AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1994
SECURITIES ACT FILE NO. 33-46216
INVESTMENT COMPANY ACT FILE NO. 811-6581
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- --------------------------------------------------------------------------------
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. 3 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 4 /X/
(Check Appropriate Box or Boxes)
------------------------
MERRILL LYNCH DRAGON FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH DRAGON FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
Copies to:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
/ / ON (DATE) PURSUANT TO PARAGRAPH (B)
/ / 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)
/ / ON (DATE) PURSUANT TO PARAGRAPH (A) OF RULE 485.
------------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF 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 APRIL 25, 1994.
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<PAGE>
MERRILL LYNCH DRAGON FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE><CAPTION>
N-1A ITEM NO. LOCATION
- --------------- ---------------------------------------
PART A
<S> <C> <C>
Item 1. Cover Page.............................................. Cover Page
Item 2. Synopsis................................................ Fee Table and Prospectus Summary
Item 3. Condensed Financial Information......................... Financial Highlights
Item 4. General Description of Registrant....................... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund.................................. Fee Table and Prospectus Summary;
Management of the Fund; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund Performance............. Not Applicable
Item 6. Capital Stock and Other Securities...................... Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered.................... Cover Page; Fee Table and Prospectus
Summary; Purchase of Shares;
Alternative Sales Arrangements;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase................................ Fee Table and Prospectus Summary;
Alternative Sales Arrangements;
Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal Proceedings............................... Not Applicable
PART B
Item 10. Cover Page.............................................. Cover Page
Item 11. Table of Contents....................................... Back Cover Page
Item 12. General Information and History......................... Not Applicable
Item 13. Investment Objectives and Policies...................... Investment Objective and Policies
Item 14. Management of the Fund.................................. Management of the Fund
Item 15. Control Persons and Principal Holders of Securities..... Management of the Fund
Item 16. Investment Advisory and Other Services.................. Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other Practices................ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities...................... General Information-Description of
Shares
Item 19. Purchase, Redemption and Pricing of Securities Being
Offered................................................. Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; Additional
Information
Item 20. Tax Status.............................................. Additional Information-Dividends and
Distributions; Additional
Information-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
APRIL 28, 1994
MERRILL LYNCH DRAGON FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 -- PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Dragon Fund, Inc. (the "Fund") is a non-diversified, open-end
management investment company seeking long-term capital appreciation by
investing primarily in equity and debt securities of issuers domiciled in
developing countries located in Asia and the Pacific Basin. For purposes of its
investment objective, the Fund considers developing Asia-Pacific countries to be
all countries in Asia and the Pacific Basin other than Japan, Australia and New
Zealand. The objective of the Fund reflects the belief that the emerging
economies and securities markets of the developing Asia-Pacific countries
present attractive investment opportunities. It is expected that under normal
conditions at least 65% of the Fund's total assets will be invested in
developing Asia-Pacific securities. The Fund may attempt 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 in developing
Asia-Pacific securities involve certain risk factors. See "Risk Factors and
Special Considerations" on page 9, herein.
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares") or (ii) on a deferred basis (the "Class B
shares"). The original charges to which the Class B shares are subject shall
consist of a contingent deferred sales charge which may be imposed on
redemptions made within four years of purchase and an ongoing account
maintenance fee and distribution fee. These alternatives permit an investor to
choose the method of purchasing shares that is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other circumstances. Class A shares pay an ongoing
(Continued on next page)
------------------------
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 April 28, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
(Continued from Cover Page)
account maintenance fee at the annual rate of 0.25% of the Fund's average daily
net assets attributable to Class A shares; Class B shares pay an ongoing account
maintenance fee and an ongoing distribution fee at the annual rates of 0.25% and
0.75%, respectively, of the Fund's average daily net assets attributable to the
Class B shares. Investors should understand that the purpose and function of the
deferred sales charges and account maintenance fee with respect to the Class B
shares are the same as those of the initial sales charge and account maintenance
fee with respect to the Class A shares. Investors should also understand that
over time the deferred sales charges and ongoing account maintenance fee related
to Class B shares may exceed the initial sales charge and ongoing account
maintenance fee with respect to Class A shares. See "Alternative Sales
Arrangements" on page 6.
Each Class A share and Class B share represents an identical interest in
the investment portfolio of the Fund and has the same rights, except that Class
B shares bear the expenses of the account maintenance and distribution fees and
certain other costs resulting from the deferred sales charge arrangement, which
will cause Class B shares to have a higher expense ratio and to pay lower
dividends than Class A shares, which also bear the expense of an account
maintenance fee. The two classes also have different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $250, 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".
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A and Class B shares follows:
<TABLE><CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
-------------------- --------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a 6.50%(a) None
percentage of offering price)................................
Sales Charge Imposed on Dividend Reinvestment.................. None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower)............ None(f) 4.00% during the
first year,
decreasing 1%
annually to 0.00%
after the fourth
year(b)
Exchange Fee................................................... None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS FOR THE FISCAL PERIOD ENDED DECEMBER 31, 1993):
Management Fees(c)............................................. 1.00% 1.00%
Rule 12b-1 Fees................................................ 0.25% 1.00%(d)
Other Expenses
Custodial Fees............................................. 0.14% 0.14%
Shareholder Servicing Costs(e)............................. 0.08% 0.09%
Other...................................................... 0.12% 0.12%
--------- ---------
Total Other Expenses................................... 0.34% 0.35%
----- -----
Total Fund Operating Expenses...................................... 1.59% 2.35%
===== =====
</TABLE>
- ---------------
(a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for purchases
of $1,000,000 and over. Certain investors making purchases of $1,000,000 and
over may, however, pay a contingent deferred sales charge ranging from a
high of 1.00% to a low of 0.25% of amounts redeemed within the first year
after purchase in lieu of the 0.75% initial sales charge. See "Purchase of
Shares-- Initial Sales Charge Alternative--Class A Shares"--page 34.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 36.
(c) See "Management of the Fund--Management and Advisory Arrangements"--page 28.
(d) See "Purchase of Shares--Alternative Sales Arrangements--Distribution
Plans"--page 32. This amount represents the 0.25% account maintenance fee
and the 0.75% distribution fee applicable to Class B shares of the Fund.
(e) Financial Data Services, Inc., the Fund's transfer agent, receives an annual
fee of $8 per Class A shareholder account and $9 per Class B shareholder
account, nominal miscellaneous fees and reimbursement of out-of-pocket
expenses. See "Management of the Fund--Transfer Agency Services"--page 30.
(f) Certain investors making purchases of $1,000,000 and over may, however, pay
a contingent deferred sales charge ranging from a high of 1.00% to a low of
0.25% of amounts redeemed within the first year after purchase in lieu of
the 0.75% initial sales charge. See "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares"--page 34.
<TABLE><CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD
OF:
------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment
including, for Class A shares, the maximum $65 front-end sales charge and
assuming (1) an operating expense ratio of 1.59% for Class A shares and
2.35% for Class B shares, (2) a 5% annual return throughout the periods
and (3) redemption at the end of the period:
Class A................................................................. $ 80.12 $ 111.92 $ 145.93 $ 241.64
Class B................................................................. $ 63.81 $ 93.34 $ 125.54 $ 268.61
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A................................................................. $ 80.12 $ 111.92 $ 145.93 $ 241.64
Class B................................................................. $ 23.81 $ 73.34 $ 125.54 $ 268.61
</TABLE>
3
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B shareholders who hold their
shares for an extended period of time may pay more in Rule 12b-1 distribution
fees than the economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Merrill Lynch may charge its customers a processing fee
(presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information.
THE FUND
Merrill Lynch Dragon Fund, Inc. (the "Fund") is a non-diversified, open-end
management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in developing Asia-Pacific equity and debt
securities. For purposes of its investment objective, the Fund considers
developing Asia-Pacific countries to be all countries in Asia and the Pacific
Basin other than Japan, Australia and New Zealand. The objective of the Fund
reflects the belief that the emerging economies and securities markets of the
developing Asia-Pacific countries present attractive investment opportunities.
The economies of a number of the developing Asia-Pacific countries have
been among the most rapidly growing economies in the world in recent years. In
the 1980's, the four original newly industrialized economies ("NIEs") in the
region were Hong Kong, South Korea, Singapore and Taiwan, the so-called four
"tigers". In the late 1980's, the economies of Thailand, Malaysia, and Indonesia
began to emerge, making significant economic progress. More recently, southern
China, particularly the province of Guangdong, experienced rapid economic
growth. This regional growth has resulted from government policies directed
towards market-oriented economic reform and, in particular, seeking to encourage
the development of labor-intensive, export-oriented industries. There also has
been growth resulting from an increase in domestic demand. In addition, the
governments have been introducing deregulatory reforms to encourage development
of their securities markets and, in varying degrees, permit foreign investment.
A number of these securities markets have been undergoing rapid growth. While
investments in the developing Asia-Pacific countries are subject to considerable
risks (see "Risk Factors and Special Considerations"), the Fund believes that
the above developments in the region present attractive investment
opportunities.
4
<PAGE>
The opportunities for capital appreciation are prevalent in Asia-Pacific
equity securities. The Fund may also seek capital appreciation through
investment in developing Asia-Pacific debt securities. 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. The receipt of income from such debt securities is incidental to the
Fund's objective of long-term capital appreciation.
The Fund is authorized to employ a variety of investment techniques to
hedge against market and currency risk, although at the present time suitable
hedging instruments may not be available with respect to developing Asia-Pacific
securities on a timely basis and on acceptable terms. Furthermore, even if
hedging techniques are available, the Fund will only engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when market or currency movements occur.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investments in securities of developing Asia-Pacific issuers involve
special considerations and risks not typically associated with investments in
securities of U.S. issuers, including the risks associated with international
investing generally, such as currency fluctuations; the risks of investing in
countries with smaller capital markets, such as limited liquidity, price
volatility and restrictions on foreign investment; and the risks associated with
undeveloped economies of the developing Asia-Pacific countries, including
significant political and social uncertainties, government involvement in the
economies, overburdened infrastructures, archaic legal systems, environmental
problems, and obsolete financial systems.
THE MANAGER
Merrill Lynch Asset Management, L.P., which does business as Merrill Lynch
Asset Management (the "Manager"), acts as the manager for the Fund and provides
the Fund with management services. The Manager is owned and controlled by
Merrill Lynch & Co., Inc. The Manager, or an affiliate, Fund Asset Management,
L.P. ("FAM"), acts as the investment adviser for more than 90 other registered
investment companies. The Manager and FAM also offer portfolio management and
portfolio analysis services to individuals and institutions. As of February 28,
1994, the Manager and FAM had a total of approximately $164.4 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Manager. See "Management of the
Fund--Management and Advisory Arrangements".
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "Class A
shares") or (ii) on a deferred basis (the "Class B shares"). Class A shares pay
an ongoing account maintenance fee, and Class B shares pay ongoing account
maintenance and distribution fees. See "Alternative Sales Arrangements" and
"Purchase of Shares".
Shareholders may redeem their Class A and Class B shares at any time at the
next determined net asset value, except that in the case of Class B shares, the
redemption price for shares will be subject to the contingent deferred sales
charge imposed on Class B shares redeemed within four years of purchase. See
"Redemption of Shares".
5
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income.
Dividends from such net investment income are paid at least annually. All net
realized long-term and short-term capital gains, if any, will be distributed to
the Fund's shareholders at least annually. See "Additional Information--
Dividends and Distributions".
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily as
of 4:15 p.m., New York time, on each day during which the New York Stock
Exchange is open for trading. See "Additional Information--Determination of Net
Asset Value".
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Class A shares incur a 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 the Class A shares. Although Class A
shares incur a sales charge when they are purchased, they enjoy the benefit of
not being subject to the ongoing distribution fee to which Class B shares are
subject or any sales charge when they are redeemed. Certain purchases of Class A
shares qualify for reduced initial sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B shares. Class B shares do not incur a sales charge
when they are purchased, but they are subject to ongoing account maintenance and
distribution fees of 0.25% and 0.75%, respectively, of the Fund's average net
assets attributable to the Class B shares and a sales charge if they are
redeemed within four years of purchase. Class B shares enjoy the benefit of
permitting all of the investor's dollars to work from the time the investment is
made. The ongoing distribution fee paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than Class A shares.
Both Class A shares and Class B shares pay an ongoing account maintenance fee.
Payment of the distribution fee is subject to certain limits as set forth under
"Purchase of Shares--Deferred Sales Charge Alternative-- Class B Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Shares acquired under the initial sales charge alternative
are subject to an ongoing account maintenance fee that is lower than the sum of
the ongoing account maintenance fee and distribution fee on Class B shares.
However, because initial sales charges are deducted at the time of purchase,
such investors would not have all their funds invested initially. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time might also elect the initial sales
charge alternative because over time the accumulated continuing account
maintenance and distribution fees on Class B shares may exceed the
6
<PAGE>
initial sales charge and ongoing account maintenance fee on Class A shares.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the deferred
alternative. However, there can be no assurance as to the return, if any, which
will be realized on such additional funds. Certain other investors might
determine it to be more advantageous to have all their funds invested initially,
although remaining subject to continued account maintenance and distribution
fees and, for a four-year period of time, a contingent deferred sales charge.
The distribution expenses incurred by the Distributor and dealers
(primarily Merrill Lynch) in connection with the sale of the shares will be
paid, in the case of the Class A shares, from the proceeds of the initial sales
charge and ongoing account maintenance fee, and in the case of the Class B
shares, such distribution expenses will be paid from the proceeds of the ongoing
account maintenance and distribution fees and the contingent deferred sales
charge incurred upon redemption within four years of purchase. Sales personnel
may receive different compensation for selling Class A or Class B shares.
Investors should understand that the purpose and function of the deferred sales
charges and account maintenance fee with respect to the Class B shares are the
same as those of the initial sales charge and account maintenance fee with
respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B shares, to
the extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class, and the
account maintenance fee relating to Class A shares will be borne exclusively by
that class. See "Additional Information--Determination of Net Asset Value".
Class A and Class B shareholders of the Fund each have an exchange privilege for
Class A and Class B shares, respectively, of certain other mutual funds
sponsored by Merrill Lynch. Class A and Class B shareholders of the Fund also
may exchange their shares for shares of certain money market funds sponsored by
Merrill Lynch. See "Shareholder Services--Exchange Privilege".
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and state laws,
will seek to assure that no such conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE METHOD
OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE PURCHASE,
THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND OTHER
CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR PARTICULAR
CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES CHARGE AND AN
ACCOUNT MAINTENANCE FEE OR TO HAVE THE ENTIRE INITIAL PURCHASE PRICE INVESTED
IN THE FUND WITH THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT
MAINTENANCE AND DISTRIBUTION FEES. TO ASSIST INVESTORS IN MAKING THIS
DETERMINATION, THE FEE TABLE ON PAGE 3 SETS FORTH THE CHARGES APPLICABLE TO
EACH CLASS OF SHARES, AND A DISCUSSION OF RELEVANT FACTORS IN MAKING SUCH
DETERMINATION IS SET FORTH UNDER "PURCHASE OF SHARES-- ALTERNATIVE SALES
ARRANGEMENTS" ON PAGE 31.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche, independent auditors. Financial statements for the fiscal
period ended December 31, 1993, and the independent auditors' report thereon 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 financial statements.
<TABLE><CAPTION>
CLASS A CLASS B
---------------------------- ----------------------------
FOR THE FOR THE FOR THE FOR THE
TEN MONTHS PERIOD TEN MONTHS PERIOD
ENDED MAY 29, 1992+ ENDED MAY 29, 1992+
DEC. 31, TO FEB. 28, DEC. 31, TO FEB. 28,
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1993 1993++++ 1993++++
- ---------------------------------------------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 11.01 $ 10.00 $ 11.01 $ 10.00
----------- --------------- ----------- ---------------
Investment income (loss)--net..................... .07 .05 (.02) (.02)
Realized and unrealized gain on investments and
foreign currency transactions--net.................. 7.88 1.04 7.86 1.05
----------- --------------- ----------- ---------------
Total from investment operations.................... 7.95 1.09 7.84 1.03
----------- --------------- ----------- ---------------
Less dividends and distributions:
Investment income--net............................ (.01) -- --++ --
In excess of investment income--net............... (.07) (.08) --++ (.02)
Realized gain on investments--net................. (.11) --++ (.11) --++
----------- --------------- ----------- ---------------
Total dividends and distributions................... (.19) (.08) (.11) (.02)
----------- --------------- ----------- ---------------
Net asset value, end of period...................... $ 18.77 $ 11.01 $ 18.74 $ 11.01
----------- --------------- ----------- ---------------
----------- --------------- ----------- ---------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 72.31%++ 10.99%++ 71.27%++ 10.32%++
----------- --------------- ----------- ---------------
----------- --------------- ----------- ---------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and
distribution fees................................... 1.34%* 1.48%* 1.35%* 1.49%*
----------- --------------- ----------- ---------------
Expenses............................................ 1.59%* 1.73%* 2.35%* 2.49%*
----------- --------------- ----------- ---------------
Investment income (loss)--net....................... .61%* .69%* (.15)%* (.08)%*
----------- --------------- ----------- ---------------
----------- --------------- ----------- ---------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $ 311,848 $ 111,180 $ 990,843 $ 365,430
----------- --------------- ----------- ---------------
----------- --------------- ----------- ---------------
Portfolio turnover.................................. 16.62% 4.65% 16.62% 4.65%
----------- --------------- ----------- ---------------
----------- --------------- ----------- ---------------
</TABLE>
- ---------------
+ Commencement of Operations.
++ Amount was less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Aggregate total investment return.
++++ Based on average shares outstanding during the period.
8
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RISK FACTORS AND SPECIAL CONSIDERATIONS
GENERAL
Because the Fund intends to invest primarily in developing Asia-Pacific
securities, an investor in the Fund should be aware of certain risk factors and
special considerations relating to investing in developing Asia-Pacific
economies. More generally, the investor should also be aware of risks and
considerations related to international investing and investing in smaller
capital markets, each of which may involve risks which are not typically
associated with investments in securities of U.S. issuers. Consequently, the
Fund should be considered as a means of diversifying an investment portfolio and
not in itself a balanced investment program.
INVESTING ON AN INTERNATIONAL BASIS AND IN COUNTRIES WITH SMALLER CAPITAL
MARKETS
Investing on an international basis and in countries with smaller capital
markets involves certain risks not involved in domestic investments, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Since the Fund will invest heavily in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. In addition, with respect to certain
foreign countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which could affect investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rates of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. Certain foreign investments may also be subject to foreign
withholding taxes. These risks are often heightened for investments in smaller
capital markets and developing Asia-Pacific countries.
Most of the securities held by the Fund will not be registered with the
Securities and Exchange Commission, nor will the issuers thereof be subject to
the reporting requirements of such agency. Accordingly, there may be less
publicly available information about a foreign company than about a U.S.
company, and such foreign companies 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 to certain smaller capital markets. Foreign companies, and companies
in smaller capital markets in particular, are not generally subject to uniform
accounting, auditing and financial reporting standards or to practices and
requirements comparable to those applicable to domestic companies. Foreign
markets also have different clearance and settlement procedures, and in certain
markets there have been times when settlements have failed to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. 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. The inability to dispose
of a portfolio security due to settlement problems could result either in losses
to the Fund due to subsequent declines in the value of such portfolio security
or, if the Fund has entered into a contract to sell the security, could result
in possible liability to the purchaser. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. There is generally less government
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supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities since the
expenses of the Fund, such as management and advisory fees and custodial costs,
are higher.
INVESTING IN DEVELOPING ASIA-PACIFIC SECURITIES MARKETS AND ECONOMIES
The securities markets of developing Asia-Pacific countries are not as
large as the U.S. securities markets and have substantially less trading volume,
resulting in a lack of liquidity and high price volatility. Certain markets,
such as those of China, are in only the earliest stages of development. There is
also a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region, such as in Japan. Developing Asia-Pacific brokers typically are
fewer in number and less capitalized than brokers in the United States. These
factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investments discussed below, result in
potentially fewer investment opportunities for the Fund and may have an adverse
impact on the investment performance of the Fund. The Fund's investment
restrictions permit it to invest up to 15% of its net assets in securities which
are determined by the Manager to be illiquid securities. However, under the law
of certain states, the Fund presently is limited with respect to such
investments to 10% of its net assets.
The investment objective of the Fund reflects the belief that the economies
of the developing Asia-Pacific countries will continue to grow in such a fashion
as to provide attractive investment opportunities. At the same time, emerging
economies present certain risks that do not exist in more established economies,
especially significant is that political and social uncertainties exist for many
of the developing Asia-Pacific countries. In addition, the governments of many
of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy. Another risk common to most such countries is that the
economy is heavily export oriented and, accordingly, is dependent upon
international trade. The existence of overburdened infrastructure and obsolete
financial systems also presents risks in certain countries, as do environmental
problems. Certain economies also depend to a significant degree upon exports of
primary commodities and, therefore, are vulnerable to changes in commodity
prices which, in turn, may be affected by a variety of factors.
Archaic legal systems in certain developing Asia-Pacific countries also may
have an adverse impact on the Fund. For example, while the potential liability
of a shareholder in a U.S. corporation with respect to acts of the corporation
is generally limited to the amount of the shareholder's investment, the notion
of limited liability is less clear in certain developing Asia-Pacific countries.
Similarly, the rights of investors in developing Asia-Pacific companies may be
more limited than those of shareholders of U.S. corporations.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in
developing Asia-Pacific countries. For example, some of the currencies of
developing Asia-Pacific countries have experienced devaluations relative to the
U.S. dollar, and major adjustments have been made periodically in certain of
such currencies. Certain countries, such as India, face serious exchange
constraints. In addition, as mentioned above, governments of many developing
Asia-Pacific countries have exercised and continue to exercise substantial
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influence over many aspects of the private sector. In certain cases, the
government owns or controls many companies, including the largest in the
country. Accordingly, government actions in the future could have a significant
effect on economic conditions in developing Asia-Pacific countries, which could
affect private sector companies and the Fund, as well as the value of securities
in the Fund's portfolio.
In addition to the relative lack of publicly available information about
developing Asia-Pacific issuers and the possibility that such issuers may not be
subject to the same accounting, auditing and financial reporting standards as
are applicable to U.S. companies, inflation accounting rules in some developing
Asia-Pacific countries require, for companies that keep accounting records in
the local currency, for both tax and accounting purposes, that certain assets
and liabilities be restated on the company's balance sheet in order to express
items in terms of currency of constant purchasing power. Inflation accounting
may indirectly generate losses or profits for certain developing Asia-Pacific
companies.
Satisfactory custodial services for investment securities may not be
available in some developing Asia-Pacific countries, which may result in the
Fund incurring additional costs and delays in providing transportation and
custody services for such securities outside such countries.
Certain developing Asia-Pacific countries, such as the Philippines, India
and Turkey, are especially large debtors to commercial banks and foreign
governments. Trading in debt obligations ("sovereign debt") issued or guaranteed
by developing Asia-Pacific governments or their agencies and instrumentalities
("governmental entities") involves a high degree of risk. The governmental
entity that controls the repayment of sovereign debt may not be willing or able
to repay the principal and/or interest when due in accordance with the terms of
such obligations. A governmental entity's willingness or ability to repay
principal and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the relative size of the debt service burden
to the economy as a whole, the governmental entity's dependence on expected
disbursements from third parties, the governmental entity's policy toward the
International Monetary Fund and the political constraints to which a
governmental entity may be subject. As a result, governmental entities may
default on their sovereign debt. Holders of sovereign debt (including the Fund)
may be requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. There is no bankruptcy proceeding by
which sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
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 developing Asia-Pacific country. The Fund
may invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience.
RESTRICTIONS ON FOREIGN INVESTMENTS
Some developing Asia-Pacific 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 may 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 (including price)
than securities of the company available for purchase by nationals. Certain
countries may restrict investment opportunities in issuers or industries deemed
important to national interests.
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The manner in which foreign investors may invest in companies in certain
developing Asia-Pacific countries, as well as limitations on such investments,
also may have an adverse impact on the operations of the Fund. For example, the
Fund may be required in certain of such countries to invest initially through a
local broker or other entity and then have the shares purchased re-registered in
the name of the Fund. Re-registration may in some instances not be able to occur
on a timely basis, resulting in a delay during which the Fund may be denied
certain of its rights as an investor, including rights as to dividends or to be
made aware of certain corporate actions. There also may be instances where the
Fund places a purchase order but is subsequently informed, at the time of
re-registration, that the permissible allocation of the investment to foreign
investors has been filled, depriving the Fund of the ability to make its desired
investment at that time.
Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or the proceeds of sales
of securities by foreign investors. The Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments. No more than 15% (or, to the extent required by
state law (as is presently the case), 10%) of the Fund's net assets may be
comprised, in the aggregate, of assets which are (i) subject to material legal
restrictions on repatriation or (ii) invested in illiquid securities. Even where
there is no outright restriction on repatriation of capital, the mechanics of
repatriation may affect certain aspects of the operations of the Fund. For
example, funds may be withdrawn from the People's Republic of China only in U.S.
or Hong Kong dollars and only at an exchange rate established by the government
once each week.
A number of publicly traded closed-end investment companies have been
organized to facilitate indirect foreign investment in developing Asia-Pacific
countries, and certain of such countries, such as Thailand and South Korea, have
specifically authorized such funds. There also are investment opportunities in
certain of such countries in pooled vehicles that resemble open-end investment
companies. In accordance with the Investment Company Act, the Fund may invest up
to 10% of its total assets in securities of investment companies, not more than
5% of which may be invested in any one such company. This restriction on
investments in securities of investment companies may limit opportunities for
the Fund to invest indirectly in certain developing Asia-Pacific countries.
Shares of certain investment companies may at times be acquired only at market
prices representing premiums to their net asset values. If the Fund acquires
shares of investment companies, shareholders would bear both their proportionate
share of expenses in the Fund (including management and advisory fees) and,
indirectly, the expenses of such investment companies.
In certain countries, banks or other financial institutions may be among
the leading companies or have actively traded securities. The Investment Company
Act restricts the Fund's investments in any equity securities 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 restrict the Fund's investments in certain foreign banks and
other financial institutions.
LIMITATIONS ON SHARE TRANSACTIONS
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 reinvestment. 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.
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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 are higher than the
management fees and operating expenses of other mutual funds managed by the
Manager and other investment advisers. Any limitations on the growth of the Fund
could adversely affect its operating expense ratio.
HEDGING STRATEGIES
The Fund may engage in various portfolio strategies to seek to hedge
against movements in the equity markets, interest rates and exchange rates
between currencies by the use of options, futures, options on futures and
forward currency transactions. However, suitable hedging instruments may not be
available with respect to developing Asia-Pacific securities on a timely basis
and on acceptable terms. Furthermore, even if hedging techniques are available,
the Fund will only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when market or currency movements
occur. In addition, utilization of options and futures transactions involves the
risk of imperfect correlation in movements in the prices of options and futures
and movements in the prices of the securities, interest rates or currencies
which are the subject of the hedge. Hedging transactions in foreign markets are
also subject to the risk factors associated with foreign investments generally,
as discussed above. Investors should be aware that U.S. dollar denominated
securities may not be available in some or all developing Asia-Pacific
countries, that the forward currency market for the purchase of U.S. dollars in
most, if not all, developing Asia-Pacific countries is not highly developed, and
that, in certain developing Asia-Pacific countries, no forward market for
foreign currencies currently exists or such market may be closed to investment
by the Fund.
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 ("high yield/high risk securities") are predominately
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. The sovereign
debt instruments in which the Fund may invest involve great risk and are deemed
to be the equivalent in terms of quality to high yield/high risk securities. The
Fund may have difficulty disposing of certain sovereign debt obligations because
there may be no liquid secondary trading market for such securities. The Fund
may invest up to 5% of its total assets in sovereign debt that is in default.
See "Investment Objective and Policies-Certain Risks of Debt Securities".
BORROWING
The Fund may borrow up to 33 1/3% of its total assets, taken at market
value, but only from banks as a temporary measure for extraordinary or emergency
purposes, including to meet redemptions or to settle securities transactions.
The Fund will not purchase securities while borrowings exceed 5% of its total
assets, except (a) to honor prior commitments or (b) to exercise subscription
rights when outstanding borrowings have been obtained exclusively for
settlements of other securities transactions. The purchase of securities while
borrowings are outstanding will have the effect of leveraging the Fund.
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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 may not invest more than 5% of its total assets in the securities of any one
issuer. To the extent the Fund makes investments in excess of 5% of its assets
in a particular issuer, its exposure to credit and market risks associated with
that issuer is increased. Also, as a non-diversified investment company, since a
relatively high percentage of the Fund's assets may be invested in the
securities of a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified
investment company.
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 primarily in developing Asia-Pacific equity and debt securities.
Except for Temporary Investments, as discussed below, at least 65% of the Fund's
assets will consist of direct or indirect investments in developing Asia-Pacific
equity and debt securities, including common stocks, preferred stocks, debt
securities convertible into common stocks and non-convertible debt securities.
This investment objective 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. The
Fund is authorized to employ a variety of investment techniques to hedge against
market and currency risk, although suitable hedging instruments may not be
available on a timely basis and on acceptable terms. There can be no assurance
that the Fund's investment objective will be achieved.
For the purposes of the Fund's investment objective, developing
Asia-Pacific countries include Hong Kong, South Korea, Singapore, Taiwan,
Thailand, Malaysia, Indonesia, China, the Philippines, India, Pakistan, Turkey,
Brunei and Sri Lanka. Japan, Australia and New Zealand, because they have more
developed economies, are not included. A security ordinarily will be considered
to be a developing Asia-Pacific security when its issuer is organized in, or its
primary trading market is located in, a developing country in Asia or in the
Pacific Basin. The Fund may consider a security to be a developing Asia-Pacific
security, without reference to its issuer's domicile or to its primary trading
market, when at least 50% of the issuer's 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 may acquire developing Asia-Pacific
securities that are denominated in currencies other than a developing
Asia-Pacific currency. The Fund also may consider a debt security that is
denominated in a developing Asia-Pacific currency to be a developing
Asia-Pacific security without reference to its principal trading market or to
the location of its issuer. The Fund may consider investment companies to be
located in the country or countries in which they primarily make their portfolio
investments.
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The economies of a number of the developing Asia-Pacific countries have
been among the most rapidly growing economies in the world in recent years. In
the 1980s, the four original NIEs were Hong Kong, South Korea, Singapore and
Taiwan, the so-called four "tigers". In the late 1980s, the economies of
Thailand, Malaysia and Indonesia, which, together with Singapore, the
Philippines and Brunei, are members of the Association of Southeast Asian
Nations ("ASEAN"), began to emerge, making significant economic progress. More
recently, southern China, particularly the province of Guangdong, experienced
rapid economic growth. This regional growth has resulted from government
policies directed towards market-oriented economic reform and, in particular,
seeking to encourage the development of labor-intensive, export-oriented
industries. There also has been growth resulting from an increase in domestic
demand. In addition, the governments have been introducing deregulatory reforms
to encourage development of their securities markets and, in varying degrees,
permit foreign investment. A number of these securities markets have been
undergoing rapid growth. While investments in developing Asia-Pacific securities
are subject to considerable risks (see "Risk Factors and Special
Considerations"), the objective of the Fund reflects the belief that the
emerging economies and securities markets of developing Asia-Pacific countries
present attractive investment opportunities.
The Fund will generally seek to diversify investments on a geographic basis
within the developing Asia-Pacific countries. Under certain adverse investment
conditions, however, the Fund may restrict the developing Asia-Pacific
securities markets in which its assets are invested. The allocation of the
Fund's assets among the various securities markets of the developing
Asia-Pacific countries will be determined by the Manager.
Many investors, particularly individuals, lack the information, capability
or inclination to invest in the developing Asia-Pacific countries. It also may
not be permissible for such investors to invest directly in certain developing
Asia-Pacific capital 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 may also seek capital appreciation through investment in
developing Asia-Pacific debt securities. 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. The
receipt of income from such debt securities is incidental to the Fund's
objective of long-term capital appreciation. 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. For a description of the risks involved in investing in high yield
debt see "Certain Risks of Debt Securities" below.
The Fund may invest in debt securities ("sovereign debt") issued or
guaranteed by developing Asia-Pacific governments (including developing
Asia-Pacific countries, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), debt securities 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"),
debt securities issued by corporations or financial institutions or debt
securities issued by the U.S. Government or an agency or instrumentality
thereof.
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Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related governmental
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank") and the Asian 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 reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in developing Asia-Pacific
countries, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities including money market securities
denominated in U.S. dollars or foreign currencies ("Temporary Investments"). The
Fund may invest in the securities of developing Asia-Pacific issuers in the form
of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs),
Global Depositary Receipts (GDRs) or other securities convertible into
securities of developing Asia-Pacific 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. The Fund
may also invest in venture capital investments and illiquid privately placed
securities, provided that such investments, together with other illiquid
securities held by the Fund, do not exceed 15% of the Fund's net assets (or 10%,
as presently required by state law).
CERTAIN RISKS OF DEBT SECURITIES
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 low
rating categories of nationally recognized statistical rating organizations such
as Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc.
("Moody's") and unrated securities of comparable quality (referred to herein as
"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 "Statement of Additional
Information--Appendix". These securities are commonly referred to as "junk"
bonds. 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 is not authorized to purchase debt securities that
are in default, except for sovereign debt (discussed below) in which the Fund
may invest no more than 5% of its total assets while such sovereign debt
securities are in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are
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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/high risk securities because such securities may be unsecured and may be
subordinated to other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities 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 securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it 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.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers of
prices for actual sales. The Fund's Directors, or the Manager, will carefully
consider the factors affecting the market for high yield/high risk, lower rated
securities in determining whether any particular security is liquid or illiquid
and whether current market quotations are readily available.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk 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.
Sovereign Debt. Certain developing Asia-Pacific countries, such as the
Philippines and Turkey, owe significant amounts of debt to commercial banks and
foreign governments. Investment in sovereign debt involves a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms,
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achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's ability
or willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign debt
on which a governmental entity has defaulted may be collected in whole or in
part.
The sovereign debt instruments in which the Fund may invest involve great
risk and are deemed to be the equivalent in terms of quality to high yield/high
risk securities discussed above and are subject to many of the same risks as
such securities. Similarly, the Fund may have difficulty disposing of certain
sovereign debt obligations because there may be a thin trading market for such
securities. The Fund will not invest more than 5% of its total assets in
sovereign debt which is in default.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund is authorized to engage in various portfolio strategies to hedge
its portfolio against adverse 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
financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions and foreign currency options and
futures, and related options on such futures. Each of these portfolio strategies
is described below. Although certain risks are involved in options and futures
transactions (as discussed below and in "Risk Factors in Options and Futures
Transactions" below), the Manager believes that, because the Fund will engage in
options and futures transactions only for hedging purposes, the options and
futures portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of the
Fund's shares will fluctuate. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
There can be no assurance that the Fund's hedging transactions will be
effective. Suitable hedging instruments may not be available with respect to
developing Asia-Pacific securities on a timely basis and on acceptable terms.
Furthermore, the Fund will only engage in hedging activities from time to time
and will not necessarily engage in hedging transactions when movements in any
particular equity, debt and currency markets occur.
Set forth below are descriptions of certain hedging strategies in which the
Fund is authorized to engage.
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
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increase in the underlying security above the option exercise price. In
addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction. A closing purchase transaction cancels out the Fund's position as
the writer of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written. Covered call
options serve as a partial hedge against the price of the underlying security
declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt 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.
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 any offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if as a result of such purchase,
the aggregate cost of all outstanding options on securities held by the Fund
would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase or
write put and call options on stock indices to hedge against the risks of
market-wide stock price movement in the securities in which the Fund invests.
Options on indices are similar to options on securities except that on exercise
or assignment, the parties to the contract pay or receive an amount of cash
equal to the difference between the closing value of the index and the exercise
price of the option times a specified multiple. The Fund may invest in stock
index options based on a broad market index or based on a narrow index
representing an industry or market segment.
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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 limitations as described below under "Restrictions on the Use of
Futures Transactions".
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
it may purchase futures in order to gain rapid market exposure that may in part
or entirely offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, an equivalent amount of futures contracts
will be terminated by offsetting sales. The Manager does not consider purchases
of futures contracts to be a speculative practice under 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 may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated by
the buyer and seller. See "Restrictions on OTC Options" below for information as
to restrictions on the use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest and
multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to
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hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. The
Fund has no limitation on transaction hedging. The Fund will not speculate in
foreign forward exchange. If the Fund enters into a position hedging
transaction, the Fund's custodian will place cash or liquid debt securities in a
separate account of the Fund in an amount equal to the value of the Fund's total
assets committed to the consummation of such forward contract. If the value of
the securities placed in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. Investors should be aware
that U.S. dollar denominated securities may not be available in some or all
developing Asia-Pacific countries, that the forward currency market for the
purchase for U.S. dollars in most, if not all, developing Asia-Pacific countries
is not highly developed and that in certain developing Asia-Pacific countries no
forward market for foreign currencies currently exists or such market may be
closed to investment by the Fund.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund may use such techniques to hedge the stated value
in U.S. dollars of an investment in a Philippine peso denominated security. In
such circumstances, for example, the Fund may purchase a foreign currency put
option enabling it to sell a specified amount of Philippine pesos for dollars at
a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the Philippine peso 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 Philippine
pesos for dollars at a specified price by a future date (a technique called a
"straddle"). By selling a call option in this illustration, the Fund gives up
the opportunity to profit without limit from increases in the relative value of
the Philippine peso to the dollar. The Manager believes that "straddles" of the
type which may be utilized by the Fund constitute hedging transactions and are
consistent with the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of the securities denominated in
such currency which it owns; the expected
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acquisition price of securities which it has committed or anticipates to
purchase which are denominated in such currency, and in the case of securities
which have been sold by the Fund but not yet delivered, the proceeds thereof in
its denominated currency. Further, the Fund will segregate at its custodian U.S.
Government or other high quality securities having a market value substantially
representing any subsequent net decrease in the market value of such hedged
positions, including net positions with respect to cross-currency hedges. The
Fund may not incur potential net liabilities of more than 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 applicable to the Fund provide that the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool" 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. These restrictions are in
addition to other restrictions on the Fund's hedging activities mentioned
herein.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
over-the-counter stock index options, over-the-counter foreign currency options
and options on foreign currency futures, only with member banks of the Federal
Reserve System and primary dealers in U.S. Government securities or with
affiliates of such banks or dealers that have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million or any other bank or dealer having capital of at least $150 million or
whose obligations are guaranteed by an entity having capital of at least $150
million.
The staff of the Securities and Exchange 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 net 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
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option, plus the amount by which the option is "in-the-money". This policy as to
OTC options is not a fundamental policy of the Fund and may be amended by the
Directors of the Fund without the approval of the Fund's shareholders. However,
the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge. If
the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction. In addition, options and futures
transactions in foreign markets are subject to the risk factors associated with
foreign investments generally. See "Risk Factors and Special Considerations".
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, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. 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
the bankruptcy of a broker with whom the Fund has an open position in an option,
a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in the
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
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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 are considered 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 that the Fund assumes large
positions in the securities of a small number of issuers, the Fund's net asset
value may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers, and the Fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain of
such exchanges. See "Risk Factors and Special Considerations". In executing the
Fund's portfolio 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. The Fund may invest in certain securities
traded in the over-the-counter market and, where possible, 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 Securities and Exchange Commission. Affiliated persons of the
Fund may serve as its broker in transactions conducted on an exchange and in
over-the-counter transactions conducted on an agency basis. In addition,
consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., the Fund may consider sales of shares of the Fund as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund. It is expected that the majority of the shares of the Fund will be
sold by Merrill Lynch. Costs associated with transactions in foreign securities
are generally higher than those associated with transactions in U.S. securities,
although the Fund will endeavor to achieve the best net results in effecting
such transactions.
Portfolio Turnover. The Manager will effect portfolio transactions without
regard to holding period, if, in its judgment, such transactions are advisable
in light of a change in circumstance in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 100% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year or
less) by the monthly average value of the securities in the portfolio during the
year. A high portfolio turnover rate involves correspondingly
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greater transaction costs in the form of dealer spreads and brokerage
commissions, which are borne directly by the Fund.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of its commitments in
connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement the Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.50% 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 presently 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 a commitment or security. The
Fund will at all times maintain a segregated account with its custodian of cash,
cash equivalents, U.S. Government securities or other high grade liquid debt
securities denominated in U.S. dollars or non-U.S. currencies in an aggregate
amount equal to the purchase price of the securities underlying a commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities. Purchase and
sale contracts may be entered into only with financial institutions
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which have capital of at least $50 million or whose obligations are guaranteed
by an entity having capital of at least $50 million. Under such agreements, the
other party agrees, upon entering into the contract with the Fund, to repurchase
the securities at a mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period
although it may be affected by currency fluctuations. In the case of repurchase
agreements, the prices at which the trades are conducted do not reflect accrued
interest on the underlying obligations; whereas, in the case of purchase and
sale contracts, the prices take into account accrued interest. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with disposition of
the collateral. A purchase and sale contract differs from a repurchase agreement
in that the contract arrangements stipulate that the securities are owned by the
Fund. In the event of a default under such a repurchase agreement or under a
purchase and sale contract, instead of the contractual fixed rate, the rate of
return to the Fund shall be dependent upon intervening fluctuations of the
market value of such securities and the accrued interest on the securities. In
such event, the Fund would have rights against the seller for breach of contract
with respect to any losses arising from market fluctuations following the
failure of the seller to perform. Repurchase agreements and purchase and sale
contracts maturing in more than seven days are deemed illiquid by the Securities
and Exchange Commission and are therefore subject to the Fund's investment
restriction limiting investments in securities that are not readily marketable
to 15% of the Fund's net assets (and such investments will presently be limited
to 10% of the Fund's net assets, as is required by the law of certain states).
See "Investment Restrictions" below.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act. During the period of such a loan, the Fund receives
the income on the loaned securities and receives either the income on the
collateral or other compensation, i.e., negotiated loan premium or fee, for
entering into the loan and thereby increases its yield. Such loans are
terminable at any time, and the borrower, after notice, will be required to
return borrowed securities within five business days. In the event that the
borrower defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed securities.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which
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are fundamental policies may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities (which for this
purpose and under the Investment Company Act means the lesser of (a) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (b) more than 50% of the outstanding shares). Among its
fundamental policies, the Fund may not invest more than 25% of its total assets,
taken at market value at the time of each investment, in the securities of
issuers of any particular industry (excluding the U.S. Government and its
agencies or instrumentalities). Other fundamental policies include policies
which (i) limit investments in securities which are (a) subject to material
legal restrictions on repatriation of assets or (b) cannot be readily resold
because of legal or contractual restrictions or which are not otherwise readily
marketable, including repurchase agreements and purchase and sale contracts
maturing in more than seven days, if, regarding all such securities, more than
15% of its net assets, taken at market value would be invested in such
securities and (ii) restrict the issuance of senior securities and limit bank
borrowings, except that the Fund may borrow amounts of up to 33 1/3% of its
assets for extraordinary purposes or to meet redemptions. As a non-fundamental
policy, the Fund will, for purposes of the 25% restriction set forth above and
to the extent required by the Securities and Exchange Commission, consider
securities issued or guaranteed by the government of any one foreign country as
the obligations of a single issuer.
While the Fund may not purchase illiquid securities in an amount exceeding
15% of its net assets (or 10%, as presently required by state law), the Fund may
purchase without regard to that 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.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
The Fund will not purchase securities while borrowings exceed 5% of its
total assets, except (a) to honor prior commitments or (b) to exercise
subscription rights where outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging or borrowing increases the Fund's exposure to capital risk, and
borrowed funds are subject to interest costs which will reduce net income.
Although not a fundamental policy, the Fund will include OTC options and
the securities underlying such options in calculating the amount of its assets
subject to the limitation set forth in clause (i) above. However, as discussed
above, the Fund may treat the securities it uses as cover for written OTC
options as liquid and, therefore, will exclude such securities from this
restriction, provided
27
<PAGE>
it follows a specified procedure. The Fund will not change or modify this policy
prior to the change or modification by the Securities and Exchange Commission
staff of its position regarding OTC options, as discussed above.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the Manager;
President and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch & Co., Inc.; Executive Vice President of Merrill Lynch; Director
of the Distributor.
DONALD CECIL--Special Limited Partner of Cumberland Partners (an investment
partnership).
EDWARD H. MEYER--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President of
Arnhold and S. Bleichroeder, Inc.; Adjunct Professor, Columbia University
Graduate School of Business.
RICHARD R. WEST--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Merrill Lynch Asset Management, L.P. (the "Manager"), which does business
as Merrill Lynch Asset Management, acts as the manager for the Fund and provides
the Fund with management and investment advisory services. The Manager is owned
and controlled by Merrill Lynch & Co., Inc., a financial services holding
company and the parent of Merrill Lynch. The Manager or an affiliate, Fund Asset
Management, L.P. ("FAM"), acts as the investment adviser for more than 90 other
registered investment companies. The Manager or FAM also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of February 28, 1994, the Manager and FAM had a total of approximately $164.4
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
28
<PAGE>
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 and
constantly reviews the Fund's holdings in light of its own research analysis and
that from other relevant sources. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Manager, subject to
review by the Board of Directors.
The Manager 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 and other
investment advisers, but management of the Fund believes this fee is justified
by the additional investment research and analysis required in connection with
investing in developing Asia-Pacific capital markets. For the fiscal period May
29, 1992 (commencement of operations) to February 28, 1993, the management fee
paid by the Fund to the Manager aggregated $2,516,278 (based on average net
assets of approximately $335.1 million). For the fiscal period March 1, 1993, to
December 31, 1993, the management fee paid by the Fund to the Manager aggregated
$5,988,153 (based on average net assets of approximately $709.6 million). At
February 28, 1994, the net assets of the Fund aggregated approximately $1.1
billion. At this asset level, the annual management fee would aggregate
approximately $9.3 million.
Kara Tan Bhala, Vice President of the Fund, is the Fund's Portfolio
Manager. Ms. Bhala has been a Vice President of the Manager and its predecessor
and Portfolio Manager since 1992; Vice President of James Capel Inc. from 1988
to 1990; and Senior Investment Analyst of James Capel (Far East) Ltd. from 1986
to 1988. Ms. Bhala has been primarily responsible for the management of the
Fund's portfolio since it commenced operations.
The Management Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the management fee;
legal and audit fees; registration fees; unaffiliated Directors' fees and
expenses; custodian and transfer agency fees; accounting costs; the costs of
issuing and redeeming shares; and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal period May 29, 1992 (commencement of
operations) to February 28, 1993, the Fund reimbursed the Manager $58,639 for
accounting services. For the same period for Class A shares, the ratio of total
expenses excluding account maintenance fees to average net assets was 1.48%
(annualized), and the ratio of total expenses including account maintenance fees
to average net assets was 1.73% (annualized); for the Class B shares, the ratio
of total expenses excluding distribution fees to average net assets was 1.49%
(annualized), and the ratio of total expenses including distribution fees to
average net assets was 2.49% (annualized). For the fiscal period March 1, 1993,
to December 31, 1993, the Fund reimbursed the Manager $78,380 for accounting
services. For the same period for Class A shares, the ratio of total expenses
excluding account maintenance fees to average net assets was 1.34% (annualized),
and the
29
<PAGE>
ratio of total expenses including account maintenance fees to average
net assets was 1.59% (annualized); for Class B shares, the ratio of total
expenses excluding account maintenance and/or distribution fees to average net
assets was 1.35% (annualized), and the ratio of total expenses including account
maintenance and/or distribution fees to average net assets was 2.35%
(annualized). (Prior to June 28, 1993, such distribution fees applicable to
Class B shares were paid pursuant to a superseded plan. If the plan currently
applicable to Class B shares had been applicable during such period, such
distribution fees would have been recharacterized as account maintenance fees
and distribution fees. See "Purchase of Shares--Alternative Sales
Arrangements--Distribution Plans" below.)
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's
transfer agent pursuant to a transfer agency, dividend disbursing agency and
shareholder servicing agency agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $8.00 per Class A shareholder account and $9.00
per Class B shareholder account, nominal miscellaneous fees (e.g., account
closing fees) and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. For the fiscal period May
29, 1992 (commencement of operations) to February 28, 1993, the Fund paid the
Transfer Agent $363,733 pursuant to the Transfer Agency Agreement. For the
fiscal period March 1, 1993, to December 31, 1993, the Fund paid the Transfer
Agent $619,799 pursuant to the Transfer Agency Agreement. At March 31, 1994, the
Fund had 18,122 Class A shareholder accounts and 68,019 Class B shareholder
accounts. At this level of accounts, the annual fee payable to the Transfer
Agent would aggregate approximately $843,288 plus miscellaneous and
out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, a subsidiary of the Manager and an affiliate of Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except that for retirement plans the minimum initial purchase
is $250, and the minimum subsequent purchase is $1.
The Fund is offering its shares at a public offering price equal to the
next determined net asset value per share plus sales charges which, at the
option of the purchaser, may be imposed either at the time of purchase (the
"initial sales charge alternative") or on a deferred basis (the "deferred sales
charge alternative"), as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 p.m., New York time, which includes
orders received after the determination of net asset value on the previous day,
the applicable offering price will be based on the net asset value determined as
of 4:15 p.m., New York time, on the day the orders are placed with the
Distributor, provided the orders are received by the Distributor prior to 4:30
p.m., New York time, on that day. If the purchase orders are not received by the
Distributor prior to 4:30 p.m., New York time, such orders shall be deemed
received on the next business day. Any order
30
<PAGE>
may be rejected by the Distributor or the Fund. The Fund or the Distributor
may suspend the continuous offering of the Fund's shares at any time in
response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Neither the Distributor nor
the dealers are permitted to withhold placing orders to benefit themselves by
a price change. Merrill Lynch may charge its customers a processing fee
(presently $4.85) to confirm a sale of shares to such customers. Purchases
directly through the Transfer Agent are not subject to the processing fee.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge
alternative. The two classes of shares each represent an interest in the same
portfolio of investments of the Fund, have the same rights and are identical in
all respects, except that (i) Class B shares bear the expenses of the deferred
sales arrangements, any expenses (including incremental transfer agency costs)
resulting from such sales arrangements and the expenses paid by the account
maintenance fee, (ii) Class A shares bear the expenses of the account
maintenance fee, and (iii) each class has exclusive voting rights with respect
to the Rule 12b-1 distribution plan pursuant to which the account maintenance
and distribution fees, in the case of the Class B shares, and the account
maintenance fee, in the case of the Class A shares, is paid. The two classes
also have different exchange privileges. See "Shareholders Services--Exchange
Privilege". The net income attributable to Class B shares and the dividends
payable on Class B shares will be reduced by the amount by which the sum of the
account maintenance and distribution fees and incremental expenses associated
with such account maintenance and distribution fees exceeds the account
maintenance fee attributable to the Class A shares; likewise, the net asset
value of the Class B shares will be reduced by such amount to the extent the
Fund has undistributed net income. Sales personnel may receive different
compensation for selling Class A or Class B shares. Investors are advised that
only Class A shares may be available for purchase through securities dealers,
other than Merrill Lynch, which are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose
the method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and an ongoing account maintenance fee, as discussed below, or to have
the entire initial purchase price invested in the Fund with the investment
thereafter being subject to ongoing account maintenance and distribution fees.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to both an ongoing account
maintenance fee and a distribution fee, as described below, although the shares
are subject to an ongoing account maintenance fee, as discussed below. However,
because initial sales charges are deducted at the time of purchase, such
investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees related to Class B shares may exceed
the initial sales charge and ongoing account maintenance fee related to Class A
shares. Again,
31
<PAGE>
however, such investors must weigh this consideration against the
fact that not all their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution fees will be offset to the extent
any return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and contingent
deferred sales charge is subject to certain limits as set forth below under
"Deferred Sales Charge Alternative--Class B Shares".
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continuing
account maintenance and distribution fees and, for a four-year period of time, a
contingent deferred sales charge as described below. For example, an investor
subject to the 6.50% initial sales charge will have to hold its investment for
more than 6 1/2 years for the ongoing 0.25% account maintenance fee and 0.75%
distribution fee of Class B shares to exceed the initial sales charge plus the
accumulated account maintenance fee of Class A shares. This example does not
take into account the time value of money which further reduces the impact of
the ongoing 0.25% account maintenance fee and 0.75% distribution fee of Class B
shares on the investment, fluctuations in net asset value, the effect of the
return on the investment over this period of time or the effect of any limits
that may be imposed upon the payment of the distribution fee and the contingent
deferred sales charge.
Distribution Plans. Pursuant to separate distribution plans adopted by the
Fund (as of April 14, 1992, with respect to the Class A shares and as of June
28, 1993, with respect to the Class B shares) pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan"), the Fund pays the
Distributor (a) an account maintenance fee relating to Class A shares, accrued
daily and paid monthly, at the annual rate of 0.25% of the average daily net
assets of the Fund attributable to Class A shares in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with
account maintenance activities and (b) an account maintenance fee and a
distribution fee relating to Class B shares, accrued daily and paid monthly, at
the annual rates of 0.25% and 0.75%, respectively, of the average daily net
assets of the Fund attributable to Class B shares in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
account maintenance and distribution services to the Fund, with the ongoing
account maintenance fee compensating the Distributor and Merrill Lynch for
providing account maintenance services to Class B shareholders and with the
ongoing distribution fee compensating the Distributor and Merrill Lynch for
providing shareholder and distribution services, and bearing certain
distribution-related expenses of the Fund, including payments to financial
consultants for selling Class B shares of the Fund. See "Additional
Information--Organization of the Fund". The Distribution Plan related to Class B
shares is designed to permit an investor to purchase Class B shares through
dealers without the assessment of a front-end sales charge and at the same time
permit the dealer to compensate its financial consultants in connection with the
sale of the Class B shares. In this regard, the purpose and function of the
ongoing account maintenance and distribution fees and the contingent deferred
sales charge are the same as those of the initial sales charge and account
maintenance fee with respect to the Class A shares of the Fund in that the
deferred sales charges provide for the financing of the distribution of the
Fund's Class B shares.
Prior to June 28, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 1.00% of
average daily net assets of the Class B shares of the Fund under a distribution
plan previously adopted by the Fund (the "Prior Class B Plan") to compensate the
Distributor and Merrill Lynch for providing account maintenance and
distribution-
32
<PAGE>
related activities and services to Class B shareholders. The fee
rate payable and the services provided under the Prior Class B Plan are
identical to the aggregate fee rate payable and the services provided under the
Class B Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled. For the fiscal period May 29, 1992
(commencement of operations) to February 28 1993, the Fund paid the Distributor
$1,946,638 pursuant to the Prior Class B Plan (based on average net assets
subject to the Prior Class B Plan of approximately $259.3 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 period March 1, 1993, to December 31, 1993, the Fund paid the
Distributor $4,567,720 pursuant to the Prior Class B Plan and the Plan (based on
average net assets subject to the Prior Class B Plan and the Plan of
approximately $541.3 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. Both the Class B Distribution Plan and the
Prior Class B Plan were designed to permit an investor to purchase Class B
shares through dealers without the assessment of a front-end sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B shares. For the fiscal period May 29,
1992 (commencement of operations) to February 28, 1993, the Fund paid the
Distributor $142,410 pursuant to the Class A Distribution Plan (based on average
net assets subject to the Class A Distribution Plan of approximately $75.8
million), all of which was paid to Merrill Lynch for providing account
maintenance services in connection with the Class A shares. For the fiscal
period March 1, 1993, to December 31, 1993, the Fund paid the Distributor
$355,108 pursuant to the Class A Distribution Plan (based on average net assets
subject to the Class A Distribution Plan of approximately $168.3 million), all
of which was paid to Merrill Lynch for providing account maintenance services in
connection with the Class A shares. At February 28, 1994, the net assets of the
Fund subject to the Class A Distribution Plan and the Class B Plan aggregated
approximately $262.4 million for Class A shares and approximately $834.5 million
for Class B shares. At these asset levels, the annual fees paid pursuant to such
Plans would aggregate approximately $553,622 for Class A shares and $7,042,076
for Class B shares.
The payments under the Class B Distribution Plan, as was the case with the
Prior Class B Plan, are based on a percentage of average daily net assets
attributable to Class B shares regardless of the amount of expenses incurred,
and accordingly, distribution-related revenues may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors for
their consideration in connection with their deliberations as to the continuance
of the Class B Distribution Plan. This information is presented annually as of
December 31 of each year on a "fully allocated accrual" basis and quarterly on a
"direct expense and revenue/cash" basis. On the fully allocated accrual basis,
revenues consist of the account maintenance fees, distribution fees, the
contingent deferred sales charges and certain other related revenues, and
expenses consist of financial consultant compensation, branch office and
regional operation center selling and transaction processing expenses,
advertising, sales promotion and marketing expenses, corporate overhead and
interest expense. On the direct expense and revenue/cash basis, revenues consist
of the account maintenance fees, distribution fees and contingent deferred sales
charges, and the expenses consist of financial consultant compensation. As of
December 31, 1993, direct cash revenues for the period since commencement of the
offering of Class B shares exceeded direct cash expenses by $679,063 (0.07% of
Class B net assets at that date). At such date, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch with respect to Class B
shares for the period since commencement of operations exceeded fully allocated
accrual revenues for such period by approximately $8,213,000 (0.83% of Class B
net assets at that date).
33
<PAGE>
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 the Class B and Class A 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 account maintenance fee, the distribution fee and the
contingent deferred sales charges in the case of Class B shares will not be used
to subsidize the sale of Class A shares. Similarly, the initial sales charges
and account maintenance fee in the case of Class A shares will not be used to
subsidize the sale of Class B shares. Payment of the distribution fee on Class B
shares is subject to certain limits as set forth under "Deferred Sales Charge
Alternative--Class B Shares".
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below.
<TABLE><CAPTION>
SALES CHARGE DISCOUNT TO
SALES CHARGE AS PERCENTAGE* OF SELECTED DEALERS
AS PERCENTAGE THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OF OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Less than $10,000...................................... 6.50% 6.95% 6.25%
$10,000 but less than $25,000.......................... 6.00 6.38 5.75
$25,000 but less than $50,000.......................... 5.00 5.26 4.75
$50,000 but less than $100,000......................... 4.00 4.17 3.75
$100,000 but less than $250,000........................ 3.00 3.09 2.75
$250,000 but less than $1,000,000...................... 2.00 2.04 1.80
$1,000,000 and over.................................... .75 .76 .65
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
Initial sales charges may be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), a deferred compensation
plan under Section 403(b) and Section 457 of the Code, other deferred
compensation arrangements, VEBA plans and non-qualified After Tax Savings and
Investment programs maintained on the Merrill Lynch Group Employee Services
system, herein referred to as "Employer Sponsored Retirement or Savings Plans"),
or a purchase by a TMASM Managed Trust, of Class A shares of the Fund. In
addition, purchases of Class A shares of the Fund made in connection with a
single investment of $1 million or more under the Merrill Lynch Mutual Fund
Adviser Program will not be subject to an initial sales charge. Purchases
described in this paragraph will be subject to a
34
<PAGE>
contingent deferred sales charge if the shares are redeemed within one year
after purchase at the following rates:
<TABLE><CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- ------------------------------------------------------------ ---------------------------------
<S> <C>
$1 million up to $2.5 million............................... 1.00%
Over $2.5 million up to $3.5 million........................ 0.60%
Over $3.5 million up to $5 million.......................... 0.40%
Over $5 million............................................. 0.25%
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors of Merrill Lynch &
Co., Inc., to participants in certain benefit plans, to directors and trustees
of certain other Merrill Lynch sponsored investment companies, to an investor
who has a business relationship with a financial consultant who joined Merrill
Lynch from another investment firm within six months prior to the date of
purchase if certain conditions set forth in the Statement of Additional
Information are met and to employees of Merrill Lynch & Co., Inc. and its
subsidiaries. Also, Class A shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies. No
initial sales charges are imposed upon Class A shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions. Class A
shares of the Fund are also offered at net asset value, without sales charge, to
an investor who has a business relationship with a Merrill Lynch financial
consultant and who has invested in a mutual fund sponsored by a non-Merrill
Lynch company for which Merrill Lynch has served as a selected dealer and where
Merrill Lynch has either received or given notice that such arrangement will be
terminated, if the following conditions are satisfied: first, the investor must
purchase Class A shares of the Fund with proceeds from a redemption of shares of
such other mutual fund and such fund imposed a sales charge either at the time
of purchase or on a deferred basis; second, such purchase of Class A shares must
be made within 90 days after such notice of termination. Class A shares are
offered to TMASM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value; however, such purchases may
be subject to a contingent deferred sales charge of up to 1% of the dollar
amount of the purchase if the shares are redeemed within one year after
purchase. Class A shares are offered at net asset value to (i) certain
retirement plans, including eligible 401(k) plans, provided such plans meet the
required minimum number of eligible employees or required amount of assets
advised by the Manager or its subsidiary, FAM, and (ii) certain Employer
Sponsored Retirement or Savings Plans, provided such plans meet the required
minimum number of eligible employees or required amount of assets advised by the
Manager or any of its affiliates. Class A shares of the Fund are also offered at
net asset value to shareholders of certain closed-end funds advised by the
Manager or FAM who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund, provided certain
conditions are met. For example, Class A shares of the Fund and certain other
mutual funds advised by the Manager or FAM are offered at net asset value to
shareholders of Merrill Lynch Senior
35
<PAGE>
Floating Rate Fund, Inc. (formerly known as Merrill Lynch Prime Fund, Inc.) who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such
funds.
During the fiscal period May 29, 1992 (commencement of operations) to
February 28, 1993, the Fund sold 10,664,260 Class A shares for aggregate net
proceeds to the Fund of $107,804,104. The gross sales charges for the sale of
Class A shares of the Fund for that period were $2,992,104, of which $48,308 and
$2,943,796 were received by the Distributor and Merrill Lynch, respectively.
During the fiscal period March 1, 1993, to December 31, 1993, the Fund sold
7,846,115 Class A shares for aggregate net proceeds to the Fund of $114,904,877.
The gross sales charges for the sale of Class A shares of the Fund for that
period were $2,948,376, of which $183,544 and $2,764,832 were received by the
Distributor and Merrill Lynch, respectively.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold without an initial sales
charge so that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling Class B
shares at the time of purchase from its own funds. The proceeds of the
contingent deferred sales charge and the ongoing distribution fee discussed
below are used to defray Merrill Lynch's expenses, including compensating its
financial consultants. The proceeds from the ongoing account maintenance fee are
used to compensate Merrill Lynch for providing continuing account maintenance
activities.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to financial consultants for
selling Class B shares. Payments by the Fund to the Distributor of the
distribution fee under the Distribution Plan relating to Class B shares also may
be used in whole or in part by the Distributor for this purpose. The combination
of the contingent deferred sales charge and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services-Exchange
Privilege" will continue to be subject to the Fund's contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares acquired as a result of the exchange.
For the fiscal period May 29, 1992 (commencement of operations) to February 28,
1993, the Distributor received contingent deferred sales charges of $236,960
with respect to the redemption of Class B shares, all of which was paid to
Merrill Lynch. For the fiscal period March 1, 1993, to December 31, 1993, the
Distributor received contingent deferred sales charges of $807,253 with respect
to the redemption of Class B shares, all of which was paid to Merrill Lynch.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
four years of purchase may be subject to a contingent deferred sales charge at
the rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
current market value or the costs of the shares being redeemed. Accordingly, no
sales charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
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<PAGE>
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE><CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- --------------------------------------------------------------------- ---------------------
<S> <C>
0-1............................................................. 4.0%
1-2............................................................. 3.0%
2-3............................................................. 2.0%
3-4............................................................. 1.0%
4 and thereafter................................................ None
</TABLE>
In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12, and during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The contingent deferred sales charge is waived on redemptions of shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. The contingent deferred sales charge is waived on redemptions of
shares by certain eligible 401(a) and eligible 401(k) plans. The contingent
deferred sales charge is also waived for any Class B shares which are purchased
by an eligible 401(k) or eligible 401(a) plan and which are rolled over into a
Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. Additional information concerning the waiver
of the contingent deferred sales charge is set forth in the Statement of
Additional Information.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based
sales charges such as the Fund's distribution fee and the contingent deferred
sales charge but not the account maintenance fees. As applicable to the Fund,
the maximum sales charge rule limits the aggregate of distribution fee payments
and contingent deferred sales charges payable by the Fund to (1) 6 1/4% of
eligible gross sales of Class B shares (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received
37
<PAGE>
from the payment of the distribution fee and the contingent deferred sales
charge). The Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") is 6.75% of eligible gross sales. The Distributor retains the right to
stop waiving 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, and any contingent deferred sales charges will be paid to the
Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fees. 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 December 31,
1993, with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule and
the Distributor's voluntary maximum for the fiscal period May 29, 1992
(commencement of operations) to December 31, 1993.
<TABLE><CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1993
---------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
--------- ----------- ----------- --------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As
Adopted............... $ 455,945 $ 28,497 $ 2,128(2) $ 30,625 $ 5,930 $ 24,694 $ 7,417
Under Distributor's
Voluntary Waiver...... $ 455,945 $ 28,497 $ 2,280 $ 30,777 $ 5,930 $ 24,846 $ 7,417
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since May 29, 1992
(commencement of operations) 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 contingent deferred sales charge payments, distribution fee
payments and accruals. Of the distribution fee payments made prior to June
28, 1993, under the Prior Class B Plan at the 1.00% rate, 0.75% of average
daily net assets has been treated as a distribution fee and 0.25% of average
daily net assets has been deemed to have been a service fee and not subject
to the NASD maximum sales charge rule.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any contingent deferred sales charge payments)
is amortizing the unpaid balance. No assurance can be given that payments of
the distribution fee will reach either the voluntary maximum or the NASD
maximum.
38
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund upon receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any contingent deferred sales charge
which may be applicable to Class B shares, there will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption
in the case of shares deposited with the Transfer Agent may be accomplished by a
written letter requesting redemption. Proper notice of redemption in the case of
shares for which certificates have been issued may be accomplished by a written
letter as noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. A redemption request
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as his (their) name(s) appear(s) on the Transfer
Agent's register or on the certificate, as the case may be. The signature(s) on
the redemption request must be guaranteed by an "eligible guarantor institution"
(including, for example, Merrill Lynch branch offices and certain other
financial institutions) as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of which
may be verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing of
a redemption check until such time as good payment 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 4:00 p.m., New York time, on the
day received and is received by the Fund from such dealer not later than 4:30
p.m., New York time, on the same day.
39
<PAGE>
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 4:30 p.m., New York time, in order to obtain that day's
closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
contingent deferred sales charge in the case of Class B shares). Securities
firms which do not have selected dealer agreements with the Distributor,
however, may impose a transaction charge on the shareholder for transmitting the
notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a repurchase of shares. Redemptions
directly through the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might affect adversely 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares. Full
details as to each of such services, copies of the various plans described below
and instructions as to how to participate in the various plans and services, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page or from the Distributor or Merrill Lynch.
Certain of these services are available only to U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive quarterly statements
from the Transfer Agent. These quarterly statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
quarterly statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary dividends and long-term
capital gain distributions. Shareholders may make additions to their Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders may also maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A shares.
Shareholders interested in transferring their Class B shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
40
<PAGE>
the shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an individual
retirement account from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account is
to be transferred will not take delivery of shares of the Fund, a shareholder
must either redeem the shares (paying any applicable redemption fee) so that the
cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
Exchange Privilege. U.S. Class A and Class B shareholders of the Fund each
have an exchange privilege with certain other mutual funds sponsored by Merrill
Lynch. There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Securities and Exchange
Commission. Class A shareholders of the Fund may exchange their shares
("outstanding Class A shares") for Class A shares of another fund ("new Class A
shares") on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the outstanding Class A shares and the sales charge payable at the time of
the exchange on the new Class A shares. The Fund's exchange privilege is
modified with respect to purchases of Class A shares under the Merrill Lynch
Mutual Fund Adviser program. First, the initial allocation of assets is made
under the program. Then, any subsequent exchange under the program of Class A
shares of a fund for Class A shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other fund and the sales charge payable on the shares of
the Fund being acquired in the exchange under this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent deferred
sales charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the new Class B shares. In addition, Class B shares of the
Fund acquired through use of the exchange privilege will be subject to the
Fund's contingent deferred sales charge schedule if such schedule is higher than
the deferred sales charge schedule relating to the Class B shares of the fund
from which the exchange has been made. For purposes of computing the contingent
deferred sales charge that may be payable upon a disposition of the new Class B
shares, the holding period for the outstanding Class B shares is "tacked" to the
holding period of the new Class B shares. Class A and Class B shareholders of
the Fund may also exchange their shares for shares of certain money market
funds, but in the case of an exchange from Class B shares, the period of time
that shares are held in a money market fund will not count toward satisfaction
of the holding period requirement for purposes of reducing the contingent
deferred sales charge. Exercise of the exchange privilege is treated as a sale
for Federal income tax purposes. For further information, see "Shareholder
Services--Exchange Privilege" in the Statement of Additional Information.
41
<PAGE>
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are reinvested automatically in full and fractional
shares of the Fund, without a sales charge, at the net asset value per share
next determined on the ex-dividend date of such dividend or distribution. A
shareholder may at any time, by written notification to Merrill Lynch if the
shareholder's account is maintained with Merrill Lynch or by written
notification or telephone call (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividend or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. No contingent deferred sales charge will be imposed on redemption
of shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions. The Automatic Investment Program is not available
to shareholders whose shares are held in a brokerage account with Merrill Lynch
other than a CMA(R) account.
Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment Account
in the form of payments by check or through automatic payment by direct deposit
to his bank account on either a monthly or quarterly basis. A Class A
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual
or annual basis through the Systematic Redemption Program, subject to certain
conditions. Regular additions of Class A shares may be made to an investor's
Investment Account by prearranged charges of $50 or more to his regular bank
account. Investors who maintain CMA accounts may arrange to have periodic
investments made in the Fund in their CMA accounts or in certain related
accounts in amounts of $250 or more through the CMA Automatic Investment
Program. The Automatic Investment Program is not available to shareholders whose
shares are held in a brokerage account with Merrill Lynch (other than a CMA
account).
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified periods in advertisements or information furnished to present
or prospective shareholders. Average annual total return is computed separately
for Class A and Class B shares in accordance with a formula specified by the
Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A shares and the
contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares. Dividends paid by the Fund with respect to Class A and Class B
shares, to the extent any dividends are paid, will be calculated in the
42
<PAGE>
same manner at the same time on the same day and will be in the same amount,
except that account maintenance and distribution fees and any incremental
transfer agency costs relating to Class B shares will be borne exclusively by
Class B shares, and the account maintenance fee relating to Class A shares will
be borne exclusively by Class A shares. The Fund will include performance data
for both Class A and Class B shares of the Fund in any advertisement or
information including performance data of the Fund.
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 distributed to investors whose purchases are subject to
reduced sales charges in the case of Class A shares or waiver of the contingent
deferred sales charge in the case of Class B shares (such as investors in
certain retirement plans), the performance data may take into account the
reduced, and not the maximum, sales charges or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the contingent deferred
sales charge, a lower amount of expenses is deducted. See "Purchase of Shares".
The Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average or performance
data published by Lipper Analytical Services, Inc., Morningstar Publications,
Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. In addition, from time to time the Fund may include the Fund's
risk-adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature. As with other performance data,
performance comparisons should not be considered representative of the Fund's
relative performance for any future period.
43
<PAGE>
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. See "Additional Information--
Determination of Net Asset Value". Dividends and distributions may be reinvested
automatically in shares of the Fund, at net asset value without a sales charge.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. See "Shareholder Services--Automatic
Reinvestment of Dividends and Distributions" for information as to how to elect
either dividend reinvestment or cash payments. 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.
The per share dividends and distributions on Class B shares will be lower
than the per share dividends and distributions on Class A shares as a result of
the effect of the distribution and higher transfer agency fees applicable with
respect to the Class B shares. See "Determination of Net Asset Value" below.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments may increase or decrease the
amount of the Fund's income available for distribution to shareholders. If such
losses exceed other income during a taxable year, (a) the Fund would not be able
to make any ordinary dividend distributions, and (b) distributions made before
the losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
tax basis in his Fund shares for Federal income tax purposes. For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Taxes" below. If in any fiscal year, the Fund has net income
from certain foreign currency transactions, such income will be distributed
annually.
DETERMINATION OF NET ASSET VALUE
Net asset value per share is determined once daily as of 4:15 p.m., New
York time, on each day during which the New York Stock Exchange is open for
trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation. The net
asset value is computed by dividing the market 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 Distributor, are accrued daily.
The per share net asset value of the Class B shares generally will be lower
than the per share net asset value of the Class A shares, reflecting the daily
expense accruals of the higher sum of account maintenance, distribution and
higher transfer agency fees applicable with respect to the Class B shares, as
compared with the account maintenance fee applicable to the Class A shares. It
is expected, however,
44
<PAGE>
that the per share net asset value of the two classes will tend to converge
immediately after the payment of dividends or distributions which will differ by
approximately the amount of the expense accrual differential between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid
prices obtained from one or more dealers in the over-the-counter market prior to
the time of valuation. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. 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 elect to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but
not its shareholders) will not be subject to Federal income tax on the part of
its net ordinary income and net realized capital gains which it distributes to
Class A and Class B shareholders (together, the "shareholders"). The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend or distribution
will be treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
45
<PAGE>
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 certain ordinary income dividends and capital gain
dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom a certified
taxpayer identification number is not 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.
Due to investment laws in certain developing Asia-Pacific countries, the
Fund's investments in equity securities in such countries may include shares of
investment companies (or similar investment entities) organized under foreign
law or of ownership interests in special accounts, trusts or partnerships. The
Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be treated
as owning shares in a passive foreign investment company ("PFIC") for U.S.
Federal income tax purposes. The Fund may be subject to U.S. Federal income tax,
and an additional tax in the nature of interest, on a portion of the
distributions from such a company and on gain from the disposition of the shares
(collectively referred to as "excess distribution"), 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, the
Fund may elect to "mark-to-market" at the end of each taxable year all shares
that it holds in PFICs. If it makes this election, the Fund will recognize as
ordinary income any increase in the value of such shares. Unrealized losses,
however, will not be recognized. By making the mark-to-market election, the Fund
can avoid imposition of the interest charge with respect to its distributions
from PFICs, but in any
46
<PAGE>
particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts", and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class A
shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income dividends and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on February 13, 1992. It has
an authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A Common Stock and Class B
Common Stock, each of which consists of 100,000,000 shares. Both Class A Common
Stock and Class B Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the expenses of the account
maintenance fee relating to the Class A shares are borne solely by the Class A
shares and that the expenses of the account maintenance and distribution fees
relating to the Class B shares are borne solely by the Class B shares and that
Class A and Class B shareholders have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
See "Purchase of Shares". The
47
<PAGE>
Fund has received an order from the Securities and Exchange Commission (the
"Commission") permitting the issuance and sale of an unlimited number of
classes of common stock. The Directors of the Fund may classify and reclassify
the shares of the Fund into additional classes of common stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold an annual meeting of shareholders in any year in which the Investment
Company Act does not require shareholders to elect Directors. Also, the by-laws
of the Fund require that a special meeting of shareholders be held upon the
written request of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting, if they comply with applicable Maryland law. The Fund
will assist in shareholder communications in the manner described in Section
16(c) of the Investment Company Act. Voting rights for Directors are not
cumulative. Shares issued are fully paid and non-assessable and have no
preemptive or conversion rights. Each share of Class A Common Stock and Class B
Common Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities, except that, as noted
above, expenses related to the distribution and/or account maintenance of the
shares of a class will be borne solely by such class.
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.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 1-800-637-3863.
48
<PAGE>
MERRILL LYNCH DRAGON FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase ............ Class A shares or
............ Class B shares (choose one) of Merrill Lynch Dragon Fund, Inc. and
establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $ .... payable to Financial Data Services, Inc.,
as an initial investment (minimum $1,000) (subsequent investments $50 or
more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
<TABLE>
<S> <C> <C> <C>
1. ..................................................... 4. .....................................................
2. ..................................................... 5. .....................................................
3. ..................................................... 6. .....................................................
(Please list all Funds. Use a separate sheet of paper if necessary.)
</TABLE>
Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Distribution ELECT / / reinvest dividends ELECT / / reinvest capital
Options gains
ONE / / pay dividends in ONE / / pay capital gains in
cash cash
</TABLE>
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
------------------------
(PLEASE PRINT)
Name ...........................................................................
First Name Initial Last Name
Social Security No.
Name of Co-Owner (if any) ......................................................
or Taxpayer Identification No.
First Name Initial Last Name
Address ........................................................................
...............................................................................
.... , 19 ...
(Zip Code)
Date
Occupation .......................... Name and Address of Employer ............
.................................................
.................................................
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security No. or Taxpayer Identification No. and (2) that I am not
subject to backup withholding (as discussed in the Prospectus under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
Signature of Owner .......................... Signature of Co-Owner (if
any) ...........................................................................
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- --------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
................... ,
19 ...
Date of initial purchase
GENTLEMEN:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Dragon Fund, Inc. or any other investment company with an initial sales
charge or deferred sales charge for which Merrill Lynch Funds Distributor, Inc.
acts as distributor over the next 13-month period which will equal or exceed:
/ / $10,000 / / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Dragon 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 Dragon 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 .................................
- --------------------------------------------------------------------------------
49
<PAGE>
MERRILL LYNCH DRAGON FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
Minimum requirements: $10,000 for monthly disbursements, $5,000 for quarterly,
of shares in Merrill Lynch Dragon Fund, Inc., at cost or current offering price.
Begin systematic withdrawal on .............. , 19 .... . Withdrawals to be made
either (check one) / / Monthly / / Quarterly*
[Date]
*Quarterly withdrawals are made on the 24th day of March, June, September and
December.
Specify withdrawal amount (check one): / / $ .............. or / / ... % of the
current value of Class A shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
(A) I HEREBY AUTHORIZE PAYMENT BY CHECK (B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND
Draw checks payable (IF NECESSARY) DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES
(check one) MADE IN ERROR TO MY ACCOUNT.
Specify type of account (check one): / / checking / / savings
I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or
terminating this service.
/ / as indicated in Item 1. Name on your Account.................................................
/ / to the order of ................................. Bank #....................... Account #..............................
Mail to (check one)
Bank Address.........................................................
/ / the address indicated in Item 1.
Bank Address ........................................................
/ / Name (Please Print) .............................
Signature of Depositor ...................Date ......................
Signature of Owner .....................................
Signature of Depositor (if joint account)............................
Signature of Co-Owner (if any) ......................... NOTE: If Automatic Direct Deposit is elected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account
should accompany this Application.
</TABLE>
- --------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase ....... Class A shares or ......... Class B shares
(choose one) of Merrill Lynch Dragon Fund, Inc., subject to the terms set forth
below.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS DRAWN BY FINANCIAL DATA SERVICES, INC.
<S> <C>
You are hereby authorized to draw a check or an ACH debit
each month on my bank account for investment in Merrill To ............................................................. Bank
Lynch Dragon Fund, Inc., as indicated below: (Investor's Bank)
Amount of each check or ACH debit $ ................. Bank Address ........................................................
Account No. .......................................... City............... State......... Zip Code..........................
Please date and invest checks or draw ACH debits on the
20th of each month beginning.......................... As a convenience to me, I hereby request and authorize you to pay and
(Month) charge to my account checks or ACH debits drawn on my account by
or as soon thereafter as possible. and payable to Financial Data Services, Inc., Transfer Agency Mutual
I agree that you are preparing these checks or drawing Fund Operations, Jacksonville, Florida 32232-5289. I agree that your
these debits voluntarily at my request and that you shall rights in respect to each such check or debit shall be the same as if
not be liable for any loss arising from any delay in it were a check drawn on you and signed personally by me. This
preparing or failure to prepare any such check or debit. If authority is to remain in effect until revoked personally by me in
I change banks or desire to terminate or suspend this program, writing. Until you receive such notice, you shall be fully protected
I agree to notify you promptly in writing. in honoring any such check or debit. I further agree that if any
such check or debit be dishonored, whether with or without cause and
I further agree that if a check or debit is not honored whether intentionally or inadvertently, you shall be under no
upon presentation, Financial Data Services, Inc. is authorized liability.
to discontinue immediately the Automatic Investment Plan and
to liquidate sufficient shares held in my account to offset .......................... .......................................
the purchase made with the returned check or dishonored debit. Date Signature of Depositor
................. ................................. .......................... .......................................
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,
Signature of Depositor undersigned check marked "VOID" should accompany this Application.
(If joint account, both must sign)
--------------------------------------------------------------------------------
5. FOR DEALER ONLY We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as
Branch Office, Address, Stamp our agent in connection with transactions under this authorization
form and agree to notify the Distributor of any purchases made under
a Letter of Intention or Systematic Withdrawl Plan. We guarantee
the shareholder's signature.
....................................................................
Dealer Name and Address
By.................................................................
Authorized Signature of Dealer
This form when completed should be mailed to: ....................
Merrill Lynch Dragon Fund, Inc. Branch Code F/C No. F/C Last Name
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289 Dealer's Custommer A/C No.
</TABLE>
50
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY Prospectus
INFORMATION OR TO MAKE ANY REPRESENTATIONS,
OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER
CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE
MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFERING IN ANY
STATE IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
PAGE
----
Fee Table............................. 3
Prospectus Summary.................... 4
Alternative Sales Arrangements........ 6
Financial Highlights.................. 8 [Paste-up/Artwork]
Risk Factors and Special Considerations 9
Investment Objective and Policies..... 14
Management of the Fund................ 28 ----------------------
Board of Directors.................. 28
Management and Advisory Merrill Lynch
Arrangements..................... 28
Transfer Agency Services............ 30 Dragon Fund, Inc.
Purchase of Shares.................... 30
Alternative Sales Arrangements...... 31
Initial Sales Charge Alternative--
Class A Shares..................... 34
Deferred Sales Charge Alternative--
Class B Shares..................... 36
Redemption of Shares.................. 38
Redemption.......................... 39
Repurchase.......................... 39
Shareholder Services.................. 40
Performance Data...................... 42
Additional Information................ 43
Dividends and Distributions......... 43
Determination of Net Asset Value.... 44
Taxes............................... 45 April 28, 1994
Organization of the Fund............ 47
Shareholder Inquiries............... 48 Distributor:
Shareholder Reports................. 48 Merrill Lynch
Authorization Form.................. 49 Funds Distributor, Inc.
This prospectus should be
retained for future
Code # 16261 reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH DRAGON FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 -- PHONE (609) 282-2800
------------------------
Merrill Lynch Dragon Fund, Inc. (the "Fund") is a non-diversified, open-end
management investment company seeking long-term capital appreciation by
investing primarily in developing Asia-Pacific equity and debt securities. This
objective of the Fund reflects the belief that the emerging economies of the
developing Asia-Pacific countries present attractive investment opportunities.
The Fund may employ a variety of instruments and techniques to hedge against
market and currency risk, although suitable hedging investments may not be
available on a timely basis and on acceptable terms.
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus in both cases a
sales charge which, at the election of the purchaser, may be imposed (i) at the
time of purchase (the "Class A shares") or (ii) on a deferred basis (the "Class
B shares"). These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should understand that the purpose and function of the deferred sales
charges and ongoing account maintenance fee with respect to the Class B shares
are the same as those of the initial sales charge and the ongoing account
maintenance fee with respect to the Class A shares. Each Class A and Class B
share represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B shares bear the expenses of the account
maintenance and distribution fees and certain other costs resulting from the
deferred sales charge arrangement, and Class A shares bear the expenses of the
account maintenance fee. The two classes also have different exchange
privileges.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated April
28, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is April 28, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in developing Asia-Pacific equity and debt
securities. 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"), which
does business as Merrill Lynch Asset Management, will effect portfolio
transactions without regard to holding period, if, in its judgment, such
transactions are advisable in light of a change in circumstances of a particular
company or within a particular industry or due to general market, economic or
financial conditions. Accordingly, while the Fund anticipates that its annual
turnover rate should not exceed 100% under normal conditions, it is impossible
to predict portfolio turnover rates. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of U.S. Government securities and of
all other securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of securities in the portfolio during the
year. 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 Fund's portfolio
turnover rate for the fiscal period May 29, 1992 (commencement of operations) to
February 28, 1993, was 4.65%. The Fund's portfolio turnover rate for the fiscal
period March 1, 1993, to December 31, 1993, was 16.62%.
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 will 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 assets 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
2
<PAGE>
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.
Suitable hedging instruments may not be available with respect to developing
Asia-Pacific securities on a timely basis and on acceptable terms. The following
is further information relating to portfolio strategies involving options and
futures the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option 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 writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt 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 the
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 a put option if the aggregate value of the obligations
underlying the put shall exceed 50% of the Fund's net assets.
3
<PAGE>
Options referred to herein and in the Fund's Prospectus may be options
traded on foreign securities exchanges. An option position may be closed 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 Options Clearing Corporation (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 prices and terms negotiated
between the buyer and seller. The staff of the Securities and Exchange
Commission has taken the position that OTC options and the assets used as cover
for written OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. 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
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majority of transactions in futures contracts, however, do not result in the
actual delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin", are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Securities and Exchange Commission
exempting the Fund from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act of 1940, as amended (the "Investment Company Act"), in
connection with its strategy of investing in futures contracts. Section 17(f)
relates to the custody of securities and other assets of an investment company
and may be deemed to prohibit certain arrangements between the Fund and
commodities brokers with respect to initial and variation margin. Section 18(f)
of the Investment Company Act prohibits an open-end investment company such as
the Fund from issuing a "senior security" other than a borrowing from a bank.
The staff of the Securities and Exchange 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 may invest as a hedge against possible variations in the foreign
exchange rates among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in forward foreign
exchange. The Fund may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund will enter into such
transactions only to the extent, if any, deemed
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appropriate by the Manager. The Fund will not enter into a forward contract with
a term of more than one year. Investors should be aware that U.S. dollar
denominated securities may not be available in some or all developing
Asia-Pacific countries, that the forward currency market for the purchase of
U.S. dollars in most, if not all, developing Asia-Pacific countries is not
highly developed and that in certain developing Asia-Pacific countries no
forward market for foreign currencies currently exists or such market may be
closed to investment by the Fund.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund may use such techniques to hedge the stated value
in U.S. dollars of an investment in a Philippine peso denominated security. In
such circumstances, for example, the Fund may purchase a foreign currency put
option enabling it to sell a specified amount of Philippine pesos for dollars at
a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the Philippine pesos 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 Philippine
pesos 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 Philippine peso to the dollar. The Manager believes that "straddles" of the
type which may be utilized by the Fund constitute hedging transactions and are
consistent with the policies described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions involves the risk of imperfect correlation in movements
in the prices of options and futures and movements in the prices of the
securities or currencies which are the subject of the hedge. If the price of the
options and futures moves more or less than the prices of the hedged security or
currency, the Fund will experience a gain or loss which will not be completely
offset by movements in the prices 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.
Prior to exercise or expiration, an exchange-traded options 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 options or futures
transactions on an exchange only if there appears to be a liquid secondary
market for such options or
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futures. However, there can be no assurance that a liquid secondary market will
exist for any particular call or put option or futures contract at any specific
time. Thus, it may not be possible to close an option or futures position. The
Fund will acquire only over-the-counter 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),
unless a quotation from only one dealer is available, in which case only that
dealer's price will be used, or which can be sold at a formula price provided
for in the over-the-counter 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 currency or security
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or related option. The risk of loss from
investing in futures transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits,
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and positions 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 (the "Code"). See "Dividends,
Distributions and Taxes--Taxes". To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single issuer and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer, and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A fund which elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5% and
10% requirements with respect to 75% of its total assets. To the extent that the
Fund assumes large positions in the securities of a small number of issuers, the
Fund's net asset value may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers, and the Fund may be more susceptible to any
single economic, political or regulatory occurrence than a diversified company.
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When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the amount of its commitment
in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement the Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.50% 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 presently 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% (which
presently is further limited by state law to 10%) of its assets taken at the
time of acquisition of such commitment or security. The Fund will at all times
maintain a segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt 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 security 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 agreement and the related
commitment fee will be recorded on the date which the security can reasonably be
expected to be issued, and the value of the security will thereafter be
reflected in the calculation of the Fund's net asset value. The cost basis of
the security will be adjusted by the amount of the commitment fee. In the event
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities. Purchase and
sale contracts may be entered into only with financial institutions which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million. Under such agreements, the other party
agrees, upon entering into the
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contract with the Fund, to repurchase the security at a mutually agreed upon
time and price in a specified currency, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period although it may be affected by currency
fluctuations. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short periods,
often less than one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right to
seek additional collateral in the case of purchase and sale contracts. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
constitute only collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. A purchase and sale
contract differs from a repurchase agreement in that the contract arrangements
stipulate that the securities are owned by the Fund. In the event of a default
under such a repurchase agreement or under a purchase and sale contract, instead
of the contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market values 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
resulting from market fluctuations following the failure of the seller to
perform. The Fund may not invest more than 15% (which presently is further
limited to 10% by applicable state law) of its net assets in repurchase
agreements or purchase and sale contracts maturing in more than seven days.
While the substance of purchase and sale contracts is similar to repurchase
agreements, because of the different treatment with respect to accrued interest
and additional collateral, management believes that purchase and sale contracts
are not repurchase agreements as such term is understood in the banking and
brokerage community.
Lending of Portfolio Securities. Subject to investment restriction (8)
below, the Fund may lend securities from its portfolio to approved borrowers and
receive collateral therefor in cash or securities issued or guaranteed by the
U.S. Government which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The purpose of such
loans is to permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral is received by
the Fund, it is invested in short-term money market securities, and a portion of
the yield received in respect of such investment is retained by the Fund.
Alternatively, if securities are delivered to the Fund as collateral, the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for lending its portfolio securities. In either event, the total yield on
the Fund's portfolio is increased by loans of its portfolio securities. The Fund
will have the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time, and the borrower, after notice, will be required to return borrowed
securities within five business days. The Fund may pay reasonable finder's,
administrative and custodial fees in connection with such loans. With respect to
the lending of portfolio securities, there is the risk of failure by the
borrower to return the securities involved in such transactions.
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INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities).
2. Make investments for the purpose of exercising control or
management. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making
of investments for the purpose of exercising control of management.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase of securities of investment companies and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, or (iii)
10% of Fund's assets, taken at market value, would be invested in such
securities. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed an
investment in other investment companies.
4. Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may invest in securities secured by
real estate or interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or interests therein.
5. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. The payment by the Fund of initial or
variation margin in connection with futures or related options
transactions, if applicable, shall not be considered the purchase of a
security on margin.
6. Make short sales of securities or maintain a short position.
7. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, or participations therein, short-term commercial paper,
certificates of deposit, bankers' acceptances and repurchase agreements and
purchase and sale contracts shall not be deemed to be the making of a loan,
and except further that the Fund may lend its portfolio securities as set
forth in (8) below.
8. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loans may only be made in
accordance with the guidelines set forth above.
9. Issue senior securities, borrow money or pledge its assets in
excess of 33 1/3% of its total assets taken at market value (including the
amount borrowed) and then only from a bank as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions. Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only as a temporary
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measure for extraordinary or emergency purposes, including to meet
redemptions or to settle securities transactions which may otherwise
require untimely dispositions of Fund securities. The Fund will not
purchase securities while borrowings exceed 5% of total assets except (a)
to honor prior commitments or (b) to exercise subscription rights where
outstanding borrowings have been obtained, exclusively for settlements of
other securities transactions. (For the purpose of this restriction,
collateral arrangements with respect to the writing of options, and, if
applicable, futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to
be a pledge of assets and neither such arrangements nor the purchase or
sale of futures or related options are deemed to be the issuance of a
senior security.)
10. Invest in securities which (i) are subject to material legal
restrictions on repatriation of assets or (ii) cannot be readily resold
because of legal or contractual restrictions or which are otherwise not
readily marketable, including repurchase agreements and purchase and sale
contracts maturing in more than seven days, if at the time of acquisition
more than 15% of its net assets would be invested in such securities. While
the Fund will not purchase illiquid securities and assets subject to
material legal restrictions on repatriation in an amount exceeding 15% of
its net assets, the Fund may purchase, without regard to that limitation,
securities that are not registered under the Securities Act of 1933 (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.
11. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter in selling portfolio securities.
12. Purchase or sell interests (including leases) in oil, gas or other
mineral exploration or development programs, except that the Fund may
invest in securities issued by companies that engage in oil, gas or other
mineral exploration or development activities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors, provide that the Fund may not:
(i) Invest in warrants if at the time of acquisition its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York or American Stock Exchange. For purposes of this restriction,
warrants acquired by the Fund in units or attached to securities may be
deemed to be without value.
(ii) Purchase or sell commodities or commodity contracts, except that
the Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest and purchase and sell stock
index and currency options, stock index futures, financial futures and
currency futures contracts and related options on such futures.
(iii) Invest in securities of corporate issuers having a record,
together with predecessors, of less than three years of continuous
operation, if more than 5% of its total assets, taken at market value,
would be invested in such securities.
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(iv) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent described in the Fund's
Prospectus and in this Statement of Additional Information, as amended from
time to time.
(v) Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Manager, the directors of such general partner or any
subsidiary thereof each owning beneficially more than 1/2 of 1% of the
securities of such issuer own in the aggregate more than 5% of the
securities of such issuer.
(vi) Invest more than 10% of its net assets in securities of real
estate investment trusts.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased over-the-counter options ("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% (presently, further
limited to 10% by the law of certain states) of the net assets of the Fund,
taken at market value, together with all other assets of the Fund which are
illiquid or are otherwise not readily marketable. However, if 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 equal to the repurchase price less the amount by which the
option is "in-the-money" (i.e., current market value of the underlying
securities minus the option's strike price). The repurchase price with the
primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Directors of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or modify
this policy prior to the change or modification by the Commission staff of its
position.
In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the Fund
will, for purposes of investment restriction (1), treat securities issued or
guaranteed by the government of any one foreign country as the obligations of a
single issuer.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage". Without such an exemptive order, the
Fund would be prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal and from purchasing securities in
public offerings which are not registered under the Securities Act of 1933, as
amended, in which such firms or any of their affiliates participate as an
underwriter or dealer.
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MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is Box 9011,
Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Director(1)(2)-- President of the Manager and
its predecessor since 1977 and Chief Investment Officer since 1976; President of
Fund Asset Management, L.P. ("FAM") since 1977 and Chief Investment Officer
since 1976; President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; Executive Vice President of Merrill Lynch since 1990 and
a Senior Vice President thereof from 1985 to 1990; Executive Vice President of
Merrill Lynch & Co., Inc. since 1990; Director of the Distributor.
DONALD CECIL--Director(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982; Member of Institute of Chartered Financial Analysts; Member and
Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER--Director(2)--777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Excecutive Officer since
1970 and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan Allen
Interiors Inc., and Harman International Industries, Inc.
CHARLES C. REILLY--Director(2)--9 Hampton Harbor Road, Hampton Bays, N.Y.
11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association.
RICHARD R. WEST--Director(2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance since 1984, and Dean from 1984 to 1993, of New York
University Leonard N. Stern School of Business Administration; Director of Bowne
& Co., Inc. (financial printers), Vornado, Inc. (real estate holding company),
Smith-Corona Corporation (manufacturer of typewriters and word processors) and
Alexander's Inc.
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President of
the Manager and FAM and their predecessors since 1983; Executive Vice President
and Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
NORMAN R. HARVEY--Senior Vice President(1)(2)--Senior Vice President of the
Manager and FAM and their predecessors since 1982; Senior Vice President of
Princeton Services since 1993.
KARA W.Y. TAN BHALA--Vice President(1)--Portfolio manager with the Manager
and its predecessor since 1992; Vice President of James Capel Inc. from 1988 to
1990; Senior Investment Analyst of James Capel (Far East) Ltd. from 1986-1988.
DONALD C. BURKE--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager and its predecessor since 1990; employee of Deloitte &
Touche from 1982 to 1990.
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GERALD M. RICHARD--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and FAM and their predecessors since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer since 1984.
MICHAEL J. HENNEWINKEL--Secretary(1)(2)--Vice President of the Manager and
its predecessor since 1985 and attorney associated with the Manager and FAM and
their predecessors since 1982.
- ---------------
(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.
At April 15, 1994, the Directors and officers of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund owned less than 1% of the outstanding shares of common stock of
Merrill Lynch & Co., Inc.
The Fund pays each Director not affiliated with the Manager a fee of $3,500
per year plus $500 per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit Committee, which consists of all of the non-
affiliated Directors, at a rate of $500 per meeting attended. The Chairman of
the Audit Committee receives an additional fee of $250 per meeting. Fees and
expenses paid to the unaffiliated Directors aggregated $26,942 for the fiscal
period May 29, 1992 (commencement of operations) to February 28, 1993, and
$26,703 for the fiscal period March 1, 1993, to December 31, 1993.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. 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 period May 29,
1992 (commencement of operations) to February 28, 1993, the total management
fees paid by the Fund to the Manager aggregated $2,516,278. For the fiscal
period March 1, 1993, to
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<PAGE>
December 31, 1993, the total management fees paid by the Fund to the Manager
aggregated $5,988,153.
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual expense
limitations require that the Manager reimburse the Fund in any amount necessary
to prevent the aggregate ordinary operating expenses (excluding taxes, brokerage
fees and commissions, distribution fees and extraordinary charges such as
litigation costs) from exceeding in any fiscal year 2.5% of the Fund's first $30
million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. Such reimbursement, if any,
will be subtracted from the monthly management fee. No fee payment will be made
to the Manager during any fiscal year which will cause such expenses to exceed
the expense limitations at the time of such payment.
The Fund has received an order from the State of California partially
waiving the expense limitations described above. Pursuant to the terms of such
order, the expense limitations that would otherwise apply are waived to the
extent the Fund's expense for custodial services, management and auditing fees
exceeds the average of such fees of a group of funds managed by the Manager or
its subsidiary which primarily invest domestically. Since the Fund's
commencement of operations, no reimbursement of expenses has been required
pursuant to the applicable expense limitation provisions discussed above.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of the Manager or any of
its affiliates. The Fund pays all other expenses incurred in its operation,
including, among other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the custodian, any sub-custodian and transfer
agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Manager, and the Fund reimburses the Manager for its costs in connection
with such services on a semi-annual basis. For the Fund's fiscal periods May 29,
1992 (commencement of operations) to February 28, 1993, and March 1, 1993, to
December 31, 1993, the amount of such reimbursement was $58,639 and $78,380,
respectively. The Distributor will pay certain promotional expenses of the Fund
incurred in connection with the offering of its shares. Certain expenses 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--Alternative
Sales Arrangements--Distribution Plans".
Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc. and
Princeton Services, Inc. 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.
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<PAGE>
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contracts are 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.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares. Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that (i)
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such sales
arrangements, and the expenses paid by the account maintenance fee and (ii) that
the Class A shares bear the expenses of the ongoing account maintenance fee, and
(iii) each class has exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the account maintenance and distribution
fees, in the case of the Class B shares, and the account maintenance fee, in the
case of the Class A shares, is paid. The two classes also have different
exchange privileges. See "Shareholder Services--Exchange Privilege".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offerings of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of Class A and Class B shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement described
above.
Distribution Plans. Reference is made to "Purchase of Shares--Alternative
Sales Arrangements--Distribution Plans" in the Prospectus for certain
information with respect to the distribution plans of the Fund (the
"Distribution Plans").
The payment of the account maintenance fee and distribution fee with
respect to Class B shares and the account maintenance fee with respect to Class
A shares is subject to the provisions of Rule 12b-1 under the Investment Company
Act. See "General Information--Description of Shares". 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
and/or distribution fees paid to the Distributor. In their consideration of the
Distribution Plans, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plans to the Fund
and its shareholders. Each Distribution Plan further provides that, so long as
such Distribution Plan remains in effect, the selection and nomination of
Directors who are not "interested
16
<PAGE>
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 respective
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 Class A or Class B voting
securities of the Fund voting separately by Class. Neither Distribution Plan can
be amended to increase materially the amount to be spent by the Fund without
approval by the related class of shareholders, and all material amendments are
required to be approved by the vote of Directors, including a majority of the
Independent Directors who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of the Distribution Plans
and any reports made pursuant to such plans for a period of not less than six
years from the date of the Distribution Plans or such reports, the first two
years in an easily accessible place.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
During the fiscal period May 29, 1992 (commencement of operations) to
February 28, 1993, the Fund sold 10,664,260 Class A shares for aggregate net
proceeds to the Fund of $107,804,104. The gross sales charges for the sale of
Class A shares of the Fund for that period were $2,992,104, of which $48,308 and
$2,943,796 were received by the Distributor and Merrill Lynch, respectively.
During the fiscal period March 1, 1993, to December 31, 1993, the Fund sold
7,846,115 Class A shares for aggregate net proceeds to the Fund of $114,904,877.
The gross sales charges for the sale of Class A shares of the Fund for that
period were $2,948,376, of which $183,544 and $2,764,832 were received by the
Distributor and Merrill Lynch, respectively.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A shares of the
Fund refers to a single purchase by an individual, or to concurrent purchases,
which in the aggregate are at least equal to the prescribed amounts, by an
individual, his spouse and their children under the age of 21 years purchasing
shares for his or their own account and to single purchases by a trustee or
other fiduciary purchasing shares for a single trust estate or single fiduciary
account (including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Internal Revenue
Code of 1986, as amended (the "Code")) although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company", as that
term is defined in the Investment Company Act, but does not include purchases by
any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount. The term "purchase" shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. The term "purchase" also
includes purchases by employee benefit plans not qualified under Section 401 of
the Code, including purchases by employees or by employers on behalf of
employees, by means of a payroll deduction plan or otherwise, of shares of the
Fund. Purchases by such a company or non-qualified employee benefit plan will
qualify for the quantity discounts discussed above 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
17
<PAGE>
individual investors or employees and forwarding investments by such persons to
the Fund and by any such employer or plan bearing the expense of any payroll
deduction plan.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
Class A shares of the Fund at the offering price applicable to the total of (a)
the dollar amount then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the purchaser's
combined holdings of the Class A and Class B shares of the Fund and of any other
investment company with a sales charge for which the Distributor acts as the
distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or the
purchaser's securities dealer, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time.
Letter of Intention. The reduced sales charges are applicable to a purchase
aggregating $10,000 or more of Class A shares of the Fund or any other
investment company with a sales charge or deferred sales charges for which the
Distributor acts as the distributor made within a thirteen-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
in the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A shares, 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 executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class A shares of the Fund and of other investment
companies with a sales charge for which the Distributor acts as the distributor
presently held at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward completion of such Letter but the reduced sales charge applicable
to the amount covered by such Letter will be applicable only to new purchases.
If the total amount of shares purchased does not equal the amount stated in the
Letter of Intention (minimum of $10,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class A
shares equal to five percent of the intended amount will be held in escrow
during the thirteen-month period (while 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
shares then being purchased under such Letter, but there will be no retroactive
reduction of the sales charges on any previous purchase. The value of any shares
redeemed or otherwise disposed of by the purchaser prior to termination or
completion of the Letter of Intention will be deducted from the total purchases
made under such Letter. An exchange from Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch Ready Assets Trust, Merrill Lynch
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<PAGE>
Retirement Reserves Money Fund or Merrill Lynch U.S.A. Government Reserves into
the Fund that creates a sales charge will count toward completing a new or
existing Letter of Intention from the Fund.
Employer Sponsored Retirement and Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
plans within the meaning of Sections 403(b) and 457 of the Code, other deferred
compensation arrangements, VEBA plans, and non-qualified After Tax Savings and
Investment programs, maintained on the Merrill Lynch Group Employee Services
system, herein referred to as "Employer Sponsored Retirement or Savings Plans",
provided the plan has $5 million or more in existing plan assets initially
invested in portfolios, mutual funds or trusts advised by the Manager either
directly or through an affiliate. Class A shares are being offered at net
asset value to Employer Sponsored Retirement or Savings Plans, provided the plan
has accumulated $5 million or more in existing plan assets invested in mutual
funds advised by the Manager charging a front-end sales charge or contingent
deferred sales charge. Assets of Employer Sponsored Retirement or Savings Plans
sponsored by the same sponsor or an affiliated sponsor may be aggregated. The
Class A share reduced load breakpoints also apply to these aggregated assets.
Class A shares may be offered at net asset value to multiple plans sponsored by
the same sponsor or an affiliated sponsor provided that the addition of one or
more of the multiple plans results in aggregate assets of $5 million or more
invested in portfolios, mutual funds or trusts advised by the Manager either
directly or through an affiliate. Employer Sponsored Retirement or Savings Plans
are also offered Class A shares at net asset value, provided such plan initially
has 1,000 or more employees eligible to participate in the plan. Employees
eligible to participate in an Employer Sponsored Retirement or Savings Plan of
the same sponsoring employer or its affiliates may be aggregated. Any Employer
Sponsored Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares at net asset value has the option of
purchasing Class A shares at the sales charge schedule disclosed in the
Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the contingent deferred sales charge
upon redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored Retirement
or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and any trust, pension, profit-sharing or other benefit
plan for such persons may purchase Class A shares of the Fund at net asset
value.
Class A shares of the Fund are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. (formerly known as Merrill
Lynch Prime Fund, Inc.) who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of Merrill Lynch Senior Floating Rate
Fund, Inc. in shares of the Fund. In order to exercise this investment option,
Merrill Lynch Senior Floating Rate Fund, Inc. shareholders must sell their
Merrill Lynch Senior Floating Rate Fund, Inc. shares to the Merrill Lynch Senior
Floating Rate Fund, Inc. in connection with a tender offer conducted by the
Merrill Lynch Senior Floating Rate Fund, Inc. and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Merrill Lynch Senior Floating Rate Fund, Inc. shares as to
which no Early Withdrawal Charge (as defined in the Merrill Lynch Senior
Floating Rate Fund, Inc. prospectus) is applicable. Purchase orders from Merrill
Lynch Senior Floating Rate Fund, Inc. shareholders wishing to exercise this
investment option will be accepted
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<PAGE>
only on the day that the related Merrill Lynch Senior Floating Rate Fund, Inc.
tender offer terminates and will be effected at the net asset value of the Fund
at such day.
Class A shares of the Fund are offered at net asset value to shareholders
of certain closed-end funds advised by the Manager or FAM who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund. In order to exercise this investment option, closed-end fund
shareholders must (i) sell their closed-end fund shares through Merrill Lynch
and reinvest the proceeds immediately in the Fund, (ii) have acquired the shares
in the closed-end fund's initial public offering or through reinvestment of
dividends earned on shares purchased in such offering, (iii) have maintained
their closed-end fund shares continuously in a Merrill Lynch account, and (iv)
purchase a minimum $250 worth of Fund shares.
Class A shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales charge
either at the time of purchase or on a deferred basis; second, such redemption
must have been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption must have been maintained in the interim in cash or
a money market fund.
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; however, such purchases may be subject to a contingent deferred
sales charge of up to 1% of the dollar amount of the purchase if the shares are
redeemed within one year after purchase.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares of the Fund may be reduced to the net asset value per Class A
share in connection with the acquisition of the assets of or merger or
consolidation with a public or private investment company. The value of the
assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
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 only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange is closed (other than customary weekend and holiday
closings) for any period during which an emergency exists, as defined by the
Securities and Exchange Commission, as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of the Fund.
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<PAGE>
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative-- Class B Shares", while Class B shares redeemed within four
years of purchase are subject to a contingent deferred sales charge under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a 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 any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the redemption
is requested within one year of the death or initial determination of
disability. For the fiscal periods May 29, 1992 (commencement of operations) to
February 28, 1993, and March 1, 1993, to December 31, 1993, the Distributor
received contingent deferred sales charges of $236,960 and $807,253,
respectively, all of which was paid to Merrill Lynch.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A shares at net asset value has the option of
purchasing Class A shares at the sales charge schedule disclosed in the
Prospectus, or if the Retirement Plan meets the following requirements, then it
may purchase Class B shares with a waiver of the contingent deferred sales
charge upon redemption. The contingent deferred sales charge is waived for any
Eligible 401(k) Plan redeeming Class B shares. The contingent deferred sales
charge is also waived for redemptions from a 401(a) plan qualified under the
Code, provided, however, that such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing Class B shares of a mutual fund
advised by the Manager or FAM ("Eligible 401(a) Plan"). The contingent deferred
sales charge is waived for any Class B shares which are purchased by an Eligible
401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices--Portfolio Transactions" in the Prospectus.
Subject to policies established by the Board of Directors of the Fund, the
Manager seeks to obtain the best net results for the Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
Subject to obtaining the best price and execution, brokers who provide
supplemental investment research to the Manager may receive orders for
transactions by the Fund. Information so received will be in addition to and not
in lieu of the services required to be performed by the Manager under the
Management Agreement, and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information. It is
possible that certain of the supplementary investment research so received will
primarily benefit one or more other investment companies or other accounts for
which investment
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<PAGE>
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other accounts or investment companies.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States generally will
be conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with such persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Commission. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principal for their own accounts,
affiliated persons of the Fund, including Merrill Lynch and any of its
affiliates, will not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis provided that, among other things, the
fee or commission received by such affiliated broker is reasonable and fair
compared to the fee or commission received by such non-affiliated brokers in
connection with comparable transactions. However, affiliated persons of the Fund
may serve as its broker in listed or over-the-counter transactions conducted on
an agency basis provided that, among other things, the fee or commission
received by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions.
For the fiscal period March 1, 1993, to December 31, 1993, the Fund paid
total brokerage commissions of $3,002,855, of which $75,638, or 2.5%, was paid
to Merrill Lynch for effecting 2.1% of the aggregate amount of transactions on
which the Fund paid brokerage commissions. For the fiscal period May 29, 1992
(commencement of operations) to February 28, 1993, the Fund paid total brokerage
commissions of $2,540,047, of which $77,206, or 3.0%, was paid to Merrill Lynch
for effecting 3.7% of the aggregate amount of transactions on which the Fund
paid brokerage commissions.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement disclosing the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the
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<PAGE>
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund.
The Directors have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the advisory fee paid by the Fund. After considering all
factors deemed relevant, the Directors made a determination not to seek such
recapture. The Directors will reconsider this matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 4:15 p.m., New York time, on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is not open on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. Net asset value is computed by dividing the value of
the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time. Expenses, including the fees payable to the Manager and the Distributor,
are accrued daily. The net asset value per share of the Class A and Class B
shares is expected to be equivalent. Under certain circumstances, however, the
per share net asset value of the Class B shares may be lower than the per share
net asset value of the Class A shares reflecting the higher daily expense
accruals of the distribution and higher transfer agency fees applicable with
respect to the Class B shares. Even under those circumstances, the per share net
asset value of the two classes eventually will tend to converge immediately
after the payment of dividends, which will differ by approximately the amount of
the expense accrual differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price on the principal market on which such securities are traded, as
of the close of business on the day the securities are being valued or, lacking
any sales, at the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid prices obtained from one or
more dealers in the over-the-counter market prior to the time of valuation.
Portfolio securities which are traded both in the over-the-counter market and on
a stock exchange are valued according to the broadest and most representative
market. When the Fund writes a call option, the amount of the premium received
is recorded on the books of the Fund as an asset and an equivalent liability.
The amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last asked price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the average of the last asked price as obtained from
one or more dealers. Options purchased by the Fund are valued at their last bid
price in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the average of the last bid price as obtained
from two or more dealers unless a quotation from only one dealer is available,
in which case only that dealer's price will be used. Other investments,
including futures contracts and related options, are stated at market value.
23
<PAGE>
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. Such valuation 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 and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive quarterly statements from the transfer
agent. These quarterly statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The quarterly statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at any
time by mailing a check directly to the transfer agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B shares at the applicable public offering price
either through the shareholders's securities dealer or by mail directly to the
transfer agent, acting as agent for such securities dealer. Voluntary
accumulation can also be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. An investor whose shares of the Fund are held within a CMA(R)
account may arrange to have periodic investments made in the Fund in amounts of
$250 or more through the CMA Automatic Investment Program. The Automatic
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch other than a CMA(R) account.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund, without
sales charge, as of the close of business on the ex-dividend date of the
dividend or distribution. Shareholders may elect in writing to receive either
their dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed 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
24
<PAGE>
Fund or vice versa, and commencing ten days after receipt by the transfer agent
of such notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make withdrawals from an Investment
Account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired Class A shares of
the Fund having a value, based on cost or the current offering price, of $5,000
or more and monthly withdrawals for shareholders with Class A shares with such a
value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the close of
business of the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A shares will be
redeemed at the close of business 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
Class A shares in the Investment Account are reinvested automatically in Fund
Class A shares. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the transfer
agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for Class A shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption Program.
The minimum fixed dollar amount redeemable is $25. The proceeds of systematic
redemptions will be posted to the shareholder's account five business days after
the date the shares are redeemed. Monthly systematic redemptions will be made at
net asset value on the first Monday of each month, bimonthly systematic
redemptions will be made at net asset value on the first Monday of every other
month, and quarterly, semiannual or annual redemptions are made at net asset
value on the first Monday of months selected at the shareholders' option. If the
first Monday of the month is a holiday, the redemption will be processed at net
asset value on the next business day. The Systematic Redemption Program is not
available if Fund shares are being purchased within the account pursuant to the
Automatic Investment Program. For more information on the Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
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<PAGE>
EXCHANGE PRIVILEGE
U.S. Class A and Class B shareholders of the Fund may exchange their Class
A or Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc.,
Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch California Limited Maturity Municipal
Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill Lynch Capital
Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Corporate
Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc. (shares of
which are deemed Class A shares for purposes of the exchange privilege), Merrill
Lynch EuroFund, Merrill Lynch Federal Securities Trust, Merrill Lynch Florida
Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund
for Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Holdings (residents of Arizona must meet investor
suitability standards), Merrill Lynch Global Resources Trust, Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of Wisconsin must
meet investor suitability standards), Merrill Lynch International Equity Fund,
Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund,
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch
Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal Intermediate
Term Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund,
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New York Limited
Maturity Municipal Bond Fund, Merrill Lynch New York Municipal Bond Fund,
Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal
Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund, Merrill
Lynch Pennsylvania Municipal Bond Fund, Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Merrill Lynch Special Value Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch Texas Municipal Bond Fund, Merrill Lynch Utility Income
Fund, Inc., and Merrill Lynch World Income Fund, Inc. on the basis described
below. In addition, Class A shareholders of the Fund may exchange their Class A
shares for shares of Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
U.S. Treasury Money Fund and Merrill Lynch Ready Assets Trust (or Merrill Lynch
Retirement Reserves Money Fund if the exchange occurs within certain retirement
plans) (together, the "Class A money market funds"), and Class B shareholders of
the Fund may exchange their Class B shares for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Treasury Fund
and Merrill Lynch Institutional Tax-Exempt Fund (together, the "Class B money
market funds") on the basis described below. Shares with a net asset value of at
least $250 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for at least 15
days. It is contemplated that the exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor. Certain
funds into which exchanges may be made may impose a redemption fee (not in
excess of 2.00% of the amount redeemed) on shares purchased through the
26
<PAGE>
exchange privilege when such shares are subsequently redeemed, including
redemption through subsequent exchanges. Such redemption fee would be in
addition to any contingent deferred sales charge otherwise applicable to a
redemption of Class B shares.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on the outstanding
Class A shares and the sales charge payable at the time of the exchange on the
new Class A shares. With respect to outstanding Class A shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A
shares in the initial purchase and any subsequent exchange. Class A shares
issued pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A shares. For purposes of the exchange privilege, Class
A shares acquired through dividend reinvestment shall be deemed to have been
sold with a sales charge equal to the sales charge previously paid on the Class
A shares on which the dividend was paid. Based on this formula, Class A shares
of the Fund generally may be exchanged into the Class A shares of the other
funds or into shares of the Class A money market funds with a reduced or without
a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding shares. Class B shareholders of the Fund exercising the exchange
privilege will continue to be subject to the Fund's contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the new Class B shares acquired through the use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's contingent deferred
sales charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the sales charge that may be payable on a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Global Resources Trust (formerly Merrill Lynch Natural Resources
Trust) after having held the Fund's Class B shares for two and a half years. The
2% sales charge that generally would apply to a redemption would not apply to
the exchange. Three years later the investor may decide to redeem the Class B
shares of Merrill Lynch Global Resources Trust and receive cash. There will be
no contingent deferred sales charge due on this redemption, since by "tacking"
the two and a half year holding period of the Fund's Class B shares to the three
year holding period for the Merrill Lynch Global Resources Trust Class B shares,
the investor will be deemed to have held the new Class B shares for more than
five years.
Shareholders also may exchange Class A shares and Class B shares from any
of the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales charge. However, shares of a Class B money market fund which were acquired
as a result of an exchange for
27
<PAGE>
Class B shares of a fund may, in turn, be exchanged back into Class B shares of
any fund offering such shares, in which event the holding period for Class B
shares of the fund will be aggregated with previous holding periods for purposes
of reducing the contingent deferred sales charges. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund after having held the Fund Class B shares for two and a half
years and three years later decide to redeem the shares of Merrill Lynch
Institutional Fund for cash. At the time of this redemption, the 2% contingent
deferred sales charge that would have been due had the Class B shares of the
Fund been redeemed for cash rather than exchanged for shares of Merrill Lynch
Institutional Fund will be payable. If instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund (which imposes a
contingent deferred sales charge on redemptions made within four years of
purchase) and which the shareholder continues to hold for an additional three
and a half years, any subsequent redemption will not incur a contingent deferred
sales charge.
Below is a description of the investment objectives of the other funds into
which exchanges can be made:
<TABLE>
<S> <C>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. .... High current income consistent with a policy of limiting
the degree of fluctuation in net asset value by
investing primarily in a portfolio of adjustable rate
securities, consisting principally of mortgage-backed
and asset-backed securities.
MERRILL LYNCH AMERICAS INCOME
FUND, INC............................................. A high level of current income, consistent with prudent
investment risk, by investing primarily in debt
securities denominated in a currency of a country
located in the Western Hemisphere (i.e., North and
South America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND
FUND.................................................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and Arizona income taxes as is
consistent with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Arizona Municipal
Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND............... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide investors with as high a level of income
exempt from Federal and Arizona income taxes as is
consistent with prudent investment management.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND RETIREMENT......................... As high a level of total investment return as is
consistent with reasonable risk by investing in common
stocks and other types of securities, including fixed
income securities and convertible securities.
MERRILL LYNCH BASIC VALUE FUND, INC. ................... Capital appreciation and, secondarily, income through
investment in securities, primarily equities, that are
undervalued and therefore represent basic investment
value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND................................... A portfolio of Merrill Lynch California Municipal Series
Trust, a series fund, whose objective is to provide
shareholders with as high a level of income exempt
from Federal and California income taxes as is
consistent with prudent investment management through
investment in a portfolio consisting primarily of
insured California Municipal Bonds.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND.......................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide shareholders with as high a
level of income exempt from Federal and California
income taxes as is consistent with prudent investment
management through investment in a portfolio primarily
of intermediate-term investment grade California
Municipal Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND............ A portfolio of Merrill Lynch California Municipal Series
Trust, a series fund, whose objective is to provide
investors with as high a level of income exempt from
Federal and California income taxes as is consistent
with prudent investment management.
MERRILL LYNCH CAPITAL FUND, INC. ....................... The highest total investment return consistent with
prudent risk through a fully managed investment policy
utilizing equity, debt and convertible securities.
MERRILL LYNCH COLORADO MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Colorado income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CORPORATE BOND FUND,
INC. ................................................. Current income from three separate diversified
portfolios of fixed income securities.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC. ................................... Long-term appreciation through investments in
securities, principally equities, of issuers in
countries having smaller capital markets.
MERRILL LYNCH EUROFUND.................................. Capital appreciation primarily through investment in
equity securities of corporations domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES TRUST.................. High current return through investments in U.S.
Government and Government agency securities, including
GNMA mortgage-backed certificates and other
mortgage-backed Government securities.
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND
FUND.................................................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt from
Federal income taxes as is consistent with prudent
investment management while serving to offer
shareholders the opportunity to own securities exempt
from Florida intangible personal property taxes
through investment in a portfolio primarily of
intermediate-term investment grade Florida Municipal
Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL BOND FUND............... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal income
taxes as is consistent with prudent investment
management while seeking to offer shareholders the
opportunity to own securities exempt from Florida
intangible personal property taxes.
MERRILL LYNCH FUND FOR TOMORROW, INC. .................. Long-term growth through investment in a portfolio of
good quality securities, primarily common stock,
potentially positioned to benefit from demographic and
cultural changes as they affect consumer markets.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. ............ Long-term growth through investment in a diversified
portfolio of equity securities placing particular
emphasis on companies that have exhibited
above-average growth rates in earnings.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. ............. High total return consistent with prudent risk, through
a fully managed investment policy utilizing United
States and foreign equity, debt and money market
securities, the combination of which will be varied
from time to time both with respect to the types of
securities and markets in response to changing market
and economic trends.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND
RETIREMENT.............................................. High total investment return from investment in a global
portfolio of debt instruments denominated in various
currencies and multi-national currency units.
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. ............ High total return from investment primarily in an
internationally diversified portfolio of convertible
debt securities, convertible preferred stock and
"synthetic" convertible securities consisting of a
combination of debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS (residents of Arizona must
meet investor suitability standards).................. The highest total investment return consistent with
prudent risk through worldwide investment in an
internationally diversified portfolio of securities.
MERRILL LYNCH GLOBAL RESOURCES TRUST.................... Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural resource
assets.
MERRILL LYNCH GLOBAL UTILITY FUND,
INC. ................................................. Capital appreciation and current income through
investment of at least 65% of its total assets in
equity and debt securities issued by domestic and
foreign companies which are primarily engaged in the
ownership or operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH GOVERNMENT FUND........................... A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and security
of principal from investment in securities issued or
guaranteed by the U.S. Government, its agencies and
instrumentalities and in repurchase agreements secured
by such obligations.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT............................. Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes to be
undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC. (residents of
Wisconsin must meet investor suitability standards)... Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in healthcare.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH INSTITUTIONAL FUND........................ A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
maximum current income consistent with liquidity and
the maintenance of a high-quality portfolio of money
market securities.
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT FUND............. A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income exempt from Federal income taxes,
preservation of capital and liquidity available from
investing in a diversified portfolio of short-term,
high-quality municipal bonds.
MERRILL LYNCH INTERNATIONAL EQUITY
FUND.................................................. Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other than
the United States.
MERRILL LYNCH LATIN AMERICA FUND, INC................... Capital appreciation by investing primarily in Latin
American equity and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Maryland income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL
BOND FUND............................................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt from
Federal and Massachusetts income taxes as is
consistent with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Massachusetts
Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Massachusetts income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND
FUND.................................................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt from
Federal and Michigan income taxes as is consistent
with prudent investment management through investment
in a portfolio primarily of intermediate-term
investment grade Michigan Municipal Bonds.
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Michigan income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Minnesota income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC. ................................................. Tax-exempt income from three separate diversified
portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND.......... Currently the only portfolio of Merrill Lynch Municipal
Series Trust, a series fund, whose objective is to
provide as high a level as possible of income exempt
from Federal income taxes by investing in investment
grade obligations with a dollar weighted average
maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND.......................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt from
Federal and New Jersey income taxes as is consistent
with prudent investment management through a portfolio
primarily of intermediate-term investment grade New
Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL BOND FUND............ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and New
Jersey income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND.......................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt from
Federal, New York State and New York City income taxes
as is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade New York Municipal
Bonds.
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal, New York
State and New York City income taxes as is consistent
with prudent investment management.
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND........ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and North
Carolina income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO MUNICIPAL BOND
FUND.................................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and Ohio
income taxes as is consistent with prudent investment
management.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and Oregon
income taxes as is consistent with prudent investment
management.
MERRILL LYNCH PACIFIC FUND, INC. ....................... Capital appreciation by investing in equity securities
of corporations domiciled in Far Eastern and Western
Pacific countries, including Japan, Australia, Hong
Kong and Singapore.
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL
BOND FUND............................................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and Pennsylvania income taxes as
is consistent with prudent investment management
through investment in a portfolio of intermediate-term
investment grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL BOND FUND.......... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Pennsylvania income taxes as is consistent with
prudent management.
MERRILL LYNCH PHOENIX FUND, INC. ....................... Long-term growth of capital by investing in equity and
fixed income securities, including tax-exempt
securities, of issuers in weak financial condition or
experiencing poor operating results believed to be
undervalued relative to the current or prospective
condition of such issuer.
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH READY ASSETS TRUST........................ Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing
objectives from the short-term money market securities
in which the Trust invests.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND (available
only if the exchange occurs within certain retirement
plans).................................................. Currently the only portfolio of Merrill Lynch Retirement
Series Trust, a series fund, whose objectives are
current income, preservation of capital and liquidity
available from investing in a diversified portfolio of
short-term money market securities.
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. ...... As high a level of current income as is consistent with
prudent investment management from a global portfolio
of high quality debt securities denominated in various
currencies and multinational currency units and having
remaining maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND, INC. ................. Long-term growth of capital from investments in
securities, primarily common stocks, of relatively
small companies believed to have special investment
value and emerging growth companies regardless of
size.
MERRILL LYNCH STRATEGIC DIVIDEND FUND................... Long-term total return from investment in dividend
paying common stocks which yield more than Standard &
Poor's 500 Composite Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND, INC. .................... Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND.................................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal income
taxes as is consistent with prudent investment
management by investing primarily in a portfolio of
long-term, investment grade obligations issued by the
State of Texas, its political subdivisions, agencies
and instrumentalities.
MERRILL LYNCH TREASURY FUND............................. A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and security
of principal from investment in direct obligations of
the U.S. Treasury and up to 10% of its total assets in
repurchase agreements secured by such obligations.
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH U.S.A. GOVERNMENT RESERVES................ Preservation of capital, current income and liquidity
available from investing in direct obligations of the
U.S. Government and repurchase agreements relating to
such securities.
MERRILL LYNCH U.S. TREASURY MONEY
FUND.................................................. Preservation of capital, liquidity and current income
through investment exclusively in a diversified
portfolio of short-term marketable securities which
are direct obligations of the U.S. Treasury.
MERRILL LYNCH UTILITY INCOME FUND, INC.................. High current income through investment in equity and
debt securities issued by companies which are
primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME FUND, INC. .................. High current income by investing in a global portfolio
of fixed income securities denominated in various
currencies, including multinational currencies.
</TABLE>
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes and, depending on the circumstances, a short-or long-term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the funds may be subject to a backup withholding tax unless such
shareholder certifies under penalty of perjury that the taxpayer identification
number on file with any such fund is correct and that such shareholder is not
otherwise subject to backup withholding. See "Dividends, Distributions and
Taxes-- Taxes" below.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange, or
if the exchange does not involve a money market fund, shareholders may write to
the transfer agent requesting that the exchange be effected. Such letter must be
signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" (including, for example, Merrill Lynch branch
offices and certain other financial institutions) as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and
validity of which may be verified by the transfer agent through the use of
industry publications. Shareholders of the Fund, and shareholders of other funds
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealers. The
Fund reserves the right to require a properly completed Exchange Application.
This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may suspend
the continuous offering of their shares to the general public at any time and
may thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
36
TMP
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
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. 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 Distributions" in the
Prospectus for information concerning the manner in which dividends and
distributions may be reinvested automatically in shares of the Fund. Dividends
and distributions are taxable to shareholders as described below whether they
are invested in shares of the Fund or received in cash.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A
and Class B shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures or options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Any loss upon the sale or exchange of Fund
shares held for six months or less will be treated as long-term capital loss to
the extent of any capital gain dividends received by the shareholder.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction between the Class A and Class B
shareholders according to a method (which it believes is consistent with the
Securities and Exchange Commission's exemptive order permitting the issuance and
sale of an unlimited number of classes of stock) that is based on the gross
income allocable to Class A and Class B shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
37
<PAGE>
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and capital gain
dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom a certified
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its 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. For this purpose, the Fund will allocate foreign taxes and
foreign source income between the Class A and Class B shareholders according to
a method similar to that described above for the allocation of dividends
eligible for the dividends received deduction.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class A
shares.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely
38
<PAGE>
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.
Due to investment laws in certain developing Asia-Pacific countries, it is
anticipated that the Fund's investments in equity securities in such countries
will consist primarily of shares of investment companies (or similar investment
entities) organized under foreign law or of ownership interests in special
accounts, trusts or partnerships. The Fund may invest up to 10% of its total
assets in securities of closed-end investment companies. If the Fund purchases
shares of an investment company (or similar investment entity) organized under
foreign law, the Fund will be treated as owning shares in a passive foreign
investment company ("PFIC") for U.S. Federal income tax purposes. The Fund may
be subject to U.S. Federal income tax, and an additional tax in the nature of
interest, on a portion of the distributions from such a company and on gain from
the disposition of the shares of such company (collectively referred to as
"excess distributions"), even if such excess distributions are paid by the Fund
as a dividend to its shareholders. The Fund may be eligible to make an election
with respect to certain PFICs in which it owns shares that will allow it to
avoid the taxes on excess distributions. However, such election may cause the
Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, the Fund may elect to "mark-to-market"
at the end of each taxable year all shares that it holds in PFICs. If it makes
this election, the Fund will recognize as ordinary income any increase in the
value of such shares. Unrealized losses, however, will not be recognized. By
making the mark-to-market election, the Fund can avoid imposition of the
interest charge with respect to its distributions from PFICs, but in any
particular year may be required to recognize income in excess of the
distributions it receives 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 or 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 options 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 contracts will be 60%
long-term and 40% short-term capital gain or loss. The mark-to-market rules
outlined above, however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of changes in price or interest or currency
exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts.
39
<PAGE>
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an options or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies will be qualifying income for purposes of
determining whether the Fund qualifies as a RIC. It is currently unclear,
however, who will be treated as the issuer of a foreign currency instrument or
how foreign currency options, foreign currency futures and forward foreign
currency contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund. The Fund may request a private letter
ruling from the Internal Revenue Service on some or all of these issues.
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
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's basis in Fund shares. 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 countries in which the Fund
intends to invest. No such regulations have been issued.
---------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income dividends and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
40
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A and Class B
shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares.
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. 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.
41
<PAGE>
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated.
<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 THE ON A HYPOTHETICAL AT THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
- ------------------------------------ ------------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
One Year Ended December 31, 1993.... 75.28% $1,752.80 82.15% $1,821.50
May 29, 1992 (commencement of
operations) to December 31,
1993................................ 44.07% $1,788.20 47.65% $1,859.50
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
Year Ended December 31, 1993........ 87.46% $1,874.60 86.15% $1,861.50
May 29, 1992 (commencement of
operations) to December 31,
1992................................ 2.02% $1,020.20 1.50% $1,015.00
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
May 29, 1992 (commencement of
operations) to December 31,
1993................................ 78.82% $1,788.20 85.95% $1,859.50
</TABLE>
In order to reflect the reduced sales charges in the case of Class A
shares, or the waiver of the contingent deferred sales charge in the case of
Class B shares applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares", respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses may be deducted.
42
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on February 13, 1992. It has
an authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 100,000,000 shares. Both Class A and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that expenses related to the account maintenance fee of the
Class A shares and the account maintenance and distribution fees of the Class B
shares are borne solely by each respective class, and that the Class A and Class
B shares have exclusive voting rights with respect to matters relating to such
account maintenance and/or distribution expenditures. The Fund has received an
order from the Commission permitting the issuance and sale of an unlimited
number of classes of Common Stock. The Board of Directors of the Fund may
classify and reclassify the shares of the Fund into additional classes of Common
Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold annual meetings of shareholders in any year in which the Investment Company
Act does not require shareholders to elect Directors. 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 they comply with applicable Maryland law. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive or conversion rights. Redemption rights are discussed
elsewhere herein and in the Prospectus. Each share of Class A or Class B Common
Stock is entitled to participate equally in dividends and distributions declared
by the Fund and in the net assets of the Fund upon liquidation or dissolution
after satisfaction of outstanding liabilities, except that expenses related to
the account maintenance and/or distribution of the shares within a class will be
borne solely by such class. Stock certificates are issued by the transfer agent
only on specific request. Certificates for fractional shares are not issued in
any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
Class A shares and 5,000 Class B shares of Common Stock for an aggregate of
$100,000. Such shares were acquired for investment and can only be disposed of
by redemption. The organizational expenses of the Fund will be paid by the Fund
and amortized over a period not exceeding five years. The proceeds realized by
the Manager (or any subsequent holder) upon redemption of any of such shares
will be reduced by the proportionate amount of the unamortized organizational
expenses which the number of shares redeemed bears to the number of shares
initially purchased.
43
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the value of the Fund's net assets on
December 31, 1993, and its shares outstanding on that date is as follows:
TABLE
<TABLE> <CAPTION>
CLASS A CLASS B
---------------- ----------------
<S> <C> <C>
Net Assets.................................................................... $ 311,848,005 $ 990,843,171
---------------- ----------------
---------------- ----------------
Number of Shares Outstanding.................................................. 16,611,057 52,876,010
---------------- ----------------
---------------- ----------------
Net Asset Value Per Share (net assets divided by number of shares
outstanding).................................................................. $ 18.77 $ 18.74
Sales Charge (for Class A shares: 4.00% of offering price (4.17% of amount
invested))*................................................................... 1.30 **
---------------- ----------------
Offering Price................................................................ $ 20.07 $ 18.74
---------------- ----------------
---------------- ----------------
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge on redemption of shares within four
years of purchase. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares" in the Prospectus and "Redemption of
Shares--Contingent Deferred Sales Charge--Class B Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has been
selected as the independent auditors of the Fund. The selection of independent
auditors is subject to ratification by the Fund's shareholders. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, acts as the custodian of the Fund's assets (the "Custodian"). Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund
to be held in its offices outside the United States and with certain foreign
banks and securities depositories. The Custodian is responsible for safeguarding
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Fund's
investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's
transfer agent (the "Transfer Agent"). The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening,
44
<PAGE>
maintenance and servicing of shareholder accounts. See "Management of the
Fund--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 31 of each year. The Fund
sends to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933, as amended, and
the Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on April 15, 1994.
45
<PAGE>
APPENDIX
RATINGS OF DEBT SECURITIES
Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate Ratings
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edged". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable investments. Assurance of interest
and principal payments or of maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the
46
<PAGE>
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. PRIME-1 repayment ability
will often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, in assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
47
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
"aaa" An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates
good asset protection and the least risk of dividend impairment within the universe of preferred
stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that
there is reasonable assurance the earnings and asset protection will remain relatively well maintained
in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are
judged to be somewhat greater than in the "aaa" and "aa" classifications, earnings and asset
protection are, nevertheless, expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium grade preferred stock, neither highly
protected nor poorly secured. Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance
of dividend payments and maintenance of other terms of the issue over any long period of time may be
small.
"caa" An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payments.
"c" This is the lowest rated class of preferred or preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
48
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. "BB" indicates the least
degree of speculation and "C" the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other speculative issues. However, it
faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is assigned an actual or
implied "BBB-" rating.
</TABLE>
49
<PAGE>
<TABLE>
<S> <C>
B Debt rated "B" has a greater vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied "BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default, and is dependent upon
favorable business, financial, and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied "B" or "B-" rating.
CC The rating "CC" is typically applied to debt subordinated to senior debt that is assigned an actual or
implied "CCC" rating.
C The rating "C" typically is applied to debt subordinated to senior debt which is assigned an actual or
implied "CCC-" debt rating. The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
</TABLE>
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative
standing within the major rating categories.
<TABLE>
<S> <C>
c The letter "c" indicates that the holder's option to tender the security for purchase may be canceled
under certain prestated conditions enumerated in the tender option documents.
L The letter "L" indicates that the rating pertains to the principal amount of those bonds to the extent
that the underlying deposit collateral is federally insured and interest is adequately collateralized.
In the case of certificates of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for principal and accrued
pre-default interest up to the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor insured institution, upon
maturity.
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
p The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with respect to such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's receipt of an executed copy of the
escrow agreement or closing documentation confirming investments and cash flows.
N.R. Not rated.
</TABLE>
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative
degree of safety is not as high as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more
vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for timely payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such grace period.
</TABLE>
51
<PAGE>
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by Standard
& Poor's from other sources it considers reliable. Standard & Poor's does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the debt rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
<TABLE>
<S> <C>
I. Likelihood of payment-capacity and willingness of the issuer to meet the timely payment of preferred
stock dividends and any applicable sinking fund requirements in accordance with the terms of the
obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income security. The
capacity to pay preferred stock obligations is very strong, although not as overwhelming as for issues
rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred stock obligations, although it
is somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as predominately speculative with
B respect to the issuer's capacity to pay preferred stock obligations. "BB" indicates the lowest degree
CCC of speculation and "CCC" the highest degree of speculation. While such issues will likely have some
quality and protective characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
</TABLE>
52
<PAGE>
<TABLE>
<S> <C>
CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or sinking fund
payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in default on debt instruments.
NR Indicates that no rating has been requested, that there is insufficient information on which to base a
rating, or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
</TABLE>
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to
show relative standing within the major rating
categories.
A preferred stock rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
53
<PAGE>
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54
<PAGE>
<TABLE> <CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Hong Kong
Apparel 16,900,000 Yue Yuen Industrial Holdings $ 3,678,253 $ 5,197,138 0.4%
Banking 131,600 Dao Heng Bank Group Ltd. 369,701 570,840 0.1
1,371,141 HSBC Holdings, Ltd. 9,671,550 20,417,094 1.5
1,164,800 Hang Seng Bank, Ltd. 6,114,856 11,387,078 0.9
------------ ------------ ---
16,156,107 32,375,012 2.5
Building & 1,259,500 Kumagai Gumi, Ltd. 1,406,751 1,810,236 0.1
Construction 5,000,000 Paul Y-ITC Construction Holdings Ltd. 1,817,723 1,569,986 0.1
17,400,000 UDL Holdings, Ltd. 3,981,773 3,694,937 0.3
------------ ------------ ---
7,206,247 7,075,159 0.5
Diversified 22,948,000 Guandong Investments, Ltd. 8,876,237 17,234,028 1.3
3,299,000 Hutchison Whampoa, Ltd. 7,966,690 16,445,876 1.3
789,472 Jardine Matheson Holdings Ltd. 6,480,846 8,228,991 0.6
6,800,000 Swire 'A' Peregrine (Warrants) (a)+++ 1,090,968 3,081,704 0.2
2,177,000 Swire Pacific Ltd. 'A' 10,201,012 19,591,027 1.5
------------ ------------ ---
34,615,753 64,581,626 4.9
Electrical Equipment 3,825,000 Johnson Electric Holdings Ltd. 7,098,888 9,806,422 0.8
Electronics 16,600,000 ASM Pacific Technology 5,454,485 8,812,637 0.7
Finance 2,632,000 Guoco Group, Ltd. 8,418,021 13,120,808 1.0
1,500,000 Peregrine Investment Holdings 3,269,819 3,690,276 0.3
5,000,000 Sun Hung Kai & Co. Ltd. 3,350,915 4,046,355 0.3
------------ ------------ ---
15,038,755 20,857,439 1.6
Food 5,233,200 Lam Soon (HK), Limited 4,188,961 4,302,838 0.3
Food Chains 14,384,000 Fairwood Holdings, Ltd. 6,450,162 6,006,526 0.5
Insurance 19,767,000 ++National Mutual Asia, Ltd. 7,969,425 18,684,333 1.4
3,936,000 ++National Mutual Asia, Ltd.
(Warrants) (a)+++ 563,540 2,280,668 0.2
------------ ------------ ---
8,532,965 20,965,001 1.6
Leisure 5,670,000 Hong Kong & Shanghai Hotels 4,644,068 10,939,143 0.8
2,300,000 Shangri-La Asia, Ltd.+++ 2,976,049 3,424,835 0.3
2,650,000 Television Broadcasts Ltd. 9,839,412 10,980,189 0.8
------------ ------------ ---
17,459,529 25,344,167 1.9
<PAGE>
Miscellaneous- 15,912,000 C.P. Pokphand Co., Ltd. 6,359,896 7,005,153 0.5
Consumer 12,342,000 Gold Lion Holdings Ltd. 4,865,134 8,310,035 0.7
11,450,000 M.C. Packaging (HK), Ltd. 5,643,217 6,004,467 0.5
------------ ------------ ---
16,868,247 21,319,655 1.7
Real Estate 7,940,000 Amoy Properties Ltd. 6,819,473 13,159,653 1.0
3,000,000 Amoy Properties Ltd. (Warrants) (a)+++ 1,004,519 2,369,545 0.2
2,423,000 Cheung Kong Holdings Ltd. 8,260,078 14,824,129 1.1
10,000,000 Great Eagle Holdings Co. 4,841,967 9,128,577 0.7
5,280,000 Hong Kong Land Holdings Ltd. 9,802,571 18,732,617 1.5
3,345,557 New World Development Co., Ltd. 7,953,643 17,760,953 1.4
1,250,000 New World Development Co., Ltd.
(Warrants) (a)+++ 1,030,075 3,657,905 0.3
2,410,100 Sun Hung Kai Properties Ltd. 9,663,004 22,156,817 1.7
------------ ------------ ---
49,375,330 101,790,196 7.9
Retail Stores 11,658,000 Giordano Holdings Ltd. 5,547,673 6,038,068 0.4
Telecommunications 9,950,000 ABC Communications Holdings Ltd. 2,390,343 5,024,602 0.4
12,312,000 Innovative International Holdings Ltd. 5,646,650 6,934,766 0.5
------------ ------------ ---
8,036,993 11,959,368 0.9
Utilities 1,975,200 China Light & Power Co., Ltd. 7,767,094 14,450,188 1.1
160,000 ++Consolidated Electric Power Inc.+++ 2,592,518 2,720,000 0.2
4,272,400 Hong Kong & China Gas Co. (The) 6,874,118 12,391,786 1.0
5,716,800 Hong Kong Telecommunications, Ltd. 7,803,114 12,065,757 0.9
------------ ------------ ---
25,036,844 41,627,731 3.2
Total Investments in Hong Kong 230,745,192 388,058,983 29.8
India Foreign Bonds $2,600,000 ++SCICI Ltd., 3.50% due 4/01/2004 2,699,375 3,464,500 0.2
Miscellaneous 12,000 Housing Development Finance 1,016,086 937,351 0.1
Total Investments in India 3,715,461 4,401,851 0.3
Indonesia Food 1,507,440 ++P.T. Mayorah Indah 3,509,779 8,678,226 0.7
Miscellaneous-Consumer 776,500 ++P.T. Modern Photo Film 5,119,000 7,799,953 0.6
Pharmaceuticals 663,000 P.T. Kalbe Farma 3,774,666 5,183,369 0.4
Real Estate 1,720,500 P.T. Duta Anggada Realty 4,050,619 7,581,450 0.6
Tobacco 2,170,000 P.T. Hanjaya Mandala Sampoerna 4,892,468 13,212,272 1.0
Total Investments in Indonesia 21,346,532 42,455,270 3.3
<PAGE>
Malaysia Automotive 4,875,000 Tan Chong Motor Holdings BHD 5,021,389 7,604,457 0.6
Banking 1,859,000 Arab-Malaysian Merchant Bank BHD 5,933,911 17,122,823 1.3
3,030,000 Malayan Banking BHD 7,136,396 21,381,616 1.6
2,700,000 Public Bank BHD 'Foreign' 2,361,656 6,279,851 0.5
------------ ------------ ---
15,431,963 44,784,290 3.4
Building & 1,266,000 Ekran BHD 4,942,249 7,993,315 0.6
Construction 1,712,500 George Kent Holdings BHD 2,197,862 4,324,977 0.3
2,215,000 I.J.M. Corp. BHD 4,774,407 8,802,414 0.7
4,671,000 Malayan Cement BHD 5,232,118 9,541,504 0.8
------------ ------------ ---
17,146,636 30,662,210 2.4
Conglomerates 2,570,000 Malaysian Resources Corp. BHD 5,580,056 6,633,798 0.5
9,000,000 Renong BHD 8,454,940 14,306,407 1.1
------------ ------------ ---
14,034,996 20,940,205 1.6
Consumer Products 1,360,000 Berjaya Singer BHD 3,026,424 3,586,258 0.3
1,500,000 Berjaya Singer TSR+++ 1,298,343 1,632,312 0.1
------------ ------------ ---
4,324,767 5,218,570 0.4
Finance 3,296,000 Affin Holdings BHD 4,696,934 6,120,705 0.5
Food 1,721,700 Nestle Malaysia BHD 7,333,320 10,870,529 0.8
</TABLE>
<PAGE>
<TABLE> <CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Malaysia Forest Products 1,465,000 Aokam Perdana (Ordinary) $ 6,236,221 $ 15,779,016 1.2%
(concluded) 1,100,000 Aokam Perdana TSR (Warrants) (a)+++ 3,472,786 11,643,454 0.9
580,000 Pacific Chemical 3,018,004 3,468,152 0.3
------------ ------------ ---
12,727,011 30,890,622 2.4
Leisure 1,000,000 Berjaya Sports TOTO BHD 2,482,327 2,766,945 0.2
3,059,250 Magnum Corp. BHD 4,365,007 9,089,693 0.7
4,000,000 Pernas International Hotels &
Properties BHD 3,815,457 6,090,994 0.5
2,599,000 Resorts World BHD 7,036,115 16,699,239 1.3
2,504,000 Tanjong PLC 7,760,037 15,809,842 1.2
------------ ------------ ---
25,458,943 50,456,713 3.9
<PAGE>
Oil & Gas Offshore 7,500,000 Promet BHD 5,754,101 10,752,089 0.8
Development
Property & Forest 3,694,000 Land & General BHD 7,170,230 13,308,004 1.0
Products
Real Estate 1,450,000 Hong Leong Properties BHD 2,965,612 3,042,711 0.2
Telecommunications 3,375,000 Leader Universal Cable BHD 7,763,214 17,423,398 1.3
2,890,000 Technology Resources Industries BHD+++ 5,596,725 15,134,262 1.2
1,611,000 Telekom Malaysia BHD 8,939,145 13,223,064 1.0
------------ ------------ ---
22,299,084 45,780,724 3.5
Tobacco 1,167,000 Rothmans of Pall Mall (Malaysia) BHD 6,320,033 11,269,081 0.9
Transportation 2,218,000 Malaysian International Shipping Co. BHD 6,043,232 8,237,697 0.6
Total Investments in Malaysia 156,728,251 299,938,607 23.0
Philippines
Beverages 2,352,400 San Miguel Corp. 'B' 9,778,846 21,678,138 1.7
International Trade 8,610,320 International Container Terminal 6,447,223 13,983,914 1.1
Telecommunications 42,380 Philippine Long Distance Telephone Co. 1,802,121 3,438,078 0.2
(ADR)*
Utilities-Electric 571,200 Manila Electric Co. (MERALCO) 'B' 3,557,443 10,319,124 0.8
Total Investments in the Philippines 21,585,633 49,419,254 3.8
Singapore
Airlines 1,040,000 Singapore Airlines 'Foreign' Ltd. 6,170,157 8,731,343 0.6
Automotive 1,722,000 Cycle & Carriage, Ltd. 7,118,254 9,102,612 0.7
Banking 920,000 Development Bank of Singapore Ltd. 7,785,618 10,412,935 0.8
1,366,866 OCBC Bank 'Foreign' 8,898,717 14,790,714 1.1
1,139,625 United Overseas Bank 8,026,670 11,126,936 0.9
------------ ------------ ---
24,711,005 36,330,585 2.8
Beverages 464,623 Fraser & Neave Ltd. (Warrants) (a)+++ 494,534 2,109,296 0.2
Conglomerates 1,308,000 ACMA Ltd. 8,068,496 10,411,940 0.8
Electronics 13,610,000 I.P.C. Corp.+++ 9,203,041 17,774,254 1.4
Marine/Offshore 2,612,500 Sembawang Maritime LMD 7,582,565 12,022,699 0.9
Oil Services $2,090,000 Sembawang Maritime LMD, 1.50% due
10/25/1998 1,325,470 3,119,403 0.3
------------ ------------ ---
8,908,035 15,142,102 1.2
<PAGE>
Publishing & 645,000 Singapore Press Holdings Ltd. 6,234,575 10,830,224 0.8
Broadcasting
Shipping 1,096,000 Sembawang Shipyard Ltd. 8,263,711 10,428,358 0.8
Steel 3,143,000 Natsteel Ltd. 8,554,420 10,945,771 0.8
Telecommunications 9,810,000 Goldtron, Ltd. 6,338,699 15,556,904 1.2
1,635,000 Goldtron, Ltd. (Warrants) (a)+++ 1,194,319 2,236,940 0.2
------------ ------------ ---
7,533,018 17,793,844 1.4
Total Investments in Singapore 95,259,246 149,600,329 11.5
South Korea
Automotive 21,403 Dong ah Tire Industries Co. 839,781 1,426,424 0.1
Retail Stores 87,000 Shinsegae Department Stores 3,155,863 5,562,136 0.4
13,920 Shinsegae Department Stores Co.
(New Shares)+++ 336,622 863,037 0.1
------------ ------------ ---
3,492,485 6,425,173 0.5
Utilities 5,362 Korea Mobile Telecommunications Corp. 979,459 2,861,040 0.2
246,000 Korean Electric & Power Corp. 6,197,512 6,675,009 0.5
------------ ------------ ---
7,176,971 9,536,049 0.7
Total Investments in South Korea 11,509,237 17,387,646 1.3
Taiwan
Closed-End Funds 343,300 The R.O.C. Taiwan 2,904,850 4,720,375 0.3
Food & Beverage 182,880 ++President Enterprises (ADR)* 3,119,745 4,846,320 0.4
Total Investments in Taiwan 6,024,595 9,566,695 0.7
Thailand
Banking 2,160,000 Bangkok Bank 7,125,428 21,320,799 1.7
4,390,000 Industrial Finance Corp. of Thailand 8,764,194 10,661,183 0.8
1,228,000 The Siam Commercial Bank, Ltd. 5,096,511 10,582,060 0.8
------------ ------------ ---
20,986,133 42,564,042 3.3
Building & 1,097,000 Christiani & Nielson 'Local' 7,169,983 14,351,665 1.1
Construction 329,100 Christiani & Nielson 'Local'
(Warrants) (a)+++ 647,325 644,536 0.0
886,000 Land & House Public Co. (b) 6,096,295 22,488,367 1.8
------------ ------------ ---
13,913,603 37,484,568 2.9
<PAGE>
Health & Personal Care 147,400 International Cosmetics Co. 4,652,742 6,327,865 0.4
Industrials 506,000 Thai Glass Industries Ltd. 4,552,964 6,025,225 0.5
Mutual Funds 12,600,000 Ruam Pattana Fund II 4,999,163 8,636,898 0.7
Publishing & 283,700 Post Publishing Public Co. Ltd. 2,672,649 2,778,104 0.2
Broadcasting
Telecommunications 71,000 International Engineering Co. Ltd. 1,479,971 1,524,011 0.1
210,000 International Engineering Co. Ltd.
'Local' 2,253,878 3,898,942 0.3
------------ ------------ ---
3,733,849 5,422,953 0.4
Total Investments in Thailand 55,511,103 109,239,655 8.4
Total Long-Term Investments 602,425,250 1,070,068,290 82.1
</TABLE>
<PAGE>
<TABLE> <CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Value Percent of
COUNTRIES Face Amount Short-Term Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
United Commercial Paper** $ 10,000,000 Daimler-Benz North America Corp., 3.25%
States due 1/18/1994 $ 9,984,653 $ 9,984,653 0.8%
34,435,000 General Electric Capital Corp., 3.22%
due 1/03/1994 34,428,840 34,428,840 2.6
Total Short-Term Investments 44,413,493 44,413,493 3.4
Total Investments $646,838,743 1,114,481,783 85.5
============
Other Assets Less Liabilities 188,209,393 14.5
-------------- -----
Net Assets $1,302,691,176 100.0%
============== =====
<FN>
*American Depositary Receipt (ADR).
**Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of Common Stock. The purchase price and number of shares are subject
to adjustment under certain conditions until the expiration date.
(b)Previously held as Land and Houses Co., Ltd. 'Foreign' and Land and Houses Co., Ltd. 'Local.'
+++Non-income producing security.
++Restricted securities as to resale. The value of the Fund's investment in restricted
securities was approximately $48,474,000, representing 3.7% of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Consolidated Electric Power Inc. 11/29/93 $ 2,592,518 $ 2,720,000
National Mutual Asia, Ltd. 11/25/92-8/11/93 7,969,425 18,684,333
National Mutual Asia, Ltd. (Warrants) 12/18/92-3/09/93 563,540 2,280,668
P.T. Mayorah Indah 1/08/93-7/30/93 3,509,779 8,678,226
P.T. Modern Photo Film 6/26/92-8/26/93 5,119,000 7,799,953
President Enterprises (ADR) 7/01/93-8/24/93 3,119,745 4,846,320
SCICI Ltd., 3.50% due 4/01/2004 10/18/93-10/22/93 2,699,375 3,464,500
Total $25,573,382 $48,474,000
=========== ===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE> <CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 1993
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$646,838,743) (Note 1a) $1,114,481,783
Foreign cash (Note 1c) 3,603,532
Receivables:
Capital shares sold $194,999,950
Dividends 1,425,206
Securities sold 1,032,380
Interest 18,446 197,475,982
------------ --------------
Deferred organization expenses (Note 1g) 58,995
Prepaid registration fees and other assets (Note 1g) 340,719
--------------
Total assets 1,315,961,011
--------------
Liabilities: Payables:
Securities purchased 6,026,383
Capital shares redeemed 5,175,460
Investment adviser (Note 2) 864,935
Distributor (Note 2) 709,836 12,776,614
------------
Accrued expenses and other liabilities 493,221
--------------
Total liabilities 13,269,835
--------------
Net Assets: Net assets $1,302,691,176
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 1,661,106
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 5,287,601
Paid-in capital in excess of par 816,210,955
Accumulated distributions in excess of investment income--net (2,267,236)
Undistributed realized capital gains from investments and foreign currency
transactions--net 14,345,023
Unrealized appreciation on investments and foreign currency transactions--net 467,453,727
--------------
Net assets $1,302,691,176
==============
Net Asset
Value: Class A--Based on net assets of $311,848,005 and 16,611,057 shares outstanding $ 18.77
==============
Class B--Based on net assets of $990,843,171 and 52,876,010 shares outstanding $ 18.74
==============
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE> <CAPTION>
STATEMENT OF OPERATIONS
For the Ten Months Ended December 31, 1993
<S> <C> <C> <C>
Investment Dividends (net of $1,251,984 foreign withholding tax) $ 11,613,371
Income --------------
(Notes Interest and discount earned 1,541,904
1e & 1f): Total income 13,155,275
--------------
Expenses: Investment advisory fees (Note 2) 5,988,153
Distribution and account maintenance fees--Class B (Note 2) 4,567,720
Custodian fees 1,022,611
Transfer agent fees--Class B (Note 2) 482,412
Account maintenance fee--Class A (Note 2) 355,108
Transfer agent fees--Class A (Note 2) 137,387
Registration fees (Note 1g) 136,528
Printing and shareholder reports 103,659
Accounting services (Note 2) 78,380
Professional fees 62,906
Directors' fees and expenses 26,703
Amortization of organization expenses (Note 1g) 14,389
Pricing fees 4,372
Other 7,031
--------------
Total expenses 12,987,359
--------------
Investment income--net 167,916
--------------
Realized Realized gain (loss) from:
Unrealized Investments--net $ 22,520,082
Gain (Loss) Foreign currency transactions (163,100) 22,356,982
on Invest- ------------
ments & Change in unrealized appreciation/depreciation on:
Foreign Investments--net 424,153,653
Currency Foreign currency transactions (185,503) 423,968,150
Trans- ------------ --------------
actions--Net Net realized and unrealized gain on investments and foreign currency transactions 446,325,132
(Notes 1c,1f --------------
& 3): Net Increase in Net Assets Resulting from Operations $ 446,493,048
==============
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE> <CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Ten For the Period
Months Ended May 29,1992++
Increase (Decrease) in Net Assets: Dec. 31, 1993 to Feb 28,1993
<S> <C> <C> <C>
Operations: Investment income (loss)--net $ 167,916 $ (60,824)
Realized gain (loss) on investments and foreign currency transactions--net 22,356,982 (2,044,479)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net 423,968,150 43,485,577
-------------- ------------
Net increase in net assets resulting from operations 446,493,048 41,380,274
-------------- ------------
Dividends & Investment income--net:
Distributions Class A (145,883) --
to Share- Class B (22,033) --
holders (Note In excess of investment income--net:
1h): Class A (958,265) (593,674)
Class B (144,731) (509,742)
Realized gain on investments--net:
Class A (1,408,405) (4,334)
Class B (4,539,541) (15,200)
-------------- ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (7,218,858) (1,122,950)
-------------- ------------
Capital Net increase in net assets derived from capital share transactions 386,806,540 436,253,122
Share Trans- -------------- ------------
actions
(Note 4):
Net Assets: Total increase in net assets 826,080,730 476,510,446
Beginning of period 476,610,446 100,000
-------------- ------------
End of period $1,302,691,176 $476,610,446
============== ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE> <CAPTION>
FINANCIAL HIGHLIGHTS
<S> <C> <C> <C> <C> <C>
Class A Class B
For the For the For the For the
Ten Months Period Ten Months Period
The following per share data and ratios have been derived Ended May 29, 1992++ Ended May 29, 1992++
from information provided in the financial statements. Dec. 31, to Feb. 28, Dec. 31, to Feb. 28,
1993 1993 1993++++++ 1993++++++
Increase (Decrease) in Net Asset Value:
Per Share Net asset value, beginning of period $ 11.01 $ 10.00 $ 11.01 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net .07 .05 (.02) (.02)
Realized and unrealized gain on investments
and foreign currency transactions--net 7.88 1.04 7.86 1.05
-------- -------- -------- --------
Total from investment operations 7.95 1.09 7.84 1.03
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.01) -- --++++ --
In excess of investment income--net (.07) (.08) --++++ (.02)
Realized gain on investments--net (.11) --++++ (.11) --++++
-------- -------- -------- --------
Total dividends and distributions (.19) (.08) (.11) (.02)
-------- -------- -------- --------
Net asset value, end of period $ 18.77 $ 11.01 $ 18.74 $ 11.01
======== ======== ======== ========
Total Based on net asset value per share 72.31%+++ 10.99%+++ 71.27%+++ 10.32%+++
Investment ======== ======== ======== ========
Return:**
Ratios to Expenses, excluding account maintenance
Average and distribution fees 1.34%* 1.48%* 1.35%* 1.49%*
Net Assets: ======== ======== ======== ========
Expenses 1.59%* 1.73%* 2.35%* 2.49%*
======== ======== ======== ========
Investment income (loss)--net .61%* .69%* (.15)%* (.08)%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $311,848 $111,180 $990,843 $365,430
Data: ======== ======== ======== ========
Portfolio turnover 16.62% 4.65% 16.62% 4.65%
======== ======== ======== ========
<FN>
++Commencement of Operations.
++++Amount was less than $.01 per share.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Dragon Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The shares of the Fund are divided
into Class A Shares and Class B Shares. Class A Shares are sold with
a front-end sales charge. Class B Shares may be subject to a contingent
deferred sales charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions,
except that Class A Shares bear the expenses of the ongoing account
maintenance fee with respect to the Class A Shares and Class B Shares
bear the expenses of the ongoing account maintenance and distribution fees
with respect to the Class B Shares, and each class has exclusive voting
rights with respect to matters relating to their respective account
maintenance and distribution plans. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the principal
market on which such securities are traded, as of the close of business
on the day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter market
are valued at the last available bid prices obtained from one or more
dealers in the over-the-counter market prior to the time of valuation.
Portfolio securities which are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market. Short-term securities with a remaining maturity
of sixty days or less are valued at amortized cost, which approximates
market. Options written by the Fund are valued at the last asked price
in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the average of the last asked price as
obtained from one or more dealers. Options purchased by the Fund are
valued at the last bid price in the case of exchange-traded options or,
in the case of options traded in the over-the-counter market, the average
of the last bid price as obtained from two or more dealers unless there
is only one dealer, in which case that dealer's price is used. Other invest-
ments, 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.
(b) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additions to such securities daily to ensure that the contract is fully
collateralized.
<PAGE>
(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) such transactions
expressed in foreign currencies into US dollars. Realized and unrealized
gains or losses from investments include the effects of foreign exchange
rates on investments.
The Fund is authorized to enter into forward foreign exchange contracts as
a hedge against either specific transactions or portfolio positions. Such
contracts are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
(d) Options--When the Fund sells an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market to reflect the
current value of the option written.
<PAGE>
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.
(e) Income taxes--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
and to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
NOTES TO FINANCIAL STATEMENTS (concluded)
(f) 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.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
<PAGE>
(h) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates. Dividends in the
amount of approximately $1,300,000 were paid due to the recognition
of taxable income relating to Passive Foreign Investment Companies.
(i) Reclassifications--Certain 1992 amounts have been reclassified to
conform to the 1993 presentations.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management ("MLAM"). MLAM is the name under which Merrill
Lynch Investment Management, Inc. ("MLIM") does business. MLIM is an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. 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 MLIM.
Effective January 1, 1994, the investment advisory business of MLAM
reorganized from a corporation to a limited partnership. The general
partner of MLAM is Princeton Services, Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co.
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. Certain of the states in which the
shares of the Fund are qualified for sale impose limitations on the
expenses of the Fund. The most restrictive annual expense limitation
requires that the Investment Adviser 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 next
$70 million of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. No fee payment will be made to MLAM during any
fiscal year which will cause such expenses to exceed the expense limita-
tions at the time of such payment.
The Fund has adopted separate Plans of Distribution (the "Distribution
Plans") for Class A and Class B Shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940 pursuant to which MLFD receives from the
Fund at the end of each month (a) an account maintenance fee, at an annual
rate of 0.25% of the average daily net assets of the Fund's Class A Shares
in order to compensate the Distributor in connection with account
maintenance activities, and (b) an account maintenance fee of 0.25% and a
distribution fee of 0.75% of the average daily net assets of the Fund's
Class B Shares in order to compensate the Distributor and Merrill Lynch
for providing distribution and account maintenance services to the Fund.
As authorized by the Distribution Plans, the Distributor has entered into
an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"),
which provides for the compensation of MLPF&S in connection with account
maintenance activities for Class A Shares and for providing distribution-
related services to the Fund for Class B Shares. For the ten months ended
December 31, 1993, MLFD earned $355,108 and $4,567,720 for Class A and
Class B Shares, respectively, under the Distribution Plans, all of which
was paid to MLPF&S pursuant to the agreement.
<PAGE>
For the ten months ended December 31, 1993, MLFD earned under-
writing discounts of $183,544, and MLPF&S earned dealer conces-
0sions of $2,764,832 on sales of the Fund's Class A Shares.
For the ten months ended December 31, 1993, MLPF&S received
contingent deferred sales charges of $807,253 relating to trans-
actions in Class B Shares and $75,638 in commissions on the
execution of portfolio security transactions for the Fund during
the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD and/or Merrill Lynch &
Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the ten months ended December 31, 1993 were $325,713,579 and
$100,190,826, respectively.
Net realized and unrealized gains (losses) as of December 31, 1993
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ 22,520,073 $467,643,040
Short-term investments 9 --
Foreign currency transactions (163,100) (189,313)
------------ ------------
Total $ 22,356,982 $467,453,727
============ ============
As of December 31, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $467,643,040, of which $468,702,774
related to appreciated securities and $1,059,734 related to depreciated
securities. At December 31, 1993, the aggregate cost of investments
for Federal income tax purposes was $646,838,743.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $386,806,540 for the ten months ended December 31, 1993 and
$436,253,122 for the period ended February 28, 1993.
<PAGE>
Transactions in capital shares for Class A and Class B Shares were
as follows:
Class A Shares for the Ten Months Dollar
Ended December 31, 1993 Shares Amount
Shares sold 7,846,115 $114,904,877
Shares issued to shareholders in
reinvestment of dividends and
distributions 120,851 2,113,683
---------- -----------
Total issued 7,966,966 117,018,560
Shares redeemed (1,451,683) (20,944,207)
---------- -----------
Net increase 6,515,283 $96,074,353
========== ===========
Class A Shares for the Period Dollar
May 29, 1992++ to February 28, 1993 Shares Amount
Shares sold 10,664,260 $107,804,104
Shares issued to shareholders in
reinvestment of dividends and
distributions 52,203 514,718
---------- ------------
Total issued 10,716,463 108,318,822
Shares redeemed (625,689) (6,360,726)
---------- ------------
Net increase 10,090,774 $101,958,096
========== ============
[FN]
++ Prior to May 29, 1992 (commencement of operations), the Fund issued 5,000
Class A Shares to MLAM for $50,000.
Class B Shares for the Ten Months Dollar
Ended December 31, 1993 Shares Amount
Shares sold 23,415,440 $343,265,805
Shares issued to shareholders in
reinvestment of dividends and
distributions 227,775 3,976,951
---------- ------------
Total issued 23,643,215 347,242,756
Shares redeemed (3,945,149) (56,510,569)
Net increase ---------- ------------
19,698,066 $290,732,187
========== ============
<PAGE>
Class B Shares for the Period Dollar
May 29, 1992++ to February 28, 1993 Shares Amount
Shares sold 34,279,325 $345,656,628
Shares issued to shareholders in
reinvestment of dividends and
distributions 47,212 465,987
---------- ------------
Total issued 34,326,537 346,122,615
Shares redeemed (1,153,593) (11,827,589)
Net increase ---------- ------------
33,172,944 $334,295,026
========== ============
[FN]
++ Prior to May 29, 1992 (commencement of operations), the Fund issued 5,000
Class A Shares to MLAM for $50,000.
5. Commitments:
At December 31, 1993, the Fund had entered into forward exchange con-
tracts under which it had agreed to buy various foreign currencies with
an approximate value of $4,029,000.
<PAGE>
Statement of
Additional Information
TABLE OF CONTENTS
PAGE
----
Investment Objective and Policies..... 2
Management of the Fund................ 13
Directors and Officers.............. 13
Management and Advisory
Arrangements...................... 14 [Paste-up/Artwork]
Purchase of Shares.................... 16
Redemption of Shares.................. 20
Portfolio Transaction and Brokerage... 21 ----------------------
Determination of Net Asset Value...... 23
Dividends, Distributions and Taxes.... 37 Merrill Lynch
Dividends and Distribution.......... 37
Taxes............................... 37 Dragon Fund, Inc.
Performance Data...................... 41
General Information................... 43
Description of Shares............... 43
Computation of Offering Price Per
Share............................. 44
Independent Auditors................ 44
Custodian........................... 44
Transfer Agent...................... 44
Legal Counsel....................... 45
Report to Shareholders.............. 45
Additional Information.............. 45
Security Ownership of Certain
Beneficial Owners................. 45
Appendix.............................. 46
Independent Auditors' Report.......... 55
Financial Statements.................. 56 April 28, 1994
Distributor:
Merrill Lynch
Code # 16261 Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for the fiscal year ended December 31, 1993 and the
period May 29, 1992 (commencement of operations) to February 28, 1993.
Contained in Part B:
Financial Statements:
Schedule of Investments as of December 31, 1993.
Statement of Assets and Liabilities as of December 31, 1993.
Statement of Operations for the period March 1, 1993, to December 31, 1993.
Statements of Changes in Net Assets for the periods May 29, 1992
(commencement of operations) to February 28, 1993 and March 1, 1993, to December
31, 1993.
Financial Highlights for the periods May 29, 1992 (commencement of
operations) to February 28, 1993 and March 1, 1993, to December 31, 1993.
(B) EXHIBITS
<TABLE><CAPTION>
EXHIBIT
NUMBER
- -------------
<S> <C>
1 --Articles of Incorporation of Registrant.(a)
2 --By-Laws of Registrant.(a)
3 --None.
4 --Copies of instruments defining the rights of shareholders, including the relevant portions of the
Articles of Incorporation and By-Laws of Registrant.(c)
5(a) --Management Agreement between Registrant and Merrill Lynch Asset Management.(b)
(b) --Supplement to Management Agreement between Registrant and Merrill Lynch Asset Management, L.P. dated
January 3, 1994.
6(a) --Class A Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(b)
(b) --Class B Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(b)
(c) --Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc. with respect to the
Merrill Lynch Mutual Fund Adviser Program.
7 --None.
8 --Custody Agreement between Registrant and Brown Brothers Harriman & Co.(b)
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between
Registrant and Financial Data Services, Inc.(b)
</TABLE>
C-1
<PAGE>
<TABLE><CAPTION>
EXHIBIT
NUMBER
- -------------
<S> <C>
(b) --Agreement between Merrill Lynch & Co., Inc. and Registrant relating to Registrant's use of Merrill
Lynch name.(b)
10 --None.
11 --Consent of Deloitte & Touche, independent auditors for Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management.(b)
14 --None.
15(a) --Class A Distribution Plan and Class A Distribution Plan Sub-Agreement of Registrant.(b)
(b) --Amended and Restated Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of
Registrant.(c)
16(a) --Schedule for computation of each performance quotation relating to Class A shares provided in the
Registration Statement in response to Item 22.(c)
(b) --Schedule for computation of each performance quotation relating to Class B shares provided in the
Registration Statement in response to Item 22.(c)
</TABLE>
- ---------------
(a) Filed on March 6, 1992, as an Exhibit to the Registrant's Registration
Statement on Form N-1A (File No. 33-46216) under the Securities Act of 1933.
(b) Filed on April 15, 1992, as an Exhibit to Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A (File No. 33-46216)
under the Securities Act of 1933.
(c) Filed on June 28, 1993, as an Exhibit to Post-Effective Amendment No. 2 the
Registrant's Registration Statement on Form N-1A (File No. 33-46216) under
the Securities Act of 1933.
ITEM 25. Persons Controlled by or under Common Control with Registrant
Registrant is not controlled by or under common control with any other
person.
ITEM 26. Number of Holders of Securities
<TABLE><CAPTION>
NUMBER OF
RECORD
HOLDERS AT
TITLE OF CLASS MARCH 31, 1994
- ------------------------------------------------------------------------------------------------- -----------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share........................................ 423
Class B Shares of Common Stock, par value $0.10 per share........................................ 1,157
</TABLE>
ITEM 27. Indemnification
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A and Class B Distribution
Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940 may be concerned, Article VI of the
Registrant's By-Laws provides that such
C-2
<PAGE>
payments will be made only on the following conditions: (i) the advances must be
limited to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only on receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which exceeds
the amount to which it is ultimately determined that he is entitled to receive
from the Registrant by reason of indemnification; and (iii) (a) such promise
must be secured by a surety bond, other suitable insurance or an equivalent form
of security which assumes that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance and (b) a majority of a quorum
of the Registrant's disinterested non-party Directors, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Class A and Class B 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 (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 Manager
Merrill Lynch Asset Management, L.P. (the "Manager") acts as investment
adviser for the following registered investment companies: Convertible Holdings,
Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital
Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill
C-3
<PAGE>
Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill
Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc. Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following investment companies: Apex Municipal
Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial
Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Municipal Series Trust, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets
Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program,
Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida
Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is Box 9011, Princeton,
New Jersey 08543-9011, except that the address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, FAM, Princeton Services, Inc. ("Princeton Services"), Merrill Lynch
Funds Distributor, Inc. ("MLFD") and Princeton Administrators, Inc. is also Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML
& Co.") is World Financial Center, North Tower, 250 Vesey Street, New York, New
York 10281. The address of Financial Data Services, Inc. ("FDS") is 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.
C-4
<PAGE>
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 31, 1991, for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph, and Messrs.
Geiger, Durnin, Giordano, Harvey, Kirstein and Monagle are directors, trustees
or officers of one or more of such companies.
<TABLE><CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH THE PROFESSION, VOCATION
NAME MANAGER OR EMPLOYMENT
- --------------------------- --------------------------- ------------------------------------------------------
<S> <C> <C>
ML & Co.................... Limited Partner Financial Services Holding Company
Merrill Lynch Investment
Management, Inc............ Limited Partner Investment Advisory Services; Limited Partner of FAM
Princeton Services......... General Partner General Partner of FAM
Arthur Zeikel.............. President President of FAM; President and Director of Princeton
Services; Director of MLFD; Executive Vice President
of ML & Co.; Executive Vice President of Merrill
Lynch
Terry K. Glenn............. Executive Vice President Executive Vice President of FAM; Executive Vice
President and Director of Princeton Services;
President and Director of MLFD; Director of FDS;
President of Princeton Administrators
Bernard J. Durnin.......... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Vincent R. Giordano........ Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Elizabeth Griffin.......... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Norman R. Harvey........... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
N. John Hewitt............. Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Philip L. Kirstein......... Senior Vice President, Senior Vice President, General Counsel and Secretary
General Counsel and of FAM; Senior Vice President, General Counsel,
Secretary Director and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss............ Senior Vice President and Senior Vice President and Controller of FAM; Senior
Controller Vice President and Controller of Princeton Services
Stephen M.M. Miller........ Senior Vice President Executive Vice President of Princeton Administrators;
Senior Vice President of Princeton Services
Joseph T. Monagle, Jr...... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE><CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH THE PROFESSION, VOCATION
NAME MANAGER OR EMPLOYMENT
- --------------------------- --------------------------- ------------------------------------------------------
<S> <C> <C>
Gerald M. Richard.......... Senior Vice President and Senior Vice President and Treasurer of FAM; Senior
Treasurer Vice President and Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Richard L. Rufener......... Senior Vice President Vice President of MLFD; Senior Vice President of
Princeton Services
Ronald L. Welburn.......... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Anthony Wiseman............ Senior Vice President Senior Vice President of Princeton Services
</TABLE>
ITEM 29. Principal Underwriters
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Emerging Tigers Fund., Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund,
Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, MuniYield Arizona Fund
II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio II, Inc., Senior
Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
C-6
<PAGE>
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011, Princeton,
New Jersey 08543-9011, except that the address of Messrs. Crook, Aldrich, Breen,
Graczyk, Fatseas, and Wasel is One Financial Center, Boston, Massachusetts
02111-2646.
<TABLE><CAPTION>
(2) (3)
(1) 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
Michael J. Brady.................... Vice President None
William M. Breen.................... Vice President None
Sharon Creveling.................... Vice President and Assistant Treasurer None
Mark A. DeSario..................... Vice President None
James T. Fatseas.................... Vice President None
Stanley Graczyk..................... Vice President None
Michelle T. Lau..................... Vice President None
Debra W. Landsman-Yaros............. Vice President None
Gerald M. Richard................... Vice President and Treasurer Treasurer
Richard L. Rufener.................. Vice President None
Salvatore Venezia................... Vice President None
William Wasel....................... Assistant Vice President None
Robert Harris....................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. Management Services.
Other than as set forth under the caption "Management of the
Fund--Management and Advisory Arrangements" in the Prospectus constituting Part
A of the Registration Statement and under "Management of the Fund--Management
and Advisory Arrangements" in the Statement of Additional Information
constituting Part B of the Registration Statement, Registrant is not a party to
any management-related service contract.
ITEM 32. Undertakings.
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's annual report to shareholders, upon request
and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and the State of New Jersey, on the 27th day of April
1994.
MERRILL LYNCH DRAGON FUND, INC.
(REGISTRANT)
By: /s/ ARTHUR ZEIKEL
__________________________________
(Arthur Zeikel, President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to Registrant's Registration Statement has been signed
below by the following persons in the capacities and on the date(s) indicated.
<TABLE><CAPTION>
SIGNATURE TITLE DATE(S)
- --------------------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Director April 27, 1994
- --------------------------------------------------- (Principal Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal April 27, 1994
- --------------------------------------------------- Financial and Accounting
(Gerald M. Richard) Officer)
DONALD CECIL* Director April 27, 1994
- ---------------------------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director April 27, 1994
- ---------------------------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director April 27, 1994
- ---------------------------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director April 27, 1994
- ---------------------------------------------------
(Richard R. West)
*By /s/ ARTHUR ZEIKEL April 27, 1994
- ---------------------------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE><CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------------- ----------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
1 --Articles of Incorporation of Registrant.(a)
2 --By-Laws of Registrant.(a)
3 --None.
4 --Copies of instruments defining the rights of shareholders, including the relevant portions of
the Articles of Incorporation and By-Laws of Registrant.(c)
5(a) --Management Agreement between Registrant and Merrill Lynch Asset Management.(b)
(b) --Supplement to Management Agreement between Registrant and Merrill Lynch Asset Management,
L.P. dated January 3, 1994.
6(a) --Class A Distribution Agreement between Registrant and Merrill Lynch Funds Distributor,
Inc.(b)
(b) --Class B Distribution Agreement between Registrant and Merrill Lynch Funds Distributor,
Inc.(b)
(c) --Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc. with
respect to the Merrill Lynch Mutual Fund Adviser Program.
7 --None.
8 --Custody Agreement between Registrant and Brown Brothers Harriman & Co.(b)
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement
between Registrant and Financial Data Services, Inc.(b)
(b) --Agreement between Merrill Lynch & Co., Inc. and Registrant relating to Registrant's use of
Merrill Lynch name.(b)
10 --None.
11 --Consent of Deloitte & Touche, independent auditors for Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management.(b)
14 --None.
15(a) --Class A Distribution Plan and Class A Distribution Plan Sub-Agreement of Registrant.(b)
(b) --Amended and Restated Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of
Registrant.(c)
16(a) --Schedule for computation of each performance quotation relating to Class A shares provided in
the Registration Statement in response to Item 22.(c)
(b) --Schedule for computation of each performance quotation relating to Class B shares provided in
the Registration Statement in response to Item 22.(c)
</TABLE>
- ---------------
(a) Filed on March 6, 1992, as an Exhibit to the Registrant's Registration
Statement on Form N-1A (File No. 33-46216) under the Securities Act of 1933.
(b) Filed on April 15, 1992, as an Exhibit to Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A (File No. 33-46216)
under the Securities Act of 1933.
(c) Filed on June 28, 1993, as an Exhibit to Post-Effective Amendment No. 2 the
Registrant's Registration Statement on Form N-1A (File No. 33-46216) under
the Securities Act of 1933.
<PAGE>
APPENDIX FOR GRAPHIC IMAGE AND 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
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Stylistic rendering of dragon
against a wall..................... Back cover of Propectus and
back cover of Statement of
Additional Information
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Dragon Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 3 to Registration
Statement No. 33-46216 of our report dated February 4, 1994 appearing in
the Statement of Additional Information, which is a part of such
Registration Statement, and to the reference to us under the caption
"Financial Highlights" appearing in the Prospectus, which also is a
part of such Registration Statement.
/s/ Deloitte & Touche
Princeton, New Jersey
April 28, 1994
EXHIBIT 5(b)
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
MERRILL LYNCH ASSET MANAGEMENT
As of January 1, 1994 Merrill Lynch Investment Management, Inc.
d/b/a Merrill Lynch Asset Management was reorganized as a limited
partnership, formally known as Merrill Lynch Asset Management,
L.P. and continuing to do business under the name Merrill Lynch
Asset Management ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. and the limited partners are Merrill
Lynch Investment Management, Inc. and Merrill Lynch & Co., Inc.
Pursuant to Rule 202(a)(1)-1 under the Investment Advisers Act of
1940 and Rule 2a-6 under the Investment Company Act of 1940 such
reorganization did not constitute an assignment of this
investment advisory agreement since it did not involve a change
of control or management of the investment adviser. Pursuant to
the requirements of Section 205 of the Investment Advisers Act of
1940, however, Merrill Lynch Asset Management hereby supplements
this investment advisory agreement by undertaking to advise you
of any change in the membership of the partnership within a
reasonable time after any such change occurs.
By /s/ Arthur Zeikel
-----------------------
Dated: January 3, 1994
EXHIBIT 6(c)
September 15, 1993
Merrill Lynch Funds Distributor, Inc.
Post Office Box 9011
Princeton, New Jersey 08543-9011
Each of the undersigned open-end investment companies (the
"Funds") has entered into a Distribution Agreement with Merrill
Lynch Funds Distributor, Inc. (the "Distributor"). Under the
terms of such agreements, the Distributor is authorized to offer
shares of each Fund and to purchase, as principal, such number of
shares from each of the Funds as are needed to fill unconditional
orders for shares of such Fund placed with the Distributor by
investors or by securities dealers.
This letter confirms the agreement by each Fund with the
Distributor that, in connection with the Merrill Lynch Mutual
Fund Adviser program, the Distributor and its affiliate, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, are also authorized
<PAGE>
to offer and sell shares of such Fund, as agent for the Fund, to
participants in such program. This letter further confirms that
the terms of the Distribution Agreement between each Fund and the
Distributor shall apply to such sales, including terms as to the
offering price of shares, the proceeds to be paid to each Fund,
the duties of the Distributor, the payment of expenses and
indemnification obligations of each Fund and the Distributor.
If the foregoing is consistent with your understanding of
our agreement, please sign and return one copy of the enclosed
agreement.
Very truly yours,
The Investment Companies listed
on Schedule A hereto
By: /s/ Terry K. Glenn
-------------------------
Authorized Signatory
Accepted as of the date
set forth above
Merrill Lynch Funds Distributor, Inc.
By: /s/ Gerald M. Richard
-------------------------------
Authorized Signatory
2
<PAGE>
The Declaration of Trust establishing each investment
company listed on Schedule A hereto which has been organized as a
Massachusetts trust (each, a "Fund"), a copy of which, together
with all amendments thereto, is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the
name of the Fund refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally;
and no Trustee, shareholder, officer, employee or agent of the
Fund shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs
of the Fund, but the Fund estate only shall be liable.
3
<PAGE>
SCHEDULE A
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EQUITY FUNDS:
Merrill Lynch Balanced Fund for Investment and Retirement
Merrill Lynch Basic Value Fund, Inc.
Merrill Lynch Capital Fund, Inc.
Merrill Lynch Developing Capital Markets Fund, Inc.
Merrill Lynch Dragon Fund, Inc.
Merrill Lynch EuroFund
Merrill Lynch Fundamental Growth Fund, Inc.
Merrill Lynch Fund for Tomorrow, Inc.
Merrill Lynch Global Allocation Fund, Inc.
Merrill Lynch Global Utility Fund, Inc.
Merrill Lynch Growth Fund for Investment and Retirement
Merrill Lynch Healthcare Fund, Inc.
Merrill Lynch International Equity Fund
Merrill Lynch International Holdings, Inc.
Merrill Lynch Latin America Fund, Inc.
Merrill Lynch Natural Resources Trust
Merrill Lynch Pacific Fund, Inc.
Merrill Lynch Phoenix Fund, Inc.
Merrill Lynch Special Value Fund, Inc.
Merrill Lynch Strategic Dividend Fund
Merrill Lynch Technology Fund, Inc.
FIXED INCOME FUNDS:
Merrill Lynch Adjustable Rate Securities Fund, Inc.
Merrill Lynch Americas Income Fund, Inc.
Merrill Lynch Corporate Bond Fund, Inc.
Merrill Lynch Federal Securities Trust
Merrill Lynch Global Bond Fund for Investment and Retirement
Merrill Lynch Global Convertible Fund, Inc.
Merrill Lynch Short-Term Global Income Fund, Inc.
Merrill Lynch World Income Fund, Inc.
TAX-EXEMPT FIXED INCOME FUNDS:
Merrill Lynch Arizona Municipal Bond Fund
Merrill Lynch California Municipal Bond Fund
Merrill Lynch California Insured Municipal Bond Fund
Merrill Lynch Florida Municipal Bond Fund
Merrill Lynch Massachusetts Municipal Bond Fund
Merrill Lynch Michigan Municipal Bond Fund
Merrill Lynch Minnesota Municipal Bond Fund
Merrill Lynch Municipal Bond Fund, Inc.
A-1
<PAGE>
Merrill Lynch Municipal Income Fund
Merrill Lynch New Jersey Municipal Bond Fund
Merrill Lynch New York Municipal Bond Fund
Merrill Lynch North Carolina Municipal Bond Fund
Merrill Lynch Ohio Municipal Bond Fund
Merrill Lynch Pennsylvania Municipal Bond Fund
Merrill Lynch Texas Municipal Bond Fund
INSTITUTIONAL MONEY MARKET FUNDS:
Merrill Lynch Institutional Fund
Merrill Lynch Government Fund
Merrill Lynch Treasury Fund
Merrill Lynch Institutional Tax-Exempt Fund
A-2
