 1.69
[PER-SHARE-DIVIDEND] (.12)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 14.90
[EXPENSE-RATIO] 2.56
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000849402
[NAME] MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
[SERIES]
[NUMBER] 003
[NAME] CLASS C
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-START] JUL-01-1995
[PERIOD-END] JUN-30-1996
[INVESTMENTS-AT-COST] 671318502
[INVESTMENTS-AT-VALUE] 741513322
[RECEIVABLES] 28404834
[ASSETS-OTHER] 3599221
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 773517377
[PAYABLE-FOR-SECURITIES] 21118080
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2528599
[TOTAL-LIABILITIES] 23646679
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 709583055
[SHARES-COMMON-STOCK] 3159986
[SHARES-COMMON-PRIOR] 1404635
[ACCUMULATED-NII-CURRENT] 2661403
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (18915354)
[OVERDISTRIBUTION-GAINS] (13589754)
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[EXPENSES-NET] (12351658)
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[REALIZED-GAINS-CURRENT] (19609742)
[APPREC-INCREASE-CURRENT] 94930812
[NET-CHANGE-FROM-OPS] 83105285
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (257907)
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[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2350884
[NUMBER-OF-SHARES-REDEEMED] (613802)
[SHARES-REINVESTED] 18269
[NET-CHANGE-IN-ASSETS] 196543543
[ACCUMULATED-NII-PRIOR] 3689081
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[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (13589754)
[GROSS-ADVISORY-FEES] 6265747
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 12351658
[AVERAGE-NET-ASSETS] 30718270
[PER-SHARE-NAV-BEGIN] 13.22
[PER-SHARE-NII] .09
[PER-SHARE-GAIN-APPREC] 1.70
[PER-SHARE-DIVIDEND] (.14)
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[RETURNS-OF-CAPITAL] 0
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</TABLE>
[ARTICLE] 6
[CIK] 0000849402
[NAME] MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
[SERIES]
[NUMBER] 004
[NAME] CLASS D
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-START] JUL-01-1995
[PERIOD-END] JUN-30-1996
[INVESTMENTS-AT-COST] 671318502
[INVESTMENTS-AT-VALUE] 741513322
[RECEIVABLES] 28404834
[ASSETS-OTHER] 3599221
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 773517377
[PAYABLE-FOR-SECURITIES] 21118080
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2528599
[TOTAL-LIABILITIES] 23646679
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 709583055
[SHARES-COMMON-STOCK] 3849221
[SHARES-COMMON-PRIOR] 1642796
[ACCUMULATED-NII-CURRENT] 2661403
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (18915354)
[OVERDISTRIBUTION-GAINS] (13589754)
[ACCUM-APPREC-OR-DEPREC] 70131348
[NET-ASSETS] 57821016
[DIVIDEND-INCOME] 16003219
[INTEREST-INCOME] 4132654
[OTHER-INCOME] 0
[EXPENSES-NET] (12351658)
[NET-INVESTMENT-INCOME] 7784215
[REALIZED-GAINS-CURRENT] (19609742)
[APPREC-INCREASE-CURRENT] 94930812
[NET-CHANGE-FROM-OPS] 83105285
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (462153)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4557697
[NUMBER-OF-SHARES-REDEEMED] (2382856)
[SHARES-REINVESTED] 31584
[NET-CHANGE-IN-ASSETS] 196543543
[ACCUMULATED-NII-PRIOR] 3689081
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (13589754)
[GROSS-ADVISORY-FEES] 6265747
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 12351658
[AVERAGE-NET-ASSETS] 37488330
[PER-SHARE-NAV-BEGIN] 13.33
[PER-SHARE-NII] .21
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[PER-SHARE-DIVIDEND] (.21)
[PER-SHARE-DISTRIBUTIONS] 0
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[PER-SHARE-NAV-END] 15.02
[EXPENSE-RATIO] 1.76
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
