<PAGE> 1
As filed with the Securities and Exchange Commission on October 17, 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. 4 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 5 /X/
(Check appropriate box or boxes)
---------------------
MERRILL LYNCH DRAGON FUND, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, including Area Code (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH DRAGON FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
---------------------
Copies to:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
</TABLE>
---------------------
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule
485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
---------------------
The Registrant has registered an indefinite number of its shares of 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> 2
MERRILL LYNCH DRAGON FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- -------------- ------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.......................... Cover Page
Item 2. Synopsis............................ Fee Table 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; Merrill Lynch Select
Pricing(SM) System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside
Back Cover Page
Item 8. Redemption or Repurchase............ Fee Table and Prospectus Summary;
Merrill Lynch Select Pricing(SM)
System; 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
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH DRAGON FUND, INC.
P.O. 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 10, herein.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant
circumstances. As a result of the implementation of the Merrill Lynch Select
Pricing(SM) System, Class A shares of the Fund outstanding prior to October 21,
1994, have been redesignated Class D shares. The Class A shares offered by this
Prospectus differ from the Class A shares offered prior to October 21, 1994, in
many respects, including sales charges, exchange privilege and the classes of
persons to whom such shares are offered. See "Merrill Lynch Select Pricing(SM)
System" on page 5.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], 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 $100, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated October 21, 1994 (the "Statement of Additional Information"), has
been filed with the Securities and Exchange Commission and is available, without
charge, by calling or by writing the Fund at the above telephone number or
address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C(C) CLASS D(D)
----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)...................... 5.25%(e) None None 5.25%(e)
Sales Charge Imposed on Dividend
Reinvestments........................ None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower)............................... None(f) 4.0% during the first year, 1% for one None(f)
decreasing 1.0% annually year
thereafter to 0.0% after the
fourth year
Exchange Fee........................... None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)(G):
Management Fees(h)..................... 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(i):
Account Maintenance Fees............. None 0.25% 0.25% 0.25%
Distribution Fees.................... None 0.75% 0.75% None
(Class B shares convert to
Class D shares automatically
after approximately eight years
and cease being subject to
distribution fees)
Other Expenses:
Custodial Fees....................... 0.14% 0.14% 0.14% 0.14%
Shareholder Servicing Costs(j)....... 0.08% 0.09% 0.09% 0.08%
Other................................ 0.12% 0.12% 0.12% 0.12%
Total Other Expenses............. 0.34% 0.35% 0.35% 0.34%
Total Fund Operating Expenses... 1.34% 2.35% 2.35% 1.59%
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and investment programs. The Class A shares offered by this
Prospectus differ from the Class A shares offered prior to October 21, 1994.
See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 33.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 34.
(c) Prior to the date of this Prospectus, the Fund has not offered Class C
shares to the public.
(d) Class A shares of the Fund outstanding prior to October 21, 1994, have been
redesignated Class D shares.
(e) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 33.
(f) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge will instead be subject to a CDSC of
1.0% of amounts redeemed within the first year after purchase.
(g) Information for Class B and Class D shares is stated for the fiscal period
ended December 31, 1993. Information under "Other Expenses" for Class A and
Class C shares is estimated for the fiscal year ending December 31, 1994.
(h) See "Management of the Fund -- Management and Advisory Arrangements" -- page
29.
(i) See "Purchase of Shares -- Distribution Plans" -- page 38.
(j) See "Management of the Fund -- Transfer Agency Services" -- page 30.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including the maximum $52.50
initial sales charge (Class A and Class D shares
only) and assuming (1) the Total Fund Operating
Expenses for each class set forth above; (2) a 5%
annual return throughout the periods and (3)
redemption at the end of the period:
Class A........................................ $ 65 $ 93 $ 122 $205
Class B........................................ $ 64 $ 93 $ 126 $250*
Class C........................................ $ 34 $ 73 $ 126 $269
Class D........................................ $ 68 $ 100 $ 135 $232
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of the period:
Class A........................................ $ 65 $ 93 $ 122 $205
Class B........................................ $ 24 $ 73 $ 126 $250*
Class C........................................ $ 24 $ 73 $ 126 $269
Class D........................................ $ 68 $ 100 $ 135 $232
</TABLE>
- ---------------
*Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. THE EXAMPLE SET FORTH ABOVE ASSUMES REINVESTMENT OF ALL DIVIDENDS
AND DISTRIBUTIONS AND UTILIZES A 5% ANNUAL RATE OF RETURN AS MANDATED BY
SECURITIES AND EXCHANGE COMMISSION REGULATIONS. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD") Merrill Lynch may charge its customers
a processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
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,
3
<PAGE> 6
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.
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 ("MLAM" or 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 100 other
registered investment companies. The Manager and FAM also offer portfolio
management and portfolio analysis services to individuals and institutions. As
of August 31, 1994, the Manager and FAM had a total of approximately
4
<PAGE> 7
$165.7 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 subject to the sales charges and ongoing fee
arrangements described below. See "Merrill Lynch Select Pricing(SM) System" and
"Purchase of Shares".
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".
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales
charges and ongoing fee arrangements described below. Shares of Class A and
Class D are sold to investors choosing the initial sales charge alternatives,
and shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing(SM) System is used
by more than 50 mutual funds advised by MLAM or an affiliate of MLAM, FAM.
Funds advised by MLAM or FAM are referred to herein as "MLAM-advised mutual
funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
5
<PAGE> 8
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, after approximately
decreasing 1.0% annually to eight years(4)
0.0%
- -------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC for one year. A 0.75% sales
charge for 401(k) purchases over $1 million will apply. See "Class A" and
"Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Eligible investors include certain retirement plans and participants in
certain investment programs. In addition, Class A shares will be
offered to directors and employees of Merrill Lynch & Co., Inc. and its
subsidiaries (the term "subsidiaries" when used herein with respect to
Merrill Lynch & Co, Inc. includes MLAM, FAM and certain other entities
directly or indirectly wholly owned and controlled by Merrill Lynch &
Co., Inc.) and to members of the Boards of MLAM-advised mutual funds.
The maximum initial sales charge is 5.25%, which is reduced for
purchases of $25,000 and over. Purchases of $1,000,000 or more may not
be subject to an initial sales charge but if the initial sales charge
is waived, such purchases will be subject to a CDSC of 1.0% if the
shares
6
<PAGE> 9
are redeemed within one year after purchase. Sales charges also are
reduced under a right of accumulation which takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%, an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares and for certain retirement plans is modified as
described under "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% and
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC if they are redeemed within one year of purchase. Although Class C
shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon conversion
of Class B shares as described above under "Class B". See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
particular circumstances.
7
<PAGE> 10
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Class A, Class B, Class C and Class D share holdings will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The ongoing
Class D account maintenance fees will cause Class D shares to have a higher
expense ratio, pay lower dividends and have a lower total return than Class A
shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges".
8
<PAGE> 11
FINANCIAL HIGHLIGHTS
The financial information in the table below, other than for the six month
period ended June 30, 1994, which is unaudited, has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, 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; unaudited financial
statements for the six months ended June 30, 1994, are also included in the
Statement of Additional Information. Class A shares of the Fund outstanding as
of October 21, 1994, are redesignated Class D shares on such date, and the Fund
has commenced offering shares of a new Class A having different characteristics.
Financial information is not presented for the new Class A or for Class C shares
because no shares of those classes are publicly issued before the date of this
Prospectus. 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(1)
-------------------------------------------------------
FOR THE FOR THE FOR THE
SIX MONTHS ENDED TEN MONTHS PERIOD
JUNE 30, ENDED MAY 29, 1992+
1994## DEC. 31, TO FEB. 28,
(UNAUDITED) 1993 1993
---------------- ---------------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 18.77 $ 11.01 $ 10.00
------- ------- -------------
Investment income (loss) -- net............................. .03 .07 .05
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net...................... (3.31) 7.88 1.04
------- ------- -------------
Total from investment operations............................... (3.28) 7.95 1.09
------- ------- -------------
Less dividends and distributions
Investment income -- net.................................... -- (.01) --
In excess of investment income -- net....................... -- (.07) (.08)
Realized gain on investments -- net......................... -- (.11) --++
------- ------- -------------
Total dividends and distributions.............................. -- (.19) (.08)
------- ------- -------------
Net asset value, end of period................................. $ 15.49 $ 18.77 $ 11.01
================ ================= =============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................. (17.47)%# 72.31%# 10.99%#
================ ================= =============
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and distribution
fees.......................................................... 1.34%* 1.34%* 1.48%*
================ ================= =============
Expenses....................................................... 1.59%* 1.59%* 1.73%*
================ ================= =============
Investment income (loss) -- net................................ .38%* .61%* .69%*
================ ================= =============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....................... $243,312 $311,848 $ 111,180
================ ================= =============
Portfolio turnover............................................. 9.83% 16.62% 4.65%
================ ================= =============
<CAPTION>
CLASS B
-------------------------------------------------
FOR THE FOR THE FOR THE
SIX MONTHS ENDED TEN MONTHS PERIOD
JUNE 30, ENDED MAY 29, 1992+
1994## DEC. 31, TO FEB. 28,
(UNAUDITED) 1993## 1993##
---------------- ---------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 18.74 $ 11.01 $ 10.00
------- ---------- -------------
Investment income (loss) -- net............................. (.03) (.02) (.02)
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net...................... (3.31) 7.86 1.05
------- ---------- -------------
Total from investment operations............................... (3.34) 7.84 1.03
------- ---------- -------------
Less dividends and distributions
Investment income -- net.................................... -- --++ --
In excess of investment income -- net....................... -- --++ (.02)
Realized gain on investments -- net......................... -- (.11) --++
------- ---------- -------------
Total dividends and distributions.............................. -- (.11) (.02)
------- ---------- -------------
Net asset value, end of period................................. $ 15.40 $ 18.74 $ 11.01
================ ============ =============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................. (17.82)%# 71.27%# 10.32%#
================ ============ =============
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and distribution
fees.......................................................... 1.35%* 1.35%* 1.49%*
================ ============ =============
Expenses....................................................... 2.35%* 2.35%* 2.49%*
================ ============ =============
Investment income (loss) -- net................................ (.38)%* (.15)%* (.08)%*
================ ============ =============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....................... $821,107 $990,843 $ 365,430
================ ============ =============
Portfolio turnover............................................. 9.83% 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.
(1) As of October 21, 1994, the Class A shares for which information is
presented here were redesignated Class D shares.
9
<PAGE> 12
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
10
<PAGE> 13
exchanges are generally higher than in the United States. There is generally
less government 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
influence over many aspects of the private sector.
11
<PAGE> 14
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.
12
<PAGE> 15
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.
13
<PAGE> 16
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. Such
leveraging increases the Fund's exposure to capital risk, and borrowed funds are
subject to interest costs which will reduce net income.
14
<PAGE> 17
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.
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 NIEs 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, 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.
15
<PAGE> 18
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.
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.
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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 Ratings Group ("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 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
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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 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, 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. In the event of a default by a governmental entity, there
may be few or no effective legal remedies available to the Fund, and there can
be no assurance the Fund will be able to collect on defaulted sovereign debt in
whole or in part.
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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 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
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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.
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 specified amount of a commodity, such as a type of 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".
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<PAGE> 23
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 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
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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 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
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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 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".
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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 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
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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 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
25
<PAGE> 28
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; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the contract
with the Fund, to repurchase a security (typically a security issued or
guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This insulates
the Fund from fluctuations in the market value of the underlying security during
such period, although, to the extent the repurchase agreement is not denominated
in U.S. dollars, the Fund's return may be affected by currency fluctuations.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System, a primary dealer in U.S. government securities or an affiliate
thereof. A purchase and sale contract is similar to a repurchase agreement, but
purchase and sale contracts, unlike purchase agreements, allocate interest on
the underlying security to the purchaser during the term of the agreement. In
all instances, the Fund takes possession of the underlying securities when
investing in repurchase agreements or purchase and sale contracts. Nevertheless,
if the seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. The Fund may not invest more than 10% of its net
assets in repurchase agreements or purchase and sale contracts maturing in more
than seven days, together with all other illiquid securities.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 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.
26
<PAGE> 29
During the period of such a loan, the Fund receives the income on the loaned
securities and receives either the income on the collateral or other
compensation, i.e., negotiated loan premium or fee, for entering into the loan
and thereby increases its yield. Such loans are terminable at any time, and the
borrower, after notice, will be required to return borrowed securities within
five business days. In the event that the borrower defaults on its obligation to
return borrowed securities, because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could suffer
a loss to the extent that the value of the collateral falls below the market
value of the borrowed securities.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental policies
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act of 1940, as amended (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
27
<PAGE> 30
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 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.
The Board of Directors of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by all of
the non-money market mutual funds advised by MLAM or FAM. The proposed uniform
investment restrictions are designed to provide each of these funds, including
the Fund, with as much investment flexibility as possible under the Investment
Company Act and applicable state securities regulations, help promote
operational efficiencies and facilitate monitoring of compliance. The investment
objective and policies of the Fund will be unaffected by the adoption of the
proposed investment restrictions.
The full text of the proposed investment restrictions is set forth under
"Investment Objective and Policies -- Proposed Uniform Investment Restrictions"
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL* -- President and Chief Investment Officer of the Manager;
President and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch & Co., Inc.; 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.
28
<PAGE> 31
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., 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, FAM, acts as the
investment adviser to more than 100 other registered investment companies. The
Manager or FAM also offers portfolio management and portfolio analysis services
to individuals and institutions. As of August 31, 1994, the Manager and FAM had
a total of approximately $165.7 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Manager.
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
August 31, 1994, the net assets of the Fund aggregated approximately $1.2
billion. At this asset level, the annual management fee would aggregate
approximately $12.2 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
29
<PAGE> 32
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 the former Class A shares (now
redesignated Class D 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 the former Class A shares (now redesignated Class D shares), the
ratio of total expenses excluding account maintenance fees to average net assets
was 1.34% (annualized), and the 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); none of the new Class A or Class C shares had
been issued during these periods. (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 -- 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 $11.00 per Class A or Class D shareholder
account and $14.00 per Class B or Class C shareholder account, nominal
miscellaneous fees (e.g., account closing fees) and is entitled to reimbursement
for out-of-pocket expenses incurred by it under the Transfer Agency Agreement.
For the fiscal 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
August 31, 1994, the Fund had 20,213 of the former Class A shareholder accounts
(now redesignated Class D shareholder accounts), 83,943 Class B shareholder
accounts, no Class C shareholder accounts and no Class D shareholder accounts.
At this level of accounts, the annual fee payable to
30
<PAGE> 33
the Transfer Agent would aggregate approximately $1.4 million plus miscellaneous
and out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and 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 for retirement plans, the minimum initial purchase is
$100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering
price equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 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 as of 4:15 p.m., New York time, on the day the orders are placed with the
Distributor, provided the orders are received by the Distributor prior to 4:30
p.m., New York time, on that day. If the purchase orders are not received prior
to 4:30 p.m., New York time, such orders shall be deemed received on the next
business day. The Fund or the Distributor may suspend the continuous offering
of the Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Transfer Agent are not subject to the processing
fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares
of Class B and Class C are sold to investors choosing the deferred sales
charge alternatives. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund with
the investment thereafter being subject to a contingent deferred sales charge
and ongoing distribution fees. A discussion of the factors that investors
should consider in determining the method of purchasing shares under the
Merrill Lynch Select Pricing(SM) System is set forth under "Merrill Lynch
Select Pricing(SM) System" on page 5.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except the Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will
31
<PAGE> 34
be imposed directly against those classes and not against all assets of the Fund
and, accordingly, such charges will not affect the net asset value of any other
class or have any impact on investors choosing another sales charge option.
Dividends paid by the Fund for each class of shares will be calculated in the
same manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Class B,
Class C and Class D shares each have exclusive voting rights with respect to the
Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid. See "Distribution
Plans" below. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, after approximately
decreasing 1.0% annually to eight years(4)
0.0%
- -------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. A 0.75%
sales charge for 401(k) purchases over $1 million will apply.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
32
<PAGE> 35
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DISCOUNT TO
PERCENTAGE PERCENTAGE* OF SELECTED DEALERS
OF OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- --------------------------------------------------- -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000.................................. 5.25% 5.54% 5.00%
$25,000 but less than $50,000...................... 4.75 4.99 4.50
$50,000 but less than $100,000..................... 4.00 4.17 3.75
$100,000 but less than $250,000.................... 3.00 3.09 2.75
$250,000 but less than $1,000,000.................. 2.00 2.04 1.80
$1,000,000 and over**.............................. 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994, may be subject to a CDSC if the shares are redeemed within
one year of purchase at the following rates: 1.00% on purchases of $1,000,000
to $2,500,000; 0.60% on purchases of $2,500,001 to $3,500,000; 0.40% on
purchases of $3,500,001 to $5,000,000; and 0.25% on purchases of more than
$5,000,000 in lieu of paying an initial sales charge. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class A or Class D shares by
certain 401(k) plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933.
As noted above, as a result of the implementation of the Merrill Lynch
Select Pricing(sm) System, Class A shares of the Fund outstanding prior to
October 21, 1994, have been redesignated Class D shares. The Class A shares
offered by this Prospectus differ from the Class A shares offered prior to
October 21, 1994, in many respects, including sales charges, exchange privilege
and the classes of persons to whom such shares are offered. During the fiscal
period May 29, 1992 (commencement of operations) to February 28, 1993, the Fund
sold 10,664,260 of its former Class A shares (now redesignated Class D shares)
for aggregate net proceeds to the Fund of $107,804,104. The gross sales charges
for the sale of its former Class A shares 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 of its former Class A shares for aggregate net
proceeds to the Fund of $114,904,877. The gross sales charges for the sale of
its former Class A shares for that period were $2,948,376, of which $183,544
and $2,764,832 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal period ended December 31, 1993, the Distributor
received no CDSCs with respect to redemption within one year after purchase of
Class A shares purchased subject to front-end sales charge waivers.
33
<PAGE> 36
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net
asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services and certain purchases
made in connection with the Merrill Lynch Mutual Fund Adviser program. In
addition, Class A shares will be offered at net asset value to Merrill Lynch &
Co., Inc. and its subsidiaries and their directors and employees and to members
of the Boards of MLAM-advised investment companies, including the Fund. Certain
persons who acquired shares of certain MLAM-advised closed-end funds who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the Fund
if certain conditions set forth in the Statement of Additional Information are
met. For example, Class A shares of the Fund and certain other MLAM-advised
mutual funds are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. who wish to reinvest the net proceeds from a
sale of certain of their shares of common stock of Merrill Lynch Senior
Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges
including information regarding investments by Employee Sponsored Retirement or
Savings Plans is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower
34
<PAGE> 37
continuing fees. See "Conversion of Class B Shares to Class D Shares" below.
Both Class B and Class C shares are subject to an account maintenance fee of
0.25% of net assets and a distribution fee of 0.75% of net assets as discussed
below under "Distribution Plans". The proceeds from the accrued maintenance fees
are used to compensate Merrill Lynch for providing continuing account
maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
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<PAGE> 38
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
YEAR SINCE AS A PERCENTAGE
PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
---------------- -----------------
<S> <C>
0-1.......................................................... 4.00%
1-2.......................................................... 3.00
2-3.......................................................... 2.00
3-4.......................................................... 1.00
4 and thereafter............................................. 0.00
</TABLE>
For the fiscal period May 29, 1992 (commencement of operations) to February 28,
1993, the Distributor received CDSCs 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 CDSCs of $807,253
with respect to the redemption of Class B shares, all of which was paid to
Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on 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
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans. The CDSC also is waived for any Class B shares which
are purchased by eligible 401(k) or eligible 401(a) plans which are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in
such account at the time of redemption. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject
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<PAGE> 39
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly, no
Class C CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on shares derived
from reinvestment of dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all
37
<PAGE> 40
MLAM-advised mutual funds held in that Class B Retirement Plan will be converted
into Class D shares of the appropriate funds. Subsequent to such conversion,
that Class B Retirement Plan will be sold Class D shares of the appropriate
funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
Prior to June 28, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 1.0% of
average daily net assets of the Class B shares of the Fund under a distribution
plan previously adopted by the Fund (the "Prior Plan") to compensate the
Distributor and Merrill Lynch for providing account maintenance and
distribution-related activities and services to Class B shareholders. The fee
rate payable and the services provided under the Prior 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
38
<PAGE> 41
distribution-related activities and services in connection with 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 Distribution Plan
relating to the former Class A shares (now redesignated Class D shares) (based
on average net assets subject to such Distribution Plan of approximately $75.8
million), all of which was paid to Merrill Lynch for providing account
maintenance services in connection with the former Class A shares. For the
fiscal period March 1, 1993, to December 31, 1993, the Fund paid the Distributor
$355,108 pursuant to the Distribution Plan relating to the former Class A shares
(now redesignated Class D shares) (based on average net assets subject to such
Distribution Plan of approximately $168.3 million), all of which was paid to
Merrill Lynch for providing account maintenance services in connection with the
former Class A shares. The Fund did not begin to offer Class C shares publicly
until the date of this Prospectus. Accordingly, no payments have been made
pursuant to the Class C Distribution Plan prior to the date of this Prospectus.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation. 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).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares".
39
<PAGE> 42
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the 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 Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares".
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
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<PAGE> 43
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. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 4:30 p.m., New
York time, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares.
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.
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<PAGE> 44
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various 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 statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the 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. Shareholders may make
additions to their Investment Account at any time by mailing a check directly to
the Transfer Agent. Shareholders also may maintain their accounts through
Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage
account, an Investment Account in the transferring shareholder's name will be
opened automatically, without charge, at the Transfer Agent. Shareholders
considering transferring their Class A or Class D shares from Merrill Lynch to
another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new brokerage
firm to maintain such shares in an account registered in the name of the
brokerage firm for the benefit of the shareholder. Shareholders considering
transferring a tax-
42
<PAGE> 45
deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. There is currently no limitation
on the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated in accordance with the rules of
the Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
43
<PAGE> 46
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
All dividends and capital gains distributions are 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. Cash payments can also be directly deposited to the shareholder's
bank account. No CDSC will be imposed on redemption of shares issued as a result
of the automatic reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account in the form of payments by check or through
automatic payment by direct deposit to his bank account on either a monthly or
quarterly basis. A Class A or Class D shareholder whose shares are held within a
CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be
made to an investor's Investment(R) Account by prearranged charges of $50 or
more to his regular bank account. Investors who maintain CMA(R) accounts may
arrange to have periodic investments made in the Fund in their CMA(R) accounts
or in certain related accounts in amounts of $100 or more through the CMA(R)
Automated Investment Program.
44
<PAGE> 47
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, Class B, Class C and Class D 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 any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs relating
to each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return, and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over longer periods of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B and Class C shares (such as investors in
certain retirement plans) or to reduced sales charges in the case of Class A and
Class D shares, performance data may take into account the reduced, and not the
maximum, sales charges or may not take into account the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or waiver
of the CDSC, a lower amount of expenses may be deducted. See "Purchase of
Shares". The Fund's total return may be expressed either as a percentage or as a
dollar amount in order to illustrate the effect of such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average or performance
data published by Lipper Analytical Services,
45
<PAGE> 48
Inc., Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine, Fortune
Magazine or other industry publications. In addition, from time to time the Fund
may include the Fund's risk adjusted performance ratings assigned by Morningstar
Publications, Inc. in advertising or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid at least annually.
All net realized long-or short-term capital gains, if any, are distributed to
the Fund's shareholders at least annually. 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 each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Determination of Net Asset Value" 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 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 of the shares of all classes of the Fund 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 management fees
46
<PAGE> 49
payable to the Manager and any account maintenance and/or distribution fees
payable to the Distributor, are accrued daily.
The per share net asset value of the Class A shares generally will be
higher than the per share net asset value of shares of the other classes,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fees applicable
with respect to Class D shares; moreover, the per share net asset value of Class
D shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the time
of valuation. 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 sale price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased by the Fund are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
47
<PAGE> 50
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
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,
48
<PAGE> 51
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, under proposed regulations the Fund would be able to
"mark-to-market" at the end of each taxable year all shares that it holds in
PFICs. If it made this election, the Fund would recognize as ordinary income any
increase in the value of such shares. Unrealized losses, however, would not be
recognized. By making the mark-to-market election, the Fund could avoid
imposition of the interest charge with respect to its distributions from PFICs,
but in any particular year might be required to recognize income in excess of
the distributions it receives from PFICs and its proceeds from dispositions of
PFIC stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts", and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares, and resulting in a capital gain for any shareholder who received a
distribution greater than such shareholder's basis in Fund shares (assuming the
shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
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<PAGE> 52
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 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
fee relating to such shares and Class B and Class C shares bear certain expenses
related to the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares". The Fund has received an
order from the Securities and Exchange Commission (the "Commission") permitting
the issuance and sale of multiple classes of common stock. The Directors of the
Fund may classify and reclassify the shares of the Fund into additional classes
of common stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other 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 rights. Shares have the conversion rights described in this
Prospectus. Each share of Common Stock is entitled to participate equally in
dividends and distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities, except that, as noted above, the Class B, Class C and Class D
shares bear certain additional expenses.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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<PAGE> 53
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, 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.
51
<PAGE> 54
[This page is intentionally left blank.]
52
<PAGE> 55
MERRILL LYNCH DRAGON FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
</TABLE>
of Merrill Lynch Dragon Fund, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. ..........................................................
2. ..........................................................
3. ..........................................................
4. ..........................................................
5. ..........................................................
6. ..........................................................
Name .......................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ..................................................
First Name Initial Last Name
Address.....................................................................
...................................................... Date ...............
(Zip Code)
<TABLE>
<CAPTION>
<S> <C>
Occupation ......................................... Name and Address of Employer.................................................
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Dragon Fund, Inc. Authorization Form.
Specify type of account (check one): / / checking / / savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number ............................. Account Number .......................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor..........................................................
Signature of Depositor ....................... Date ...........................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
A-1
<PAGE> 56
MERRILL LYNCH DRAGON FUND, INC. -- AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information--Taxes") either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ("IRS") has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................, 19 ....
Dear Sir/Madam: Date of initial purchase
</TABLE>
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:
/ / $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 this 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.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp ---
- --- ---
This form when completed should be mailed to:
Merrill Lynch Dragon Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's signature.
...............................................................
Dealer Name and Address
By ............................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- --------- ------------
- --------- ------------ ..............................
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
A-2
<PAGE> 57
MERRILL LYNCH DRAGON FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name................................................................................
First Name Initial Last Name ------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information.)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Dragon Fund,
Inc. at cost or current offering price. Withdrawals to be made either (check
one) / / Monthly on the 24th day of each month, or / / Quarterly on the 24th day
of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawals on _____________ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $_______
or / / ___% of the current value of / / Class A or / / Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address ........................................................................
........................................................................
Signature of Owner..............................................Date............
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .................................Account Number.....................
Bank Address....................................................................
....................................................................
Signature of Depositor .........................................Date............
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
A-3
<PAGE> 58
MERRILL LYNCH DRAGON FUND, INC. -- AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Dragon Fund, Inc., subject to the terms set forth below. In the
event that I am not eligible to purchase Class A shares, I understand that Class
D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Dragon Fund, Inc., as indicated below:
Amount of each ACH debit $...................................................
Account No...................................................................
Please date and invest ACH debits on the 20th of each month
beginning _____________ or as soon as thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip............................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc., I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such debit. I
further agree that if any such debit be dishonored, whether with or without
cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE> 59
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 60
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund, the Manager or the Distributor. This Prospectus does not constitute
an offering in any state in which such offering may not lawfully be made.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................. 2
Prospectus Summary.................... 3
Merrill Lynch Select PricingSM
System.............................. 5
Financial Highlights.................. 9
Risk Factors and Special
Considerations...................... 10
Investment Objective and Policies..... 15
Management of the Fund................ 28
Board of Directors.................. 28
Management and Advisory
Arrangements..................... 29
Transfer Agency Services............ 30
Purchase of Shares.................... 31
Initial Sales Charge
Alternatives --
Class A and Class D Shares....... 33
Deferred Sales Charge
Alternatives -- Class B and Class
C Shares......................... 34
Distribution Plans.................. 38
Limitations on the Payment of
Deferred Sales Charges........... 40
Redemption of Shares.................. 40
Redemption.......................... 41
Repurchase.......................... 41
Reinstatement Privilege -- Class A and
Class D Shares...................... 42
Shareholder Services.................. 42
Performance Data...................... 45
Additional Information................ 46
Dividends and Distributions......... 46
Determination of Net Asset Value.... 46
Taxes............................... 47
Organization of the Fund............ 50
Shareholder Inquiries............... 50
Shareholder Reports................. 51
Authorization Form.................. A-1
</TABLE>
Code # 16261-1094
[LOGO]
MERRILL LYNCH
DRAGON FUND, INC.
[ART WORK]
PROSPECTUS
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 61
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH DRAGON FUND, INC.
P.O. 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.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund
offers four classes of shares each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select PricingSM
System permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated October
21, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is October 21, 1994.
<PAGE> 62
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 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
2
<PAGE> 63
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.
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
3
<PAGE> 64
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 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
4
<PAGE> 65
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 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
5
<PAGE> 66
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 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
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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.
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
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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 or an affiliate
thereof. 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 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
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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.
CURRENT INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities).
2. Make investments for the purpose of exercising control or
management. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making
of investments for the purpose of exercising control of management.
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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 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
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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.
(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
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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.
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under "Investment Objective and Policies -- Other Investment Policies and
Practices -- Investment Restrictions", the Board of Directors of the Fund has
approved the replacement of the Fund's existing investment restrictions with the
fundamental and non-fundamental investment restrictions set forth below. These
uniform investment restrictions have been proposed for adoption by all of the
non-money market mutual funds advised by the Manager or its affiliate, Fund
Asset Management, L.P. ("FAM"). The investment objective and policies of the
Fund will be unaffected by the adoption of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
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Under the proposed fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
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 or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the proposed non-fundamental investment restrictions, the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
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b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a "Rule 144A security") and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in this
investment restriction (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 5% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 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
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to settle securities transactions. Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only as a temporary measure for
extraordinary or emergency purposes, including to meet redemptions or to
settle securities transactions which may otherwise require untimely
dispositions of Fund securities. The Fund will not purchase securities
while borrowings exceed 5% of total assets except (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained, exclusively for settlements of other
securities transactions. (For the purpose of this restriction, collateral
arrangements with respect to the writing of options, and, if applicable,
futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to
be a pledge of assets and neither such arrangements nor the purchase or
sale of futures or related options are deemed to be the issuance of a
senior security.)
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL -- President and Director(1)(2) -- President of the Manager
(which term as used herein includes its corporate predecessors) since 1977 and
Chief Investment Officer since 1976; President and Chief Investment Officer of
FAM (which term as used herein includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Executive Vice President of Merrill Lynch &
Co., Inc. since 1990; Director of the Distributor.
DONALD CECIL -- Director(2) -- 1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER -- Director(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc., and Harman International Industries, Inc.
CHARLES C. REILLY -- Director(2) -- 9 Hampton Harbor Road, Hampton Bays,
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, New York
University Leonard N. Stern School of Business Administration; Director of Re
Capital Corp. (reinsurance holding company), Bowne & Co., Inc. (financial
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printers), Vornado, Inc. (real estate holding company), Smith-Corona Corporation
(manufacturer of typewriters and word processors) and Alexander's Inc. (real
estate company).
TERRY K. GLENN -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
NORMAN R. HARVEY -- Senior Vice President(1)(2) -- Senior Vice President of
the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
KARA W.Y. TAN BHALA -- Vice President(1) -- Portfolio manager with the
Manager since 1992; Vice President of James Capel Inc. from 1988 to 1990; Senior
Investment Analyst of James Capel (Far East) Ltd. from 1986 to 1988.
DONALD C. BURKE -- Vice President(1)(2) -- Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from 1982
to 1990.
GERALD M. RICHARD -- Treasurer(1)(2) -- Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981 and
Treasurer since 1984.
MICHAEL J. HENNEWINKEL -- Secretary(1)(2) -- Vice President of the Manager
since 1985 and attorney associated with the Manager and FAM 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 or manager.
At September 30, 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
16
<PAGE> 77
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 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
17
<PAGE> 78
by the Fund pursuant to distribution plans in compliance with Rule 12b-1 under
the Investment Company Act. See "Purchase of Shares -- 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.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such 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.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests in
the investment portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by the Manager
or FAM are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offerings of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement described
above.
18
<PAGE> 79
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select Pricing(SM)
System, Class A shares of the Fund outstanding prior to October 21, 1994, have
been redesignated Class D shares. The Class A shares currently being offered
differ from the Class A shares offered prior to October 21, 1994 in many
respects, including sales charges, exchange privilege and the classes of persons
to whom such shares are offered. During the fiscal period May 29, 1992
(commencement of operations) to February 28, 1993, the Fund sold 10,664,260 of
its former Class A shares (now redesignated Class D shares) for aggregate net
proceeds to the Fund of $107,804,104. The gross sales charges for the sale of
its former Class A shares 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 of its former Class A shares for aggregate net proceeds to the Fund of
$114,904,877. The gross sales charges for the sale of its former Class A shares
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 and Class D
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 individual investors or employees and forwarding
investments by such persons to the Fund and by any such employer or plan bearing
the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or the Manager
who purchased such closed-end fund shares prior to October 21, 1994, and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A or Class D Shares, if the conditions set forth below
are satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994, and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to purchase Class A shares) or Class D shares of the Fund and other MLAM-advised
mutual funds ("Eligible Class D Shares"), if the following conditions are met.
First, the sale of the closed-end fund shares must be made through Merrill
19
<PAGE> 80
Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible
Class A or Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing dividends
from shares of common stock acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option. Class A shares of the Fund are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating
Rate Fund") who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Senior Floating Rate Fund in shares of the Fund.
In order to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares to the Senior
Floating Rate Fund in connection with a tender offer conducted by the Senior
Floating Rate Fund and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification, and acceptance
of the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. The reduced sales charges are applicable to a
purchase aggregating $25,000 or more of Class A or Class D shares of the Fund or
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares, but its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter executed within
90 days of such purchase if the Distributor is informed in writing of this
intent within such 90-day period. The value of Class A and Class D shares of the
Fund and of other MLAM-advised mutual funds, presently held at cost or maximum
offering price (whichever is higher), on the date of the first purchase under
the Letter of Intention, may be included as a credit toward completion of such
Letter but the reduced sales charge applicable to the amount covered by such
Letter will be 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 $25,000), the investor will be notified and must pay, within 20 days of the
expiration of such Letter, the difference between the sales charge on the Class
A or Class D shares purchased
20
<PAGE> 81
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to five percent of
the intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter would
otherwise be subject to a further reduced sales charge based on the right of
accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to the reduced percentage sales charge which would be applicable to a
single purchase equal to the total dollar value of the 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 an MLAM-advised money market fund into the Fund that
creates a sales charge will count toward completing a new or existing Letter of
Intention from the Fund.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
shares are offered at net asset value to Employer Sponsored Retirement or
Savings Plans, such as tax qualified retirement plans within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
deferred compensation plans within the meaning of Sections 403(b) and 457 of the
Code, other deferred compensation arrangements, Voluntary Employee Benefits
Association ("VEBA") plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system, herein
referred to as "Employer Sponsored Retirement or Savings Plans", provided the
plan has accumulated $20 million or more in MLAM-advised mutual funds (in the
case of the Class A shares) or $5 million or more in MLAM-advised mutual funds
(in the case of Class D shares). Class D shares may be offered at net asset
value to new Employer Sponsored Retirement or Savings Plans, provided the plan
has $3 million or more initially invested in MLAM-advised mutual funds. Assets
of Employer Sponsored Retirement or Savings Plans sponsored by the same sponsor
or an affiliated sponsor may be aggregated. Class A shares and Class D shares
also are offered at net asset value to Employer Sponsored Retirement or Savings
Plans that have at least 1,000 employees eligible to participate in the plan (in
the case of Class A shares) or between 500 and 999 employees eligible to
participate in the plan (in the case of Class D shares). Employees eligible to
participate in Employer Sponsored Retirement or Savings Plans of the same
sponsoring employer or its affiliates may be aggregated. Tax qualified
retirement plans within the meaning of Section 401(a) of the Code meeting any of
the foregoing requirements and which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a wide range of investments including individual corporate equities and
other securities in addition to mutual fund shares) by the Merrill Lynch
BlueprintSM Program, are offered Class A or Class D shares at a price equal to
net asset value per share plus a reduced sales charge of 0.50%. Any Employer
Sponsored Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares at net asset value has the option of
(i) purchasing Class A shares at the initial sales charge schedule and possible
CDSC schedule disclosed in the Prospectus if it is otherwise eligible to
purchase Class A shares, (ii) purchasing Class D shares at the initial sales
charge and possible CDSC schedule disclosed in the Prospectus, (iii) if the
Employer Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption, or if the
Employer Sponsored Retirement or Savings Plan does not qualify to purchase Class
B shares with a waiver of the CDSC upon redemption, purchasing Class C shares at
the CDSC schedule disclosed in the Prospectus. The minimum initial and
subsequent purchase requirements are waived in connection with all the above
referenced Employer Sponsored Retirement or Savings Plans.
21
<PAGE> 82
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of Merrill Lynch & Co., Inc. and its subsidiaries (the term "subsidiaries" when
used herein with respect to Merrill Lynch & Co., Inc. includes MLAM, FAM and
certain other entities directly or indirectly wholly owned and controlled by
Merrill Lynch & Co., Inc.), and any trust, pension, profit-sharing or other
benefit plan for such persons may purchase Class A shares of the Fund at net
asset value.
Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis;
second, such purchase of Class D shares must be made within 90 days after
notice.
Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a public or private investment company. The value of the
assets or company acquired in a tax-free transaction may 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. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the
22
<PAGE> 83
disposition of the Fund's portfolio securities shall at all times remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholder. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholder, and all material amendments are required to be
approved by the vote of the Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective
23
<PAGE> 84
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of June 30, 1994,
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 June 30, 1994. Since Class C shares of the Fund had not been
publicly issued prior to the date of this Statement of Additional Information,
information concerning Class C shares is not yet provided below.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JUNE 30, 1994
---------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE DISTRIBUTION
INTEREST AMOUNTS FEE AT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
----------- ---------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As Adopted......... $ 688,187 $ 43,012 $ 3,335 $ 46,347 $ 10,119 $ 36,228 $ 6,158
Under Distributor's Voluntary
Waiver........................... $ 688,187 $ 43,012 $ 3,441 $ 46,453 $ 10,119 $ 36,333 $ 6,158
</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 CDSC payments distribution fee payments and accruals. Of the
distribution fee payments made prior to June 28, 1993, under a prior 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. See "Purchase of Shares -- Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
24
<PAGE> 85
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
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.
DEFERRED SALES CHARGE -- CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or on redemption of Class B
shares following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a tax-free distribution following retirement under a
tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequent than annually) made for the life (or life expectancy) or any redemption
resulting from the tax-free return of an excess contribution to an IRA; or (b)
any partial or complete redemption following the death or disability (as defined
in the Code) of a Class B shareholder (including one who owns the Class B shares
as joint tenant with his or her spouse), provided the redemption is requested
within one year of the death or initial determination of disability. For the
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 or Class D shares at net asset value has the
option of purchasing Class A or Class D shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the following
requirements, then it may purchase Class B shares with a waiver of the CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. "Eligible 401(k) Plan" is defined as a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from a
401(a) plan qualified under the Code, provided, however, that each such plan has
the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a) Plan").
Other tax qualified retirement plans within the meaning of Section 401(a) and
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch also may purchase Class B shares with a waiver of the CDSC. The CDSC also
is waived for any Class B or Class C shares which are purchased by an Eligible
401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of
25
<PAGE> 86
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the above referenced
Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices -- 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 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.
26
<PAGE> 87
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 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 management fees and any account maintenance and/or
distribution fees, are accrued daily. The per share net asset value of the Class
B, Class C and Class D shares generally will be lower than the per share net
asset value of the Class A shares reflecting the daily expense accruals of the
account maintenance, distribution and higher transfer
27
<PAGE> 88
agency fees applicable with respect to the Class B and Class C shares and the
daily expense accruals of the account maintenance fees applicable with respect
to the Class D shares; moreover the per share net asset value of the Class B and
Class C shares generally will be lower than the per share net asset value of its
Class D shares reflecting the daily expense accruals of the distribution fees
and higher transfer agency fees applicable with respect to the Class B and Class
C shares of the Fund. It is expected, however that the per share net asset value
of the four classes will tend to converge immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the time
of valuation. 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 sale price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased by the Fund are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
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, copies of the various plans described below and instructions as to how
to participate in the various services or plans, or how to change options with
respect thereto, can be obtained from the Fund, the Distributor or Merrill
Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions. A shareholder
may make additions to his Investment Account at any time by mailing a check
directly to the transfer agent.
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<PAGE> 89
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the transfer agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the transfer agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. 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.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if (s)he is an eligible Class A investor as described
in the Prospectus) or Class B, Class C or Class D shares at the applicable
public offering price either through the shareholder's securities dealer or by
mail directly to the transfer agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks or
automated clearing house debits of $50 or more to charge the regular bank
account of the shareholder on a regular basis to provide systematic additions to
the Investment Account of such shareholder. An investor whose shares of the Fund
are held within a CMA(R) account may arrange to have periodic investments made
in the Fund in amounts of $250 or more ($1 for retirement accounts) through the
CMA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund 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 or
direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
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<PAGE> 90
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D 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
or Class D shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more and monthly withdrawals are available for
shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at 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 or Class D
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 or Class D shares in the Investment Account are
reinvested automatically in Class A or Class D shares of the Fund, respectively.
A shareholder's Systematic Withdrawal Plan may be terminated at any time,
without charge or penalty, by the shareholder, the Fund, the Fund's transfer
agent or the Distributor. Withdrawal payments should not be considered as
dividends, yield or income. Each withdrawal is a taxable event. If periodic
withdrawals continuously exceed reinvested dividends, the shareholder's original
investment may be reduced correspondingly. Purchases of additional Class A or
Class D shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A or Class D shares of the Fund from
investors who maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions are
made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select PricingSM System, Class A shareholders
30
<PAGE> 91
may exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of the
second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund but does not hold Class A shares of the second
fund in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares will be exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other Fund as more fully described
below. Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically designated
below as available for exchange by holders of Class A, Class B, Class C or Class
D shares. Shares with a net asset value of at least $100 are required to qualify
for the exchange privilege, and any shares utilized in an exchange must have
been held by the shareholder for 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A or Class D money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of
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<PAGE> 92
the new Class B or Class C shares, the holding period for the outstanding Class
B or Class C shares is "tacked" to the holding period of the new Class B or
Class C shares. For example, an investor may exchange Class B shares of the Fund
for those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund Class B shares for two and a half years. The 2% sales
charge that generally would apply to a redemption would not apply to the
exchange. Three years later the investor may decide to redeem the Class B shares
of Special Value Fund and receive cash. There will be no CDSC due on this
redemption, since by "tacking" the two and a half year holding period of Fund
Class B shares to the three year holding period for the Special Value Fund Class
B shares, the investor will be deemed to have held the new Class B shares for
more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of the Fund may, in turn,
be exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of the fund will be aggregated with previous holding periods for purposes
of reducing the CDSC. Thus, for example, an investor may exchange Class B shares
of the Fund for shares of Merrill Lynch Institutional Fund ("Institutional
Fund") after having held the Fund Class B shares for two and a half years and
three years later decide to redeem the shares of Institutional Fund for cash. At
the time of this redemption, the 2% CDSC that would have been due had the Class
B shares of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continued to hold for an additional two and a half years, any
subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. High current income consistent with a policy of
limiting the degree of fluctuation in net asset
value by investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and asset-backed
securities.
MERRILL LYNCH AMERICAS INCOME
FUND, INC. A high level of current income, consistent with
prudent investment risk, by investing primarily
in debt securities denominated in a currency of
a country located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).
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<PAGE> 93
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 as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH ARKANSAS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series Fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH ASSET GROWTH
FUND, INC. High total investment return, consistent with
prudent risk, from investment in United States
and foreign equity, debt and money market
securities the combination of which will be
varied both with respect to types of securities
and markets in response to changing market and
economic trends.
MERRILL LYNCH ASSET INCOME
FUND, INC. A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND
RETIREMENT As high a level of total investment return as
is consistent with reasonable risk by investing
in common stock and other types of securities,
including fixed income securities and
convertible securities.
MERRILL LYNCH BASIC VALUE
FUND, INC. Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
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<PAGE> 94
MERRILL LYNCH CALIFORNIA
INSURED MUNICIPAL
BOND FUND A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in a
portfolio consisting primarily of insured
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
California income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.
MERRILL LYNCH CALIFORNIA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CAPITAL
FUND, INC. The highest total investment return consistent
with prudent risk through a fully managed
investment policy utilizing equity, debt and
convertible securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CORPORATE BOND
FUND, INC. Current income from three separate diversified
portfolios of fixed income securities.
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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 to provide as
high a level of income exempt from Federal
income taxes as is consistent with prudent
investment management while serving to offer
shareholders the opportunity to own securities
exempt from Florida intangible personal
property taxes through investment in a
portfolio primarily of intermediate-term
investment grade Florida Municipal Bonds.
MERRILL LYNCH FLORIDA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes.
MERRILL LYNCH FUND
FOR TOMORROW, INC. Long-term growth through investment in a
portfolio of good quality securities, primarily
common stock, potentially positioned to benefit
from demographic and cultural changes as they
affect consumer markets.
MERRILL LYNCH FUNDAMENTAL
GROWTH FUND, INC. Long-term growth of capital through investment
in a diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited an above-average growth 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
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equity, debt and money market securities, the
combination of which will be varied from time
to time both with respect to the types of
securities and markets in response to changing
market and economic trends.
MERRILL LYNCH GLOBAL BOND FUND
FOR INVESTMENT AND
RETIREMENT High total investment return from investment in
a global portfolio of debt instruments
denominated in various currencies and multi-
national currency units.
MERRILL LYNCH GLOBAL
CONVERTIBLE FUND, INC. High total return from investment primarily in
an internationally diversified portfolio of
convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of debt
securities or preferred stock and warrants or
options.
MERRILL LYNCH GLOBAL HOLDINGS,
INC. (residents of Arizona
must meet investor
suitability standards)...... The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio of
securities.
MERRILL LYNCH GLOBAL
RESOURCES TRUST Long-term growth and protection of capital from
investment in securities of domestic and
foreign companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL
SMALLCAP FUND, INC. Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in the
United States.
MERRILL LYNCH GLOBAL UTILITY
FUND, INC. Capital appreciation and current income through
investment of at least 65% of its total assets
in equity and debt securities issued by
domestic and foreign companies primarily
engaged in the ownership or operation of
facilities used to generate, transmit or
distribute electricity, telecommunications, gas
or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund
believes to be undervalued.
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MERRILL LYNCH HEALTHCARE FUND,
INC. (residents of Wisconsin
must meet investor
suitability standards)...... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
MERRILL LYNCH LATIN AMERICA
FUND, INC. Capital appreciation by investing primarily in
Latin American equity and debt securities.
MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Massachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Michigan
Municipal Bonds.
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MERRILL LYNCH MICHIGAN
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MUNICIPAL BOND
FUND, INC. Tax-exempt income from three separate
diversified portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal income
taxes by investing in investment grade
obligations with a dollar weighted average
maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
New Jersey income taxes as is consistent with
prudent investment management through a
portfolio primarily of intermediate-term
investment grade New Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
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MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal, New
York State and New York City income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade New York
Municipal Bonds.
MERRILL LYNCH NEW YORK
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal, New York State and
New York City income taxes as is consistent
with prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH OREGON
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH PACIFIC
FUND, INC. Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
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.
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MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
income taxes as is consistent with prudent
management.
MERRILL LYNCH PHOENIX
FUND, INC. Long-term growth of capital by investing in
equity and fixed income 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.
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 to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
by investing primarily in a portfolio of
long-term, investment grade obligations issued
by the State of Texas, its political
subdivisions, agencies and instrumentalities.
MERRILL LYNCH UTILITY INCOME
FUND, INC. High current income through investment in
equity and debt securities issued by companies
which are primarily engaged in the
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ownership or operation of facilities used to
generate, transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME
FUND, INC. High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currencies.
Class A Share
Money Market Funds:
MERRILL LYNCH READY ASSETS
TRUST Preservation of capital, liquidity and the
highest possible current income consistent with
the foregoing objectives from the short-term
money market securities in which the Trust
invests.
MERRILL LYNCH RETIREMENT
RESERVES MONEY FUND
(available only for
exchanges within certain
retirement plans) Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term money
market securities.
MERRILL LYNCH U.S.A.
GOVERNMENT RESERVES Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term marketable
securities which are direct obligations of the
U.S. Treasury.
Class B, Class C and Class D
Share
Money Market Funds:
MERRILL LYNCH GOVERNMENT FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities issued
or guaranteed by the U.S. Government, its
agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL
FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current income
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consistent with liquidity and the maintenance
of a high-quality portfolio of money market
securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income exempt
from Federal income taxes, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term, high
quality municipal bonds.
MERRILL LYNCH TREASURY FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obligations
of the U.S. Treasury and up to 10% of its total
assets in repurchase agreements secured by such
obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above,
with shares for which certificates have not been issued may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Securities and Exchange Commission. The Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
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. The per share dividends
and distributions on Class B and Class C shares will be lower than the per share
dividends and distributions on Class A and Class D shares as a result of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to the Class B and Class C shares; similarly, the per share
dividends and distributions on Class D shares will be lower than the per share
dividends and distributions on Class A shares
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as a result of the account maintenance fees applicable with respect to the Class
D shares. See "Determination of Net Asset Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures 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.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the 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
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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 among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Securities and Exchange Commission exemptive order permitting the issuance and
sale of multiple classes of stock) that is based on the gross income allocable
to Class A, Class B, Class C and Class D shareholders during the taxable year,
or such other method as the Internal Revenue Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
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
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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, under proposed regulations, the Fund may elect
to "mark-to-market" at the end of each taxable year all shares that it holds in
PFICs. If it made this election, the Fund would recognize as ordinary income any
increase in the value of such shares. Unrealized losses, however, would not be
recognized. By making the mark-to-market election, the Fund could avoid
imposition of the interest charge with respect to its distributions from PFICs,
but in any particular year might be required to recognize income in excess of
the distributions it 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.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an options or futures contract.
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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.
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 (assuming the
shares were held as a capital asset). These rules and the mark to market rules
described above, however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of currency fluctuations with respect to its
investments.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain developing Asia-Pacific countries in which the Fund
intends to invest. No such regulations have been issued.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
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.
46
<PAGE> 107
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included. 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.
47
<PAGE> 108
Set forth below is total return information for the Class B and Class D
shares of the Fund for the periods indicated. As a result of the implementation
of the Select Pricing System, Class A shares of the Fund outstanding prior to
October 21, 1994, have been redesignated Class D shares, and historical
performance data pertaining to such shares is provided below under the caption
"Class D Shares". Since the new Class A and Class C shares have not been issued
prior to the date of this Statement of Additional Information, performance
information concerning the new Class A and Class C shares is not yet provided.
<TABLE>
<CAPTION>
CLASS B SHARES CLASS D SHARES
--------------------- ---------------------
REDEEMABLE REDEEMABLE
VALUE OF VALUE OF
EXPRESSED A EXPRESSED A
AS A HYPOTHETICAL AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000
BASED INVESTMENT BASED INVESTMENT
ON A AT THE ON A AT THE
HYPOTHETICAL END OF HYPOTHETICAL END OF
$1,000 THE $1,000 THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ------------------------------ ---------- ---------- ---------- ------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended June 30,
1994........................ 23.11% $1,231.10 24.92% $1,249.20
May 29, 1992 (commencement of
operations) to June 30,
1994........................ 21.26% $1,495.40 22.70% $1,532.70
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended June 30, 1994...... 29.93% $1,299.30 28.92% $1,289.20
Year Ended June 30, 1993...... 20.39% $1,203.90 19.49% $1,194.90
May 29, 1992 (commencement of
operations) to June 30,
1993........................ 0.90% $1,009.00 0.80% $1,008.00
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
May 29, 1992 (commencement of
operations) to June 30,
1994........................ 49.54% $1,495.40 53.27% $1,532.70
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
48
<PAGE> 109
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on February 13, 1992. It has
an authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Fund has received an order from the Commission permitting the issuance and
sale of multiple classes of Common Stock. The Board of Directors of the Fund may
classify and reclassify the shares of the Fund into additional classes of Common
Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold 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 rights. Redemption and conversion rights are discussed
elsewhere herein and in the Prospectus. Each share is entitled to participate
equally in dividends and distributions declared by the Fund and in the net
assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities, 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.
49
<PAGE> 110
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class B and
Class D (formerly Class A) shares of the Fund based on the value of the Fund's
net assets on June 30, 1994, and its shares outstanding on that date is as
follows:
TABLE
<TABLE>
<CAPTION>
CLASS B CLASS D
------------ ------------
<S> <C> <C>
Net Assets............................................... $821,106,992 $243,311,748
=========== ===========
Number of Shares Outstanding............................. 53,317,407 15,710,734
=========== ===========
Net Asset Value Per Share (net assets divided by number
of shares outstanding)................................. $ 15.40 $ 15.49
Sales Charge (for Class D shares: 5.25% of offering price
(5.54% of amount invested))*........................... ** 0.86
------------ ------------
Offering Price........................................... $ 15.40 $ 16.35
=========== ===========
</TABLE>
--------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales
charge but may be subject to a CDSC on redemption of shares. See
"Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B
and Class C Shares" in the Prospectus and "Redemption of
Shares -- Contingent Deferred Sales Charge -- Class B Shares" herein.
As of June 30, 1994, no new Class A or Class C shares of the fund had been
publicly offered.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the Fund's shareholders. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
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, maintenance and
50
<PAGE> 111
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 September 30, 1994.
51
<PAGE> 112
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
("MOODY'S") CORPORATE RATINGS
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.
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 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.
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<PAGE> 113
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.
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<PAGE> 114
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:
"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.
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.
54
<PAGE> 115
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.
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.
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
55
<PAGE> 116
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.
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.
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.
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.
56
<PAGE> 117
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:
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.
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.
57
<PAGE> 118
The preferred stock ratings are based on the following considerations:
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
B
CCC Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree 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.
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.
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.
58
<PAGE> 119
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MERRILL LYNCH DRAGON FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Dragon Fund, Inc. as of December
31, 1993, the related statements of operations for the ten-month period then
ended, and changes in net assets and the financial highlights for the ten-month
period then ended and the period May 29, 1992 (commencement of operations) to
February 28, 1993. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Dragon
Fund, Inc. as of December 31, 1993, the results of its operations, the changes
in its net assets, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
February 4, 1994
59
<PAGE> 120
<TABLE>
SCHEDULE OF INVESTMENTS (IN US DOLLARS)
<CAPTION>
SHARES HELD/ VALUE PERCENT OF
COUNTRIES INDUSTRIES FACE AMOUNT LONG-TERM INVESTMENTS COST (NOTE 1a) NET ASSETS
<S> <S> <C> <S> <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
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
</TABLE>
60
<PAGE> 121
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
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
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>
61
<PAGE> 122
<TABLE>
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> <S> <C> <S> <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
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
</TABLE>
62
<PAGE> 123
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
$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
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
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>
63
<PAGE> 124
<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED) (IN US DOLLARS)
<CAPTION>
VALUE PERCENT OF
COUNTRIES FACE AMOUNT SHORT-TERM INVESTMENTS COST (NOTE 1a) NET ASSETS
<S> <C> <S> <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.
</TABLE>
<TABLE>
<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>
64
<PAGE> 125
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
AS OF DECEMBER 31, 1993
<S> <S> <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>
65
<PAGE> 126
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
FOR THE TEN MONTHS ENDED DECEMBER 31, 1993
<S> <S> <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>
66
<PAGE> 127
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION> FOR THE TEN FOR THE PERIOD
MONTHS ENDED MAY 29,1992++
INCREASE (DECREASE) IN NET ASSETS: DEC. 31, 1993 TO FEB 28,1993
<S> <S> <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>
67
<PAGE> 128
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
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:
<S> <S> <C> <C> <C> <C>
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>
68
<PAGE> 129
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.
(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.
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.
69
<PAGE> 130
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.
(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.
For the ten months ended December 31, 1993, MLFD earned under-
writing discounts of $183,544, and MLPF&S earned dealer conces-
sions 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.
70
<PAGE> 131
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.
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
========== ============
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.
71
<PAGE> 132
THE FOLLOWING SEMI-ANNUAL FINANCIAL
STATEMENTS FOR THE FUND FOR THE PERIOD
ENDED JUNE 30, 1994, ARE UNAUDITED. THESE UNAUDITED
INTERIM FINANCIAL STATEMENTS
REFLECT ALL ADJUSTMENTS WHICH ARE, IN
THE OPINION OF MANAGEMENT, NECESSARY TO
A FAIR STATEMENT OF THE RESULTS FOR
THE INTERIM PERIOD PRESENTED. ALL SUCH
ADJUSTMENTS ARE OF A NORMAL RECURRING NATURE.
72
<PAGE> 133
<TABLE>
SCHEDULE OF INVESTMENTS (IN US DOLLARS)
<CAPTION>
SHARES HELD/ VALUE PERCENT OF
COUNTRIES INDUSTRIES FACE AMOUNT LONG-TERM INVESTMENTS COST (NOTE 1a) NET ASSETS
<S> <S> <C> <S> <C> <C> <C>
HONG KONG APPAREL 16,900,000 Yue Yuen Industrial Holdings $ 3,678,253 $ 3,826,498 0.4%
BANKING 1,587,700 Dah Sing Financial Holdings Ltd. 5,093,445 4,560,349 0.4
2,174,863 HSBC Holdings, Ltd. 18,601,224 23,777,452 2.2
------------ ------------ ------
23,694,669 28,337,801 2.6
DIVERSIFIED 24,448,000 Guandong Investments, Ltd. 9,907,098 14,076,025 1.3
3,499,000 Hutchison Whampoa, Ltd. 8,877,086 14,373,561 1.4
889,472 Jardine Matheson Holdings Ltd. 7,444,776 6,847,404 0.6
6,800,000 ++Swire 'A' Peregrine (Warrants) (a) 1,090,968 1,957,562 0.2
2,427,000 Swire Pacific Ltd. 'A' 12,331,978 17,427,675 1.6
------------ ------------ ------
39,651,906 54,682,227 5.1
ELECTRICAL EQUIPMENT 14,212,000 Innovative International Holdings Ltd. 6,660,162 5,148,609 0.5
4,225,000 Johnson Electric Holdings Ltd. 8,157,249 9,894,230 0.9
------------ ------------ ------
14,817,411 15,042,839 1.4
ELECTRONICS 16,600,000 ASM Pacific Technology 5,454,486 9,987,062 0.9
FINANCE 3,982,000 Guoco Group, Ltd. 14,302,400 17,001,682 1.6
1,992,000 Peregrine Investment Holdings 4,070,025 3,273,179 0.3
------------ ------------ ------
18,372,425 20,274,861 1.9
FOOD CHAINS 14,324,000 Fairwood Holdings, Ltd. 6,575,434 2,872,584 0.3
INSURANCE 19,767,000 National Mutual Asia, Ltd. 7,969,425 11,572,736 1.1
1,744,000 National Mutual Asia, Ltd. (Warrants) (a) 281,487 401,646 0.0
------------ ------------ ------
8,250,912 11,974,382 1.1
</TABLE>
73
<PAGE> 134
<TABLE>
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> <S> <C> <S> <C> <C> <C>
HONG KONG LEISURE 5,670,000 Hong Kong & Shanghai Hotels $ 4,644,068 $ 8,729,849 0.8%
(CONCLUDED) 6,094,000 Shangri-La Asia, Ltd. 8,597,078 8,751,895 0.8
2,650,000 Television Broadcasts Ltd. 9,839,412 10,457,368 1.0
------------ ------------ ------
23,080,558 27,939,112 2.6
MISCELLANEOUS-- 17,912,000 C.P. Pokphand Co., Ltd. 7,227,529 4,866,762 0.5
CONSUMER 13,040,000 Gold Lion Holdings Ltd. 5,573,902 4,091,344 0.4
------------ ------------ ------
12,801,431 8,958,106 0.9
NEWSPAPER/PUBLISHING 7,644,000 South China Morning Post Holdings 4,465,091 4,475,236 0.4
PACKAGING 12,462,000 M.C. Packaging (HK), Ltd. 6,005,677 4,474,324 0.4
REAL ESTATE 7,940,000 Amoy Properties Ltd. 6,819,474 9,348,428 0.9
3,400,000 Amoy Properties Ltd. (Warrants) (a) 1,396,520 1,308,707 0.1
1,983,000 Cheung Kong Holdings Ltd. 7,151,282 8,659,109 0.8
10,000,000 Great Eagle Holdings Co. 4,841,967 5,595,808 0.5
3,280,000 Hong Kong Land Holdings Ltd. 6,443,132 8,275,327 0.8
490,000 Hong Kong Land Holdings Ltd. (Warrants) (a) 1,015,791 427,934 0.0
3,628,020 New World Development Co., Ltd. 9,331,350 10,092,176 1.0
1,111,000 New World Development Co., Ltd.
(Warrants) (a) 1,451,300 1,164,329 0.1
2,530,100 Sun Hung Kai Properties, Ltd. 10,663,645 14,567,143 1.4
4,380,000 Wharf Holdings Ltd. 16,993,781 16,150,860 1.5
------------ ------------ ------
66,108,242 75,589,821 7.1
RETAIL STORES 11,658,000 Giordano Holdings Ltd. 5,547,674 5,844,838 0.6
TELECOMMUNICATIONS 12,220,000 ABC Communications Holdings Ltd. 3,501,176 6,166,128 0.6
TRANSPORTATION 734,000 Hong Kong Aircraft Engineering Co. 4,513,929 4,036,098 0.4
UTILITIES 2,125,200 China Light & Power Co., Ltd. 8,790,293 10,861,095 1.0
5,126,880 Hong Kong & China Gas Co. (The) 6,874,118 9,817,289 0.9
5,716,800 Hong Kong Telecommunications, Ltd. 7,803,114 10,798,975 1.0
1,650,000 Hong Kong Telecommunications, Ltd.
(Warrants) (a) 1,644,721 811,230 0.1
------------ ------------ ------
25,112,246 32,288,589 3.0
TOTAL INVESTMENTS IN HONG KONG 271,631,520 316,770,506 29.7
INDIA CHEMICALS 960,000 Mardia Chemicals Ltd. 4,415,127 4,591,105 0.5
CONSUMER--DURABLES 456,000 ++IFB Industries Ltd. 3,998,087 3,925,395 0.4
FOREIGN BONDS $ 2,600,000 SCICI Ltd., 3.50% due 4/01/2004 (b) 2,699,375 3,211,000 0.4
MISCELLANEOUS 36,000 Housing Development Finance 3,335,670 3,787,661 0.4
PHARMACEUTICALS 156,000 ++Core Parenterals 1,965,600 1,903,200 0.2
TEXTILES 179,783 Arvind Mills Ltd. 1,873,005 1,033,752 0.1
TOBACCO 25,000 Indian Tobacco Co. (GDR)** 637,500 612,500 0.1
TOTAL INVESTMENTS IN INDIA 18,924,364 19,064,613 2.1
INDONESIA BANKING 1,545,500 P.T. Bank International Indonesia 6,512,092 4,897,134 0.5
FOOD 1,884,300 P.T. Mayorah Indah 5,799,651 8,489,207 0.8
</TABLE>
74
<PAGE> 135
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
FOREST PRODUCTS 3,828,000 P.T. Indah Kiat Pulp & Paper Corp. 6,453,834 5,292,898 0.5
MISCELLANEOUS-- 1,941,250 P.T. Modern Photo Film 5,119,000 8,499,735 0.8
CONSUMER
PHARMACEUTICALS 1,326,000 P.T. Kalbe Farma 3,774,666 4,522,469 0.4
REAL ESTATE 1,930,500 P.T. Duta Anggada Realty 5,056,298 4,537,747 0.4
TOBACCO 2,170,000 P.T. Hanjaya Mandala Sampoerna 4,892,468 16,502,281 1.6
TOTAL INVESTMENTS IN INDONESIA 37,608,009 52,741,471 5.0
MALAYSIA AUTOMOTIVE 3,355,000 Tan Chong Motor Holdings BHD 3,481,736 3,505,532 0.3
BANKING 4,256,000 Affin Holdings BHD 6,646,052 6,703,135 0.6
1,969,000 Arab-Malaysian Merchant Bank BHD 6,957,819 17,547,941 1.7
2,850,000 Malayan Banking BHD 6,748,454 15,984,173 1.5
2,700,000 Public Bank BHD 'Foreign' 2,361,655 5,139,481 0.5
------------ ------------ ------
22,713,980 45,374,730 4.3
BUILDING & CONSTRUCTION 766,000 Ekran BHD 3,676,794 5,149,431 0.5
1,912,500 George Kent Holdings BHD 2,694,743 4,591,704 0.4
2,355,000 I.J.M. Corp. BHD 5,257,205 7,870,506 0.7
4,671,000 Malayan Cement BHD 5,232,118 7,787,392 0.7
------------ ------------ ------
16,860,860 25,399,033 2.3
CONGLOMERATES 9,000,000 Renong BHD 8,454,940 10,925,015 1.0
CONSUMER PRODUCTS 1,760,000 Berjaya Singer (Ordinary) BHD 4,105,157 2,433,927 0.2
1,073,000 Berjaya Singer (TSR) 927,183 531,719 0.1
------------ ------------ ------
5,032,340 2,965,646 0.3
FOOD 1,721,700 Nestle Malaysia BHD 7,333,320 11,111,156 1.0
FOREST PRODUCTS 1,155,000 Aokam Perdana BHD (Ordinary) 3,956,014 7,276,429 0.7
462,000 Aokam Perdana ('A') 1,220,396 2,662,108 0.3
1,122,000 Aokam Perdana TSR (Warrants) (a) 2,697,117 6,422,019 0.6
736,000 Pacific Chemical BHD 4,004,307 4,438,845 0.4
------------ ------------ ------
11,877,834 20,799,401 2.0
LEISURE 2,350,000 Berjaya Sports TOTO BHD 5,395,311 3,520,667 0.3
249,000 Genting BHD 2,989,683 2,965,197 0.3
4,000,000 Pernas International Hotels & Properties
BHD 3,815,457 4,794,100 0.5
2,756,000 Resorts World BHD 7,986,931 15,880,455 1.5
2,504,000 Tanjong PLC 7,760,037 10,869,392 1.0
------------ ------------ ------
27,947,419 38,029,811 3.6
PAPER & FOREST PRODUCTS 3,944,000 Land & General BHD 8,186,739 13,181,008 1.2
SHIPYARDS 705,000 Westmont BHD 5,273,593 4,522,703 0.4
TELECOMMUNICATIONS 3,375,000 Leader Universal Cable BHD 7,763,214 18,021,089 1.7
1,532,000 ++Technology Resources Industries BHD 3,068,053 6,238,168 0.6
1,611,000 Telekom Malaysia BHD 8,939,145 12,005,762 1.1
------------ ------------ ------
19,770,412 36,265,019 3.4
TOBACCO 262,000 Rothmans of Pall Mall (Malaysia) BHD 1,585,339 1,660,648 0.2
TRANSPORTATION 2,218,000 Malaysian International Shipping Co. BHD 6,043,232 7,710,856 0.7
TOTAL INVESTMENTS IN MALAYSIA 144,561,744 221,450,558 20.7
</TABLE>
75
<PAGE> 136
<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED) (IN US DOLLARS)
<CAPTION>
SHARES HELD/ VALUE PERCENT OF
COUNTRIES INDUSTRIES FACE AMOUNT LONG-TERM INVESTMENTS COST (NOTE 1a) NET ASSETS
<S> <S> <C> <S> <C> <C> <C>
PHILIP- BEVERAGES 4,804,800 San Miguel Corp. 'B' $ 10,222,586 $ 24,203,284 2.3%
PINES
CONGLOMERATES 6,280,000 JG Summit Holdings 3,427,255 2,155,821 0.2
FOOD & BEVERAGE 840,000 ++Universal Robina Corp. 695,467 689,552 0.1
INTERNATIONAL TRADE 11,573,416 International Container Terminal 6,921,440 11,875,707 1.1
RETAIL 199,215 ++SM Prime Holdings 1,999,999 1,980,197 0.2
TELECOMMUNICATIONS 57,380 Philippine Long Distance Telephone Co.
(ADR)* 2,779,559 3,385,420 0.3
UTILITIES--ELECTRIC 1,009,300 Manila Electric Co. (MERALCO) 'B' 5,518,514 12,710,401 1.2
TOTAL INVESTMENTS IN THE PHILIPPINES 31,564,820 57,000,382 5.4
SINGAPORE AIRLINES 1,040,000 Singapore Airlines 'Foreign' Ltd. 6,170,157 8,601,247 0.8
AUTOMOTIVE 1,352,000 Cycle & Carriage, Ltd. 5,687,875 10,116,705 1.0
BANKING 1,270,000 Development Bank of Singapore Ltd. 11,309,155 12,170,660 1.1
1,366,866 Overseas Chinese Banking Corp. 'Foreign' 8,900,801 12,112,039 1.1
220,000 Overseas Chinese Banking Corp. 'Foreign'
(Warrants) (a) 1,156,680 649,819 0.1
1,253,587 United Overseas Bank 8,331,992 10,038,570 0.9
------------ ------------ ------
29,698,628 34,971,088 3.2
BEVERAGES 190,000 ++Fraser & Neave Ltd. (Warrants) (a) 1,139,529 985,231 0.1
CONGLOMERATES 1,308,000 ACMA Ltd. 8,074,466 8,285,002 0.8
ELECTRONICS 14,340,000 I.P.C. Corp. 10,159,282 13,177,552 1.2
MARINE/OFFSHORE 2,807,500 Sembawang Maritime Ltd. 8,560,245 10,872,498 1.0
OIL SERVICES $ 2,090,000 Sembawang Maritime Ltd.,
1.50% due 10/25/1998 1,325,469 2,675,090 0.3
1,130,000 Van Der Horst Ltd. 6,229,305 4,858,221 0.5
------------ ------------ ------
16,115,019 18,405,809 1.8
PUBLISHING &
BROADCASTING 762,000 Singapore Press Holdings Ltd. 8,194,511 12,754,184 1.2
REAL ESTATE 2,524,000 DBS Land Ltd. 7,383,400 7,289,531 0.7
1,000,000 DBS Land Ltd. (Warrants) (a) 1,013,666 840,171 0.1
------------ ------------ ------
8,397,066 8,129,702 0.8
SHIPPING 1,521,000 Sembawang Corp. (c) 12,239,503 10,981,949 1.0
STEEL 4,266,250 Natsteel Ltd. 9,506,408 9,016,951 0.9
TELECOMMUNICATIONS 10,380,000 Goldtron, Ltd. 7,286,316 10,492,419 0.9
1,635,000 Goldtron, Ltd. (Warrants) (a) 1,194,319 1,040,991 0.1
------------ ------------ ------
8,480,635 11,533,410 1.0
TOTAL INVESTMENTS IN SINGAPORE 123,863,079 146,958,830 13.8
SOUTH AUTOMOTIVE 22,045 Dong ah Tire Industries Co. 840,416 1,355,562 0.1
KOREA
BUILDING & CONSTRUCTION 100,230 Samsung Heavy Industries 5,565,018 5,478,410 0.5
RETAIL STORES 100,920 Shinsegae Department Stores Co. 3,492,485 9,777,330 0.9
STEEL 89,000 Pohang Iron & Steel Co., Ltd. 8,236,443 9,851,913 0.9
UTILITIES 5,362 Korea Mobile Telecommunications Corp. 979,459 2,788,240 0.3
246,000 Korean Electric & Power Corp. 6,197,512 9,172,591 0.9
------------ ------------ ------
7,176,971 11,960,831 1.2
</TABLE>
76
<PAGE> 137
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
TOTAL INVESTMENTS IN SOUTH KOREA 25,311,333 38,424,046 3.6
TAIWAN CLOSED-END FUNDS 343,300 The R.O.C. Taiwan 2,904,850 3,647,562 0.3
FOOD & BEVERAGE 180,098 President Enterprises (ADR)* (b) 3,119,745 2,611,421 0.2
TOTAL INVESTMENTS IN TAIWAN 6,024,595 6,258,983 0.5
THAILAND BANKING 2,160,000 Bangkok Bank 7,125,428 16,396,324 1.5
4,390,000 Industrial Finance Corp. of Thailand 8,764,194 8,944,866 0.8
1,228,000 Siam Commercial Bank, Ltd. (The) 5,096,511 9,321,614 0.8
------------ ------------ ------
20,986,133 34,662,804 3.1
BUILDING & 1,097,000 Christiani & Nielson 'Local' 7,169,983 7,056,213 0.7
CONSTRUCTION 329,100 ++Christiani & Nielson 'Local' (Warrants)
(a) 647,325 657,411 0.1
886,000 Land & House Public Co. 6,096,294 15,574,910 1.5
------------ ------------ ------
13,913,602 23,288,534 2.3
FINANCIAL SERVICES $ 3,683 Finance One Co., Ltd., 3.50% due
12/31/2001 145,516 147,143 0.0
247,600 Finance One Co., Ltd. 'Foreign' 4,599,416 4,055,773 0.4
36,836 Finance One Co., Ltd. 'Foreign'
(Warrants) (a) 0 254,600 0.0
88,400 Phatra Thanakit Co., Ltd. 3,332,226 2,853,664 0.3
------------ ------------ ------
8,077,158 7,311,180 0.7
HEALTH & PERSONAL CARE 7,370 International Cosmetics Co. 2,921 226,135 0.0
MUTUAL FUNDS 12,600,000 Ruam Pattana Fund II 4,999,163 7,173,392 0.7
PUBLISHING & 283,700 Post Publishing Public Co. Ltd. 2,672,649 2,493,568 0.2
BROADCASTING
TELECOMMUNICATIONS 127,000 Advanced Info Services 5,406,502 4,789,772 0.4
747,000 International Engineering Co. Ltd. 3,347,314 6,744,786 0.6
------------ ------------ ------
8,753,816 11,534,558 1.0
TOTAL INVESTMENTS IN THAILAND 59,405,442 86,690,171 8.0
TOTAL LONG-TERM INVESTMENTS 718,894,906 945,359,560 88.8
<CAPTION>
FACE AMOUNT SHORT-TERM INVESTMENTS
<S> <S> <C> <S> <C> <C> <C>
UNITED COMMERCIAL PAPER*** $ 30,000,000 du Pont (E.I.) de Nemours & Co., 4.24%
STATES due 7/25/1994 $ 29,915,200 $ 29,915,200 2.8
34,967,000 General Electric Capital Corp., 4.30%
due 7/01/1994 34,967,000 34,967,000 3.3
30,000,000 Matterhorn Capital Corp.,
4.23% due 7/20/1994 29,933,025 29,933,025 2.8
30,000,000 PepsiCo., Inc., 4.22% due 7/08/1994 29,975,383 29,975,383 2.8
------------ -------------- ------
124,790,608 124,790,608 11.7
TOTAL SHORT-TERM INVESTMENTS 124,790,608 124,790,608 11.7
TOTAL INVESTMENTS
$843,685,514 1,070,150,168 100.5
============
LIABILITIES IN EXCESS OF OTHER ASSETS (5,731,428) (0.5)
-------------- ------
NET ASSETS $1,064,418,740 100.0%
============== ======
<FN>
*American Depositary Receipt (ADR).
**Global Depositary Receipt (GDR).
***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.
++Non-income producing securities.
(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)Restricted securities pursuant to Rule 144A. The value of the Fund's investment in
restricted securities was approximately $5,822,000, representing 0.5% of net assets.
(c)Previously held as Sembawang Shipyard Ltd.
See Notes to Financial Statements.
</TABLE>
77
<PAGE> 138
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
AS OF JUNE 30, 1994
<S> <S> <C> <C>
ASSETS: Investments, at value (identified cost--$843,685,514) (Note 1a) $1,070,150,168
Foreign cash (Note 1b) 5,946,694
Cash 289
Receivables:
Capital shares sold $ 3,242,515
Dividends 1,588,122
Securities sold 948,008
Interest 32,950 5,811,595
------------
Deferred organization expenses (Note 1f) 58,995
Prepaid expenses and other assets (Note 1f) 64,628
--------------
Total assets 1,082,032,369
--------------
LIABILITIES: Payables:
Securities purchased 12,998,746
Capital shares redeemed 2,668,331
Investment adviser (Note 2) 897,053
Distributor (Note 2) 742,192 17,306,322
------------
Accrued expenses and other liabilities 307,307
Total liabilities 17,613,629
--------------
NET ASSETS: Net assets $1,064,418,740
==============
NET ASSETS Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 1,571,073
CONSIST OF: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 5,331,741
Paid-in capital in excess of par 801,135,938
Accumulated on investment loss--net (3,288,364)
Undistributed realized capital gains on investments and foreign currency
transactions--net 33,206,714
Unrealized appreciation on investments and foreign currency transactions--net 226,461,638
--------------
Net assets $1,064,418,740
==============
NET ASSET Class A--Based on net assets of $243,311,748 and 15,710,734 shares outstanding $ 15.49
VALUE: ==============
Class B--Based on net assets of $821,106,992 and 53,317,407 shares outstanding $ 15.40
==============
See Notes to Financial Statements.
</TABLE>
78
<PAGE> 139
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1994
<S> <S> <C> <C>
INVESTMENT Dividends (net of $1,411,583 foreign withholding tax) $ 8,830,276
INCOME Interest and discount earned 1,838,429
(NOTES --------------
1d & 1e): Total income 10,668,705
--------------
EXPENSES: Investment advisory fees (Note 2) 5,393,191
Distribution and account maintenance fees--Class B (Note 2) 4,119,131
Custodian fees 1,025,780
Accounting services (Note 2) 56,198
Professional fees 40,630
Directors' fees and expenses 14,317
Amortization of organization expenses (Note 1f) 7,887
Pricing fees 4,732
Other 6,506
--------------
Total expenses 11,689,833
--------------
Investment loss--net (1,021,128)
--------------
REALIZED & Realized gain (loss) from:
UNREALIZED Investments--net $ 19,100,064
GAIN (LOSS) Foreign currency transactions--net (238,373) 18,861,691
ON INVEST- ------------
MENTS & Change in unrealized appreciation/depreciation on:
FOREIGN Investments--net (241,178,386)
CURRENCY Foreign currency transactions--net 186,297 (240,992,089)
TRANSACTIONS ------------ --------------
- --NET (NOTES Net realized and unrealized loss on investments and foreign currency transactions (222,130,398)
1b, 1e & 3): --------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (223,151,526)
==============
See Notes to Financial Statements.
</TABLE>
79
<PAGE> 140
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
FOR THE SIX FOR THE TEN
MONTHS ENDED MONTHS ENDED
JUNE 30, 1994 DEC. 31, 1993
INCREASE (DECREASE) IN NET ASSETS:
<S> <S> <C> <C>
OPERATIONS: Investment income (loss)--net $ (1,021,128) $ 167,916
Realized gain on investments and foreign currency transactions--net 18,861,691 22,356,982
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net (240,992,089) 423,968,150
-------------- --------------
Net increase (decrease) in net assets resulting from operations (223,151,526) 446,493,048
-------------- --------------
DIVIDENDS & Investment income--net:
DISTRI- Class A -- (145,883)
BUTIONS TO Class B -- (22,033)
SHAREHOLDERS In excess of investment income--net:
(NOTE 1G): Class A -- (958,265)
Class B -- (144,731)
Realized gain on investments--net:
Class A -- (1,408,405)
Class B -- (4,539,541)
-------------- --------------
Net decrease in net assets resulting from dividends and distributions to
shareholders -- (7,218,858)
-------------- --------------
CAPITAL SHARE Net increase (decrease) in net assets derived from capital share transactions (15,120,910) 386,806,540
TRANSACTIONS -------------- --------------
(NOTE 4):
NET ASSETS: Total increase (decrease) in net assets (238,272,436) 826,080,730
Beginning of period 1,302,691,176 476,610,446
-------------- --------------
End of period* $1,064,418,740 $1,302,691,176
============== ==============
<FN>
*Accumulated investment loss--net $ (3,288,364) $ (2,267,236)
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<CAPTION>
CLASS A CLASS B
------------------------------- --------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
HAVE BEEN DERIVED FROM INFORMATION SIX MONTHS TEN MONTHS PERIOD SIX MONTHS TEN MONTHS PERIOD
PROVIDED IN THE FINANCIAL STATEMENTS. ENDED ENDED MAY 29, 1992++ ENDED ENDED MAY 29, 1992++
JUNE 30, DEC. 31, TO FEB. 28, JUNE 30, DEC. 31, TO FEB. 28,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994* 1993 1993 1994* 1993* 1993*
<S> <S> <C> <C> <C> <C> <C> <C>
PER SHARE Net asset value, beginning of period $ 18.77 $ 11.01 $ 10.00 $ 18.74 $ 11.01 $ 10.00
OPERATING -------- -------- -------- -------- -------- --------
PERFORMANCE: Investment income (loss)--net .03 .07 .05 (.03) (.02) (.02)
Realized and unrealized gain (loss)
on investments and foreign
transactions--net (3.31) 7.88 1.04 (3.31) 7.86 1.05
-------- -------- -------- -------- -------- --------
Total from investment operations (3.28) 7.95 1.09 (3.34) 7.84 1.03
Less dividends and distributions:
Investment income--net -- (.01) (.08) -- --++++ (.02)
In excess of investment income--net -- (.07) --++++ -- --++++ --
</TABLE>
80
<PAGE> 141
<TABLE>
<S> <S> <C> <C> <C> <C> <C> <C>
Realized gain on investments--net -- (.11) -- -- (.11) --++++
-------- -------- -------- -------- -------- --------
Total dividends and distributions -- (.19) (.08) -- (.11) (.02)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.49 $ 18.77 $ 11.01 $ 15.40 $ 18.74 $ 11.01
======== ======== ======== ======== ======== ========
TOTAL Based on net asset value per share (17.47%)+++ 72.31%+++ 10.99%+++ (17.82%)+++ 71.27%+++ 10.32%+++
INVESTMENT ======== ======== ======== ======== ======== ========
RETURN:***
RATIOS TO Expenses, excluding account maintenance and
AVERAGE distribution fees 1.34%** 1.34%** 1.48%** 1.35%** 1.35%** 1.49%**
NET ASSETS: ======== ======== ======== ======== ======== ========
Expenses 1.59%** 1.59%** 1.73%** 2.35%** 1.35%** 2.49%**
======== ======== ======== ======== ======== ========
Investment income (loss)--net .38%** .61%** .61%** (.38)%** (.15)%** (.08)%**
======== ======== ======== ======== ======== ========
SUPPLEMENTAL Net assets, end of period (in thousands) $243,312 $311,848 $111,180 $821,107 $990,843 $365,430
DATA: ======== ======== ======== ======== ======== ========
Portfolio turnover 9.83% 16.62% 4.65% 9.83% 16.62% 4.65%
======== ======== ======== ======== ======== ========
<FN>
*Based on average shares outstanding during the period.
**Annualized.
***Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Amount was less than $.01 per share.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
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 that 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 accord-
ing 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
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.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies
into US dollars. Realized and unrealized gains or losses from invest-
ments include the effects of foreign exchange rates on investments.
81
<PAGE> 142
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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.
(c) 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 market value of the
option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a with-
holding tax may be imposed on interest, dividends, and capital gains
at various rates.
(e) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
date, except that if the ex-dividend date has passed, certain dividends
from foreign securities are recorded as soon as the Fund is informed
of the ex-dividend date. Interest income (including amortization of
discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified
cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS
WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement
with Merrill Lynch Asset Management, L.P. ("MLAM"). Effective
January 1, 1994, the investment advisory business of MLAM was
reorganized from a corporation to a limited partnership. Both prior
to and after the reorganization, ultimate control of MLAM was
vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of MLAM is Princeton Services, Inc., an indirect wholly-
owned subsidiary of ML & Co. The limited partners are ML & Co.
and Merrill Lynch Investment Management, Inc. ("MLIM"), which
is also an indirect wholly-owned subsidiary of ML & Co. The Fund
has also entered into a Distribution Agreement and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of MLAM.
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 "Distribu-
tion Plans") for Class A and Class B Shares in accordance with
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, accrued daily and paid monthly, 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 and Merrill
Lynch 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
82
<PAGE> 143
Class B Shares. For the six months ended June 30, 1994, MLFD earned
$318,514 and $4,119,131 for Class A and Class B Shares, respectively,
under the Distribution Plans, all of which was paid to MLPF&S
pursuant to the agreement.
For the six months ended June 30, 1994, MLFD earned under-
writing discounts of $29,097, and MLPF&S earned dealer conces-
sions of $484,161, on sales of the Fund's Class A Shares.
For the six months ended June 30, 1994, MLPF&S received
contingent deferred sales charges of $1,099,907 relating to trans-
actions in Class B Shares and $64,050 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
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1994 were $195,084,689 and
$97,720,193, respectively.
Net realized and unrealized gains (losses) as of June 30, 1994
were as follows:
REALIZED UNREALIZED
GAINS GAINS
(LOSSES) (LOSSES)
Long-term investments $ 19,095,858 $226,464,654
Short-term investments 4,206 --
Foreign currency transactions (238,373) (3,016)
------------ ------------
Total $ 18,861,691 $226,461,638
============ ============
As of June 30, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $226,464,654, of which $259,132,249
related to appreciated securities and $32,667,595 related to depre-
ciated securities. At June 30, 1994, the aggregate cost of investments
for Federal income tax purposes was $843,685,514.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share
transactions was ($15,120,910) for the six months ended June 30,
1994, and $386,806,540 for the ten months ended December 31, 1993.
Transactions in capital shares for Class A and Class B Shares were
as follows:
CLASS A SHARES FOR THE SIX MONTHS DOLLAR
ENDED JUNE 30, 1994 SHARES AMOUNT
Shares sold 1,794,696 $ 28,220,213
Shares issued to shareholders in
reinvestment of dividends and
distributions -- --
----------- ------------
Total issued 1,794,696 28,220,213
Shares redeemed (2,695,019) (44,269,207)
----------- ------------
Net decrease (900,323) $(16,048,994)
=========== ============
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 B SHARES FOR THE SIX MONTHS DOLLAR
ENDED JUNE 30, 1994 SHARES AMOUNT
Shares sold 8,272,667 $129,294,983
Shares issued to shareholders in
reinvestment of dividends and
distributions -- --
----------- ------------
Total issued 8,272,667 129,294,983
Shares redeemed (7,831,270) (128,366,899)
----------- ------------
Net increase 441,397 $ 928,084
=========== ============
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
=========== ============
5. COMMITMENTS:
At June 30, 1994, the Fund had entered into forward exchange
contracts under which it had agreed to buy and sell various foreign
currencies with values of approximately $2,206,000 and $693,000,
respectively.
83
<PAGE> 144
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies..... 2
Management of the Fund................ 15
Directors and Officers.............. 15
Management and Advisory
Arrangements..................... 16
Purchase of Shares.................... 18
Redemption of Shares.................. 25
Portfolio Transactions and
Brokerage........................... 26
Determination of Net Asset Value...... 27
Shareholder Services.................. 28
Dividends, Distributions and Taxes.... 42
Dividends and Distributions......... 42
Taxes............................... 43
Performance Data...................... 47
General Information................... 49
Description of Shares............... 49
Computation of Offering Price
Per Share........................ 50
Independent Auditors................ 50
Custodian........................... 50
Transfer Agent...................... 50
Legal Counsel....................... 51
Reports to Shareholders............. 51
Additional Information.............. 51
Security Ownership of Certain
Beneficial Owners................ 51
Appendix.............................. 52
Independent Auditors' Report.......... 59
Financial Statements (audited)........ 60
Financial Statements (unaudited)...... 72
</TABLE>
Code # 16260-1094
[LOGO]
MERRILL LYNCH
DRAGON FUND, INC.
ART WORK
STATEMENT OF
ADDITIONAL INFORMATION
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 145
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE> 146
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for the periods March 1, 1993 to December 31,
1993, and May 29, 1992 (commencement of operations) to February 28, 1993
(audited) and for the six months ended June 30, 1994 (unaudited).
Contained in Part B:
FINANCIAL STATEMENTS:
Schedules of Investments as of December 31, 1993 (audited) and June
30, 1994 (unaudited).
Statements of Assets and Liabilities as of December 31, 1993 (audited)
and June 30, 1994 (unaudited).
Statements of Operations for the period March 1, 1993, to December 31,
1993 (audited) and for the six months ended June 30, 1994 (unaudited).
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 (audited) and for the six months ended June 30, 1994
(unaudited).
Financial Highlights for the periods May 29, 1992 (commencement of
operations) to February 28, 1993, and March 1, 1993, to December 31, 1993
(audited) and for the six months ended June 30, 1994 (unaudited).
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C> <C>
1 -- Articles of Incorporation of Registrant.(a)
</TABLE>
<TABLE>
<S> <C> <C>
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.(d)
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.(d)
(d) -- Form of new Class A Distribution Agreement between Registrant and Merrill Lynch Fund
Distributor, Inc.
(e) -- Form of Class C Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.
(f) -- Form of Class D Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.
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)
</TABLE>
C-1
<PAGE> 147
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C> <C>
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management.(b)
14 -- None.
15 (a) -- Amended and Restated Class B Distribution Plan and Class B Distribution Plan
Sub-Agreement of Registrant.(c)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of
Registrant.
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of
Registrant.
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)
17 (a) -- Financial Data Schedule for Class A shares for twelve months ended December 31, 1993.
(b) -- Financial Data Schedule for Class A shares for six months ended June 30, 1994.
(c) -- Financial Date Schedule for Class B shares for twelve months ended December 31, 1993.
(d) -- Financial Data Schedule for Class B shares for six months ended June 30, 1994.
</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.
(d) Filed on April 28, 1994, as an Exhibit to Post-Effective Amendment No. 3 to
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 SEPTEMBER 30, 1994
- -------------------------------------------------------------------------------- ------------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share....................... 458
Class B Shares of Common Stock, par value $0.10 per share....................... 1,320
Class C Shares of Common Stock, par value $0.10 per share....................... 0
Class D Shares of Common Stock, par value $0.10 per share....................... 0
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the 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 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
C-2
<PAGE> 148
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. ("MLAM" or 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 Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Small Cap Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill
Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch
Senior Floating Rate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc. and Merrill Lynch Variable Series Funds, Inc. Fund Asset Management, L.P.
("FAM"), an affiliate of MLAM, acts as the investment adviser for the following
investment companies: Apex Municipal Fund, Inc., CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, 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
C-3
<PAGE> 149
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 P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, FAM, Princeton Services, Inc. ("Princeton Services"), Merrill Lynch
Funds Distributor, Inc. ("MLFD") and Princeton Administrators, Inc. is also P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of Financial Data Services, Inc. ("FDS") is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
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.
Durnin, Giordano, Harvey, Hewitt, Kirstein, Monagle and Ms. Griffin are
directors, trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
ML & Co. ...................... Limited Partner Financial Services Holding Company
Merrill Lynch Investment
Management, Inc. ............ Limited Partner Investment Advisory Services;
Limited Partner of FAM
Princeton Services............. 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
</TABLE>
C-4
<PAGE> 150
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
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
General Counsel and Counsel and Secretary of FAM;
Secretary Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services; Director
of MLFD
Ronald M. Kloss................ Senior Vice President and Senior Vice President and
Controller Controller of FAM; Senior Vice
President and Controller of
Princeton Services
Stephen M.M. Miller............ Senior Vice President Executive Vice President of
Princeton Administrators, L.P.
Joseph T. Monagle, Jr.......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Gerald M. Richard.............. Senior Vice President and Senior Vice President and Treasurer
Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Richard L. Rufener............. Senior Vice President Senior Vice President of FAM; Vice
President of MLFD; Senior Vice
President of Princeton Services
Ronald L. Welburn.............. Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Anthony Wiseman................ Senior Vice President Senior Vice President of Princeton
Services
</TABLE>
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
C-5
<PAGE> 151
High Income Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and Worldwide
DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(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
Kevin P. Boman....................... Vice President None
Michael J. Brady..................... Vice President None
William M. Breen..................... Vice President None
Sharon Creveling..................... Vice President and Assistant Treasurer None
Mark A. DeSario...................... Vice President None
James T. Fatseas..................... Vice President None
Stanley Graczyk...................... Vice President None
Michelle T. Lau...................... Vice President None
Debra W. Landsman-Yaros.............. Vice President None
Gerald M. Richard.................... Vice President and Treasurer Treasurer
Richard L. Rufener................... Vice President None
Salvatore Venezia.................... Vice President None
William Wasel........................ Vice President None
Robert Harris........................ Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder 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
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-6
<PAGE> 152
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 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 14th day of October 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>
SIGNATURES TITLE DATE(S)
- ----------------------------------- ---------------------------------- ----------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Director (Principal October 14, 1994
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and October 14, 1994
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
DONALD CECIL* Director October 14, 1994
- -----------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director October 14, 1994
- -----------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director October 14, 1994
- -----------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director October 14, 1994
- -----------------------------------
(Richard R. West)
*By: /s/ ARTHUR ZEIKEL October 14, 1994
------------------------------
(Arthur Zeikel,
Attorney-in-Fact)
</TABLE>
C-7
<PAGE> 153
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------
<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.(d)
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.(d)
(d) -- Form of new Class A Distribution Agreement between Registrant and
Merrill Lynch Fund Distributor, Inc.
(e) -- Form of Class C Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.
(f) -- Form of Class D Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.
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 LLP, independent auditors for Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management.(b)
14 -- None.
15(a) -- Amended and Restated Class B Distribution Plan and Class B Distribution
Plan Sub-Agreement of Registrant.(c)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan
Sub-Agreement of Registrant.
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan
Sub-Agreement of Registrant.
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>
[/R]
<PAGE> 154
<TABLE>
<S> <C>
17(a) -- Financial Data Schedule for Class A shares for twelve months ended
December 31, 1993.
(b) -- Financial Data Schedule for Class A shares for six months ended June
30, 1994.
(c) -- Financial Date Schedule for Class B shares for twelve months ended
December 31, 1993.
(d) -- Financial Data Schedule for Class B shares for six months ended
June 30, 1994.
</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 to
the Registrant's Registration Statement on Form N-1A (File No. 33-46216)
under the Securities Act of 1933.
(d) Filed on April 28, 1994, as an Exhibit to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A (File No. 33-46216) under
the Securities Act of 1933.
<PAGE> 1
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994 between MERRILL
LYNCH DRAGON FUND, INC., a Maryland corporation (the "Fund"), and MERRILL LYNCH
FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company, and it is affirmatively in the interest of the Fund to offer its
shares for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Class A shares
of common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints
the Distributor as the principal underwriter and distributor of the Fund to
sell Class A shares of common stock in the Fund (sometimes herein referred to
as "Class A shares") to
<PAGE> 2
eligible investors (as defined below) and hereby agrees during the term of
this Agreement to sell Class A shares of the Fund to the Distributor upon the
terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time
to time designate other principal underwriters and distributors of Class A
shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such. If
such designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall terminate,
but this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class
A shares from the Fund shall not apply to Class A shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class A shares of any
such company by the Fund.
(c) Such exclusive right also shall not apply to Class A shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
2
<PAGE> 3
(d) Such exclusive right also shall not apply to Class A shares
issued by the Fund pursuant to any conversion, exchange or reinstatement
privilege afforded redeeming shareholders or to any other Class A shares as
shall be agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class A shares from the Fund.
(a) The Distributor shall have the right to buy from the Fund the
Class A shares needed, but not more than the Class A shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class A
shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class A shares shall be
those persons so identified in the currently effective prospectus and statement
of additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"), relating to such Class A shares ("eligible
investors"). The price which the Distributor shall pay for the Class A shares
so purchased from the Fund shall be the net asset value, determined as set
forth in Section 3(d) hereof, used in determining the public offering price on
which such orders were based.
(b) The Class A shares are to be resold by the Distributor to
eligible investors at the public offering price, as set forth in Section 3(c)
hereof, or to securities dealers having agreements with the Distributor upon
the terms and conditions set forth in Section 7 hereof.
3
<PAGE> 4
(c) The public offering price(s) of the Class A shares,i.e., the
price per share at which the Distributor or selected dealers may sell Class A
shares to eligible investors, shall be the public offering price as set forth
in the prospectus and statement of additional information relating to such
Class A shares, but not to exceed the net asset value at which the Distributor
is to purchase the Class A shares, plus a sales charge not to exceed 5.25% of
the public offering price (5.54% of the net amount invested), subject to
reductions for volume purchases. Class A shares may be sold to certain
Directors, officers and employees of the Fund, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain other persons
described in the prospectus and statement of additional information, without a
sales charge or at a reduced sales charge, upon terms and conditions set forth
in the prospectus and statement of additional information. If the public
offering price does not equal an even cent, the public offering price may be
adjusted to the nearest cent. All payments to the Fund hereunder shall be made
in the manner set forth in Section 3(f).
(d) The net asset value of Class A shares shall be determined by the
Fund or any agent of the Fund in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Directors.
4
<PAGE> 5
(e) The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend
the sale of its Class A shares if trading on the New York Stock Exchange shall
have been suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some other event,
which, in the judgment of the Fund, makes it impracticable or inadvisable to
sell the Class A shares.
(f) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares from eligible
investors. The Fund (or its agent) will confirm orders upon their receipt,
will make appropriate book entries and, upon receipt by the Fund (or its agent)
of payment therefor, will deliver deposit receipts or certificates for such
Class A shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds. The Distributor agrees
to cause such payment and such instructions to be delivered promptly to the
Fund (or its agent).
Section 4. Repurchase or Redemption of Class A shares by the Fund.
5
<PAGE> 6
(a) Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
shares so tendered in accordance with its obligations as set forth in Article
VII of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to redeem or
repurchase the Class A shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(d) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund.
All payments by the Fund hereunder shall be made in the manner set forth below.
The redemption or repurchase by the Fund of any of the Class A shares purchased
by or through the Distributor will not affect the sales charge secured by the
Distributor or any selected dealer in the course of the original sale, except
that if any Class A shares are tendered for redemption or repurchase within
seven business days after the date of the confirmation of the original
purchase, the right to the sales charge shall be forfeited by the Distributor
and the selected dealer which sold such Class A shares.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor in New
York Clearing House funds on or before the seventh business day subsequent to
its having received the notice
6
<PAGE> 7
of redemption in proper form. The proceeds of any redemption of shares shall
be paid by the Fund as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the account of the
shareholder, in each case in accordance with the applicable provisions of the
prospectus and statement of additional information.
(b) Redemption of Class A shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or during any other period
when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class A
shares of the Fund, and this shall include, upon request by the Distributor,
one certified copy of all financial statements prepared for the Fund by
independent public accountants. The Fund shall make available to the
Distributor such number of copies of the prospectus and statement of additional
information as the Distributor shall reasonably request.
7
<PAGE> 8
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the Class A shareholders, all necessary action to fix the
number of authorized Class A shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class A shares as the Distributor may
reasonably be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class A shares for sale under the
securities laws of such states as the Distributor and the Fund may approve.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by
the Distributor, copies of annual and interim reports of the Fund.
8
<PAGE> 9
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund but shall not be obligated to sell any
specific number of Class A shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither
the Distributor nor any selected dealer, as defined in Section 7 hereof, nor
any other person is authorized by the Fund to give any information or to make
any representations, other than those contained in the registration statement
or related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to eligible investors
and selected dealers, the collection of amounts payable by eligible investors
and selected dealers on such sales, and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National
9
<PAGE> 10
Association of Securities Dealers, Inc. (the "NASD"), as such requirements may
from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into selected
dealers agreements with securities dealers of its choice ("selected dealers")
for the sale of Class A shares and fix therein the portion of the sales charge
which may be allocated to the selected dealers; provided that the Fund shall
approve the forms of agreements with dealers and the dealer compensation set
forth therein. Class A shares sold to selected dealers shall be for resale by
such dealers only at the public offering price(s) set forth in the prospectus
and statement of additional information. The form of agreement with selected
dealers to be used during the continuous offering of the Class A shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class A shares only to such selected dealers as are members in good standing of
the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and interim reports and proxy
10
<PAGE> 11
materials to Class A shareholders (including but not limited to the expense of
setting in type any such registration statements, prospectuses, statements of
additional information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments
of sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the
costs and expenses of printing and distributing any copies thereof which are to
be used in connection with the offering of Class A shares to selected dealers
or eligible investors pursuant to this Agreement. The Distributor shall bear
the costs and expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use by selected
dealers in connection with the offering of the Class A shares for sale to
eligible investors and any expenses of advertising incurred by the Distributor
in connection with such offering.
(c) The Fund shall bear the cost and expenses of qualification of the
Class A shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing
11
<PAGE> 12
qualification therein until the Fund decides to discontinue such qualification
pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith), as incurred, arising by reason
of any person acquiring any Class A shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the registration statement or related prospectus and statement of additional
information, as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, unless
such statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the indemnity of the
Fund in favor of the Distributor and any such controlling persons to be deemed
to protect such Distributor or any such controlling persons thereof against any
liability to the Fund or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of
12
<PAGE> 13
willful misfeasance, bad faith or gross negligence in the performance of their
duties or by reason of the reckless disregard of their obligations and duties
under this Agreement; or (ii) is the Fund to be liable under its indemnity
agreement contained in this paragraph with respect to any claim made against
the Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Fund in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve it from any liability which it may have to the person against whom such
action is brought otherwise than on account of its indemnity agreement
contained in this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the Distributor or such
controlling person or persons, defendant or defendants in the suit shall bear
the fees and expenses of any
13
<PAGE> 14
additional counsel retained by them, but in case the Fund does not elect to
assume the defense of any such suit, it will reimburse the Distributor or such
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any litigation or
proceedings against it or any of its officers or Directors in connection with
the issuance or sale of any of the Class A shares.
(b) The Distributor shall indemnify and hold harmless the Fund and
each of its Directors and officers and each person, if any, who controls the
Fund against any loss, liability, claim, damage or expense described in the
foregoing indemnity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the annual or interim reports to Class A shareholders. In case any
action shall be brought against the Fund or any person so indemnified, in
respect of which indemnity may be sought against the Distributor, the
Distributor shall have the rights and duties given to the Fund, and the Fund
and each person so indemnified shall have the rights and duties given to the
Distributor by the provisions of subsection (a) of this Section 9.
14
<PAGE> 15
Section 10. Merrill Lynch Mutual Fund Adviser Program. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized
to offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the dutires of the Distributor, the payment of expenses and indemnification
obligations of the fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This
Agreement shall become effective as of the date first above written and shall
remain in force until August __, 1995 and thereafter, but only for so long as
such continuance is specifically approved at least annually by (i) the
Directors or by the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in
the event of its assignment.
15
<PAGE> 16
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments of this Agreement. This Agreement may be
amended by the parties only if such amendment is specifically approved by (i)
the Directors or by the vote of a majority of outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors of the Fund who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
Section 13. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment
Company Act. To the extent that the applicable law of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
Section 14. This Agreement supersedes the prior Distribution
Agreement entered into by the parties hereto with respect to the Class A shares
of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
16
<PAGE> 17
MERRILL LYNCH DRAGON FUND, INC.
By
-------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
17
<PAGE> 18
EXHIBIT A
MERRILL LYNCH DRAGON FUND, INC.
CLASS A SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with MERRILL LYNCH DRAGON FUND, INC., a Maryland corporation (the
"Fund"), pursuant to which it acts as the distributor for the sale of Class A
shares of common stock, par value $0.10 per share (herein referred to as "Class
A shares"), of the Fund and as such has the right to distribute Class A shares
of the Fund for resale. The Fund is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and its Class A shares
are registered under the Securities Act of 1933, as amended. You have received
a copy of the Class A shares Distribution Agreement (the "Distribution
Agreement") between ourself and the Fund and reference is made herein to
certain provisions of such Distribution Agreement. The terms "Prospectus" and
"Statement of Additional Information" used herein refer to the prospectus and
statement of additional information, respectively, on file with the Securities
and Exchange Commission which is part of the most recent effective registration
statement pursuant to the Securities Act of 1933, as amended. We offer to sell
to you, as a member of the Selected Dealers Group, Class A shares of the Fund
for resale to investors identified in the Prospectus and Statement of
Additional Information as eligible to purchase Class A shares ("eligible
investors") upon the following terms and conditions:
1. In all sales of these Class A shares to eligible investors,
you shall act as dealer for your own account and in no transaction shall you
have any authority to act as agent for the Fund, for us or for any other member
of the Selected Dealers Group, except in connection with the Merrill Lynch
Mutual Fund Adviser program and such other special programs as we from time to
time agree, in which case you shall have authority to offer and sell shares, as
agent for the Fund, to participants in such program.
2. Orders received from you will be accepted through us only at
the public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling
1
<PAGE> 19
of orders shall be subject to Section 5 hereof and instructions which we or the
Fund shall forward from time to time to you. All orders are subject to
acceptance or rejection by the Distributor or the Fund in the sole discretion
of either. The minimum initial and subsequent purchase requirements are as set
forth in the current Prospectus and Statement of Additional Information of the
Fund.
3. The sales charges for sales to eligible investors, computed as
percentages of the public offering price and the amount invested, and the
related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
------------------ -------------- ---------- -----------
<S> <C> <C> <C>
Less than $10,000...... 5.25% 5.54% 5.00%
$10,000 but less
than $25,000.......... 5.25% 5.54% 5.00%
$25,000 but less
than $50,000.......... 4.75% 4.99% 4.50%
$50,000 but less
than $100,000......... 4.00% 4.17% 3.75%
$100,000 but less
than $250,000......... 3.00% 3.09% 2.75%
$250,000 but less
than $1,000,000....... 2.00% 2.04% 1.80%
$1,000,000 and over**.. .75% .76% .65%
</TABLE>
- -------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as
set forth in the current Prospectus and Statement of Additional Information.
2
<PAGE> 20
The term "purchase" refers to a single purchase by an individual, or
to concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing Class A shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class A shares for
a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company" as that term is defined in the Investment Company Act of 1940, as
amended, but does not include purchases by any such company which has not been
in existence for at least six months or which has no purpose other than the
purchase of Class A shares of the Fund or Class A shares of other registered
investment companies at a discount; provided, however, that it shall not
include purchases by any group of individuals whose sole organizational nexus
is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which certain eligible investors are permitted to purchase
Class A shares of the Fund at the offering price applicable to the total of (a)
the public offering price of the shares then being purchased plus (b) an amount
equal to the then current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of Class A, Class B, Class C and Class D shares
of the Fund and of any other investment company with an initial sales charge
for which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$10,000 or more of Class A shares or of Class D shares of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor made through you within a thirteen-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent letter executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made pursuant to
the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to eligible investors qualifying for reduced sales charges.
Further information as to the reduced sales charges pursuant
3
<PAGE> 21
to the right of accumulation or a Letter of Intention is set forth in the
Prospectus and Statement of Additional Information.
4. You shall not place orders for any of the Class A shares
unless you have already received purchase orders for such Class A shares at the
applicable public offering prices and subject to the terms hereof and of the
Distribution Agreement. You agree that you will not offer or sell any of the
Class A shares except under circumstances that will result in compliance with
the applicable Federal and state securities laws and that in connection with
sales and offers to sell Class A shares you will furnish to each person to whom
any such sale or offer is made a copy of the Prospectus and, if requested, the
Statement of Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class A shares of the
Fund which is inconsistent in any respect with the information contained in the
Prospectus and Statement of Additional Information (as then amended or
supplemented) or cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class A shares of the Fund to be resold by us
to you subject to the applicable terms and conditions governing the placement
of orders by us set forth in Section 3 of the Distribution Agreement and
subject to the compensation provisions of Section 3 hereof and (ii) to tender
Class A shares directly to the Fund or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding: e.g., by a
change in the "net asset value" from that used in determining the offering
price to your customers.
7. If any Class A shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the Fund or
are tendered for redemption within seven business days after the date of the
confirmation of the original purchase by you, it is agreed that you shall
forfeit your right to, and refund to us, any discount received by you on such
Class A shares.
8. No person is authorized to make any representations concerning
Class A shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class A
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's
4
<PAGE> 22
Prospectus, Statement of Additional Information, periodic reports and proxy
solicitation material is our sole responsibility and not the responsibility of
the Fund, and you agree that the Fund shall have no liability or responsibility
to you in these respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if requested, the
Statement of Additional Information at or prior to the time of offering or sale
and you agree thereafter to deliver to such purchasers copies of the annual and
interim reports and proxy solicitation materials of the Fund. You further
agree to endeavor to obtain proxies from such purchasers. Additional copies of
the Prospectus and Statement of Additional Information, annual or interim
reports and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class A shares entirely or to certain
persons or entities in a class or classes specified by us. Each party hereto
has the right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph shall
not in any way whatsoever constitute, a waiver by you of compliance with any
provision of the Securities Act of 1933, as amended, or of the rules and
regulations of the Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association
of Securities Dealers, Inc. and, with respect to any sales in the United
States, we both hereby agree to abide by the Rules of Fair Practice of such
Association.
13. Upon application to us, we will inform you as to the states in
which we believe the Class A shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your right to sell Class A
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class A shares, if necessary.
14. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
5
<PAGE> 23
15. Your first order placed pursuant to this Agreement for the
purchase of Class A shares of the Fund will represent your acceptance of this
Agreement.
16. This Agreement supersedes any prior Selected Dealers Agreement
entered into by the parties hereto with respect to the Class A shares of the
Fund.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
[MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011]
Accepted:
Firm Name: [Merrill Lynch, Pierce, Fenner & Smith Inc.]
----------------------------------------------
By:
-----------------------------------------------------
Address: [800 Scudders Mill Road]
------------------------------------------------
[Plainsboro, New Jersey 08536]
--------------------------------------------------------
Date: , 1994
---------------------------------------------------
6
<PAGE> 1
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994, between MERRILL
LYNCH DRAGON FUND, INC. a Maryland corporation (the "Fund"), and MERRILL LYNCH
FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company, and it is affirmatively in the interest of the Fund to offer its
shares for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Fund's Class C
shares in order to promote the growth of the Fund and facilitate the
distribution of its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints
the Distributor as the principal underwriter and distributor of the Fund to
sell Class C shares of common stock in the Fund (sometimes herein referred to
as "C shares") to
<PAGE> 2
the public and hereby agrees during the term of this Agreement to sell shares
of the Fund to the Distributor upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor of the Class C shares, except that:
(a) The Fund may, upon written notice to the Distributor, from time
to time designate other principal underwriters and distributors of Class C
shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such. If
such designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class C shares in the areas so designated shall terminate,
but this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class
C shares from the Fund shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class C
shares of any such company by the Fund.
2
<PAGE> 3
(c) Such exclusive right also shall not apply to Class C shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive right also shall not apply to Class C shares
issued by the Fund pursuant to any conversion, exchange or reinstatement
privilege afforded redeeming shareholders or to any other Class C shares as
shall be agreed between the Fund and the Distributor from time to time.
Section 3.Purchase of Class C Shares from the Fund.
(a) It is contemplated that the Fund will commence an offering of its
Class C shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class C shares needed, but not more than the Class C shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class C shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class C shares shall be
those persons so identified in the currently effective prospectus and statement
of additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"), relating to such Class C shares. The price
which the Distributor shall pay for the Class C shares so purchased from the
Fund shall be the net asset value, determined as set forth in Section 3(c)
hereof.
3
<PAGE> 4
(b) The Class C shares are to be resold by the Distributor to
investors at net asset value, as set forth in Section 3(c) hereof, or to
securities dealers having agreements with the Distributor upon the terms and
conditions set forth in Section 7 hereof.
(c) The net asset value of Class C shares of the Fund shall be
determined by the Fund or any agent of the Fund in accordance with the method
set forth in the prospectus and statement of additional information and
guidelines established by the Board of Directors.
(d) The Fund shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend
the sale of its Class C shares if trading on the New York Stock Exchange shall
have been suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some other event,
which, in the judgment of the Fund, makes it impracticable or inadvisable to
sell the Class C shares.
(e) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Fund
4
<PAGE> 5
(or its agent) will confirm orders upon their receipt, will make appropriate
book entries and, upon receipt by the Fund (or its agent) of payment therefor,
will deliver deposit receipts or certificates for such Class C shares pursuant
to the instructions of the Distributor. Payment shall be made to the Fund in
New York Clearing House funds. The Distributor agrees to cause such payment
and such instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by the Fund.
(a) Any of the outstanding Class C shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class C
shares so tendered in accordance with its obligations as set forth in Article
VII of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information of the Fund. The price to be paid to
redeem or repurchase the Class C shares shall be equal to the net asset value
calculated in accordance with the provisions of Section 3(c) hereof, less any
contingent deferred sales charge ("CDSC"), redemption fee or other charge(s),
if any, set forth in the prospectus and statement of additional information of
the Fund. All payments by the Fund hereunder shall be made in the manner set
forth below.
5
<PAGE> 6
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Fund as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the account of the
shareholder, in each case in accordance with the applicable provisions of the
prospectus and statement of additional information.
(b) Redemption of Class C shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or during any other period
when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class C
shares of the Fund, and this shall include, upon request by the Distributor,
one certified copy of all
6
<PAGE> 7
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
prospectus and statement of additional information as the Distributor shall
reasonably request.
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the shareholders, all necessary action to fix the number
of authorized shares and such steps as may be necessary to register the same
under the Securities Act to the end that there will be available for sale such
number of Class C shares as the Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class C shares for sale under the
securities laws of such states as the Distributor and the Fund may approve.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by
the Distributor, copies of annual and interim reports of the Fund.
7
<PAGE> 8
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither
the Distributor nor any selected dealer, as defined in Section 7 hereof, nor
any other person is authorized by the Fund to give any information or to make
any representations, other than those contained in the registration statement
or related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may
be necessary to comply with the requirements of the National Association
8
<PAGE> 9
of Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into selected
dealer agreements with securities dealers of its choice ("selected dealers")
for the sale of Class C shares; provided, that the Fund shall approve the forms
of agreements with dealers. Class C shares sold to selected dealers shall be
for resale by such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The form of agreement with selected dealers to be used
during the continuous offering of the shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class C shares only to such selected dealers that are members in good standing
of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and interim reports and proxy materials to
Class C shareholders (including but not limited to the expense of setting in
type any such registration statements,
9
<PAGE> 10
prospectuses, statements of additional information, annual or interim reports
or proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments
of sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the
costs and expenses of printing and distributing any copies thereof which are to
be used in connection with the offering of Class C shares to selected dealers
or investors pursuant to this Agreement. The Distributor shall bear the costs
and expenses of preparing, printing and distributing any other literature used
by the Distributor or furnished by it for use by selected dealers in connection
with the offering of the Class C shares for sale to the public and any expenses
of advertising incurred by the Distributor in connection with such offering.
It is understood and agreed that so long as the Fund's Class C Shares
Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor hereunder may be
paid from amounts recovered by it from the Fund under such Plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class C shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of quali-
10
<PAGE> 11
fying the Fund as a broker or dealer in such states of the United States or
other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5(c) hereof and the cost and expenses payable to each such
state for continuing qualification therein until the Fund decides to
discontinue such qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith), as incurred, arising by reason
of any person acquiring any Class C shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the registration statement or related prospectus and statement of additional
information, as from time to time amended and supplemented, or an annual or
interim report to Class C shareholders of the Fund, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, unless such statement or omission was made in reliance upon, and
in conformity with, information furnished to the Fund in connection therewith
by or on behalf of the Distributor; provided, however, that in no case (i)
11
<PAGE> 12
is the indemnity of the Fund in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or any such
controlling persons thereof against any liability to the Fund or its security
holders to which the Distributor or any such controlling persons would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement; or (ii) is the
Fund to be liable under its indemnity agreement contained in this paragraph
with respect to any claim made against the Distributor or any such controlling
persons, unless the Distributor or such controlling persons, as the case may
be, shall have notified the Fund in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Distributor or such controlling persons
(or after the Distributor or such controlling persons shall have received
notice of such service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which it may have to
the person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. The Fund will be entitled to
participate at its own expense in the defense or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the Fund
elects to assume the defense, such defense shall be
12
<PAGE> 13
conducted by counsel chosen by it and satisfactory to the Distributor or such
controlling person or persons, defendant or defendants in the suit. In the
event the Fund elects to assume the defense of any such suit and retain such
counsel, the Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses, as incurred, of any
additional counsel retained by them, but in case the Fund does not elect to
assume the defense of any such suit, it will reimburse the Distributor or such
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses, as incurred, of any counsel retained by them.
The Fund shall promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or Directors in
connection with the issuance or sale of any of the Class C shares.
(b) The Distributor shall indemnify and hold harmless the Fund and
each of its Directors and officers and each person, if any, who controls the
Fund against any loss, liability, claim, damage or expense, as incurred,
described in the foregoing indemnity contained in subsection (a) of this
Section, but only with respect to statements or omissions made in reliance
upon, and in conformity with, information furnished to the Fund in writing by
or on behalf of the Distributor for use in connection with the registration
statement or related prospectus and statement of additional information, as
from time to time amended, or the
13
<PAGE> 14
annual or interim reports to shareholders. In case any action shall be brought
against the Fund or any person so indemnified, in respect of which indemnity
may be sought against the Distributor, the Distributor shall have the rights
and duties given to the Fund, and the Fund and each person so indemnified shall
have the rights and duties given to the Distributor by the provisions of
subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized
to offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the dutires of the Distributor, the payment of expenses and indemnification
obligations of the fund and the Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until August __, 1995 and thereafter, but
only for so long as such continuance is specifically approved at least annually
by (i) the Directors or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of
14
<PAGE> 15
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments of this Agreement. This Agreement may be
amended by the parties only if such amendment is specifically approved by (i)
the Directors or by the vote of a majority of outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors of the Fund who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
Section 13. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment
Company Act. To the extent that the applicable law of the State of New York,
or any
15
<PAGE> 16
of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MERRILL LYNCH DRAGON FUND, INC.
By
------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
------------------------------------
Title:
16
<PAGE> 17
EXHIBIT A
MERRILL LYNCH DRAGON FUND, INC.
CLASS C SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Dragon Fund, Inc., a Maryland corporation (the
"Fund"), pursuant to which it acts as the distributor for the sale of Class C
shares of common stock, par value $0.10 per share (herein referred to as the
"Class C shares"), of the Fund and as such has the right to distribute Class C
shares of the Fund for resale. The Fund is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and its Class
C shares being offered to the public are registered under the Securities Act of
1933, as amended. You have received a copy of the Class C Shares Distribution
Agreement (the "Distribution Agreement") between ourself and the Fund and
reference is made herein to certain provisions of such Distribution Agreement.
The terms "Prospectus" and "Statement of Additional Information" as used herein
refer to the prospectus and statement of additional information, respectively,
on file with the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the Securities Act of 1933,
as amended. We offer to sell to you, as a member of the Selected Dealers
Group, Class C shares of the Fund upon the following terms and conditions:
1. In all sales of these Class C shares to the public, you shall
act as dealer for your own account and in no transaction shall you have any
authority to act as agent for the Fund, for us or for any other member of the
Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time to time agree,
in which case you shall have authority to offer and sell shares, as agent for
the Fund, to participants in such program.
2. Orders received from you will be accepted through us only at
the public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 4 hereof and
instructions which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum ini-
1
<PAGE> 18
tial and subsequent purchase requirements are as set forth in the current
Prospectus and Statement of Additional Information of the Fund.
3. You shall not place orders for any of the Class C shares unless
you have already received purchase orders for such Class C shares at the
applicable public offering prices and subject to the terms hereof and of the
Distribution Agreement. You agree that you will not offer or sell any of the
Class C shares except under circumstances that will result in compliance with
the applicable Federal and state securities laws and that in connection with
sales and offers to sell Class C shares you will furnish to each person to whom
any such sale or offer is made a copy of the Prospectus and, if requested, the
Statement of Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class C shares of the
Fund which is inconsistent in any respect with the information contained in the
Prospectus and Statement of Additional Information (as then amended or
supplemented) or cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class C shares of the Fund to be resold by us
to you subject to the applicable terms and conditions governing the placement
of orders by us set forth in Section 3 of the Distribution Agreement and (ii)
to tender Class C shares directly to the Fund or its agent for redemption
subject to the applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
5. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding: e.g., by a
change in the "net asset value" from that used in determining the offering
price to your customers.
6. No person is authorized to make any representations concerning
Class C shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall
2
<PAGE> 19
have no liability or responsibility to you in these respects unless expressly
assumed in connection therewith.
7. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus and, if requested, the Statement
of Additional Information at or prior to the time of offering or sale and you
agree thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
8. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class C shares entirely or to certain
persons or entities in a class or classes specified by us. Each party hereto
has the right to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph shall
not in any way whatsoever constitute, a waiver by you of compliance with any
provision of the Securities Act of 1933, as amended, or of the rules and
regulations of the Securities and Exchange Commission issued thereunder.
10. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any sales in the
United States, we both hereby agree to abide by the Rules of Fair Practice of
such Association.
11. Upon application to us, we will inform you as to the states in
which we believe the Class C shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your right to sell Class C
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class C shares, if necessary.
12. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
3
<PAGE> 20
13. Your first order placed pursuant to this Agreement for the
purchase of Class C shares of the Fund will represent your acceptance of this
Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
[MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011]
Accepted:
Firm Name: [Merrill Lynch, Pierce, Fenner & Smith Inc.]
--------------------------------------------
By:
---------------------------------------------------
Address: [800 Scudders Mill Road]
----------------------------------------------
[Plainsboro, New Jersey 08536]
-------------------------------------------------------
Date: , 1994
-------------------------------------------------
4
<PAGE> 1
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994 between Dragon Fund,
Inc., a Maryland corporation (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR,
INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company, and it is affirmatively in the interest of the Fund to offer its
shares for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Class D shares
of common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints
the Distributor as the principal underwriter and distributor of the Fund to
sell Class D shares of common stock in the Fund (sometimes herein referred to
as "Class D shares") to the
<PAGE> 2
public and hereby agrees during the term of this Agreement to sell Class D
shares of the Fund to the Distributor upon the terms and conditions herein set
forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time
to time designate other principal underwriters and distributors of Class D
shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such. If
such designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall terminate,
but this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class
D shares from the Fund shall not apply to Class D shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class D shares of any
such company by the Fund.
(c) Such exclusive right also shall not apply to Class D shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
2
<PAGE> 3
(d) Such exclusive right also shall not apply to Class D shares
issued by the Fund pursuant to any conversion, exchange or reinstatement
privilege afforded redeeming shareholders or to any other Class D shares as
shall be agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class D Shares from the Fund.
(a) It is contemplated that the Fund will commence an offering of its
Class D shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class D shares needed, but not more than the Class D shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class D shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class D shares shall be
those persons so identified in the currently effective prospectus and statement
of additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"), relating to such Class D shares. The price
which the Distributor shall pay for the Class D shares so purchased from the
Fund shall be the net asset value, determined as set forth in Section 3(d)
hereof, used in determining the public offering price on which such orders were
based.
(b) The Class D shares are to be resold by the Distributor to
investors at the public offering price, as set forth in Section 3(c) hereof, or
to securities dealers having agreements
3
<PAGE> 4
with the Distributor upon the terms and conditions set forth in Section 7
hereof.
(c) The public offering price(s) of the Class D shares,i.e., the
price per share at which the Distributor or selected dealers may sell Class D
shares to the public, shall be the public offering price as set forth in the
prospectus and statement of additional information relating to such Class D
shares, but not to exceed the net asset value at which the Distributor is to
purchase the Class D shares, plus a sales charge not to exceed 5.25% of the
public offering price (5.54% of the net amount invested), subject to reductions
for volume purchases. Class D shares may be sold to certain Directors,
officers and employees of the Fund, directors and employees of Merrill Lynch &
Co., Inc. and its subsidiaries, and to certain other persons described in the
prospectus and statement of additional information, without a sales charge or
at a reduced sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the public offering
price does not equal an even cent, the public offering price may be adjusted to
the nearest cent. All payments to the Fund hereunder shall be made in the
manner set forth in Section 3(f).
(d) The net asset value of Class D shares shall be determined by the
Fund or any agent of the Fund in accordance with the method set forth in the
prospectus and statement of additional
4
<PAGE> 5
information of the Fund and guidelines established by the Directors.
(e) The Fund shall have the right to suspend the sale of its Class D
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend
the sale of its Class D shares if trading on the New York Stock Exchange shall
have been suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some other event,
which, in the judgment of the Fund, makes it impracticable or inadvisable to
sell the Class D shares.
(f) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class D shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class D shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class D shares pursuant to
the instructions of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such payment and
such instructions to be delivered promptly to the Fund (or its agent).
5
<PAGE> 6
Section 4. Repurchase or Redemption of Class D Shares by the Fund.
(a) Any of the outstanding Class D shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class D
shares so tendered in accordance with its obligations as set forth in Article
VII of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to redeem or
repurchase the Class D shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(d) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund.
All payments by the Fund hereunder shall be made in the manner set forth below.
The redemption or repurchase by the Fund of any of the Class D shares purchased
by or through the Distributor will not affect the sales charge secured by the
Distributor or any selected dealer in the course of the original sale, except
that if any Class D shares are tendered for redemption or repurchase within
seven business days after the date of the confirmation of the original
purchase, the right to the sales charge shall be forfeited by the Distributor
and the selected dealer which sold such Class D shares.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of
6
<PAGE> 7
the Distributor in New York Clearing House funds on or before the seventh
business day subsequent to its having received the notice of redemption in
proper form. The proceeds of any redemption of shares shall be paid by the
Fund as follows: (i) any applicable CDSC shall be paid to the Distributor, and
(ii) the balance shall be paid to or for the account of the shareholder, in
each case in accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class D shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or during any other period
when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class D
shares of the Fund, and this shall include, upon request by the Distributor,
one certified copy of all financial statements prepared for the Fund by
independent public accountants. The Fund shall make available to the
Distributor
7
<PAGE> 8
such number of copies of the prospectus and statement of additional information
as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the Class D shareholders, all necessary action to fix the
number of authorized Class D shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class D shares as the Distributor may
reasonably be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class D shares for sale under the
securities laws of such states as the Distributor and the Fund may approve.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by
the Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class D shares of the Fund but shall not be obligated to sell any
specific number of Class D shares. The
8
<PAGE> 9
services of the Distributor to the Fund hereunder are not to be deemed
exclusive and nothing herein contained shall prevent the Distributor from
entering into like arrangements with other investment companies so long as the
performance of its obligations hereunder is not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither
the Distributor nor any selected dealer, as defined in Section 7 hereof, nor
any other person is authorized by the Fund to give any information or to make
any representations, other than those contained in the registration statement
or related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may
be necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into selected
dealers agreements with securities dealers of its choice
9
<PAGE> 10
("selected dealers") for the sale of Class D shares and fix therein the portion
of the sales charge which may be allocated to the selected dealers; provided
that the Fund shall approve the forms of agreements with dealers and the dealer
compensation set forth therein. Class D shares sold to selected dealers shall
be for resale by such dealers only at the public offering price(s) set forth in
the prospectus and statement of additional information. The form of agreement
with selected dealers to be used during the continuous offering of the Class D
shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class D shares only to such selected dealers as are members in good standing of
the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and interim reports and proxy materials to
Class D shareholders (including but not limited to the expense of setting in
type any such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
10
<PAGE> 11
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments
of sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the
costs and expenses of printing and distributing any copies thereof which are to
be used in connection with the offering of Class D shares to selected dealers
or investors pursuant to this Agreement. The Distributor shall bear the costs
and expenses of preparing, printing and distributing any other literature used
by the Distributor or furnished by it for use by selected dealers in connection
with the offering of the Class D shares for sale to the public and any expenses
of advertising incurred by the Distributor in connection with such offering.
It is understood and agreed that so long as the Fund's Class D Shares
Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor hereunder in
connection with account maintenance activities may be paid from amounts
recovered by it from the Fund under such plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class D shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund
11
<PAGE> 12
and the Distributor pursuant to Section 5(c) hereof and the cost and expenses
payable to each such state for continuing qualification therein until the Fund
decides to discontinue such qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith), as incurred, arising by reason
of any person acquiring any Class D shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the registration statement or related prospectus and statement of additional
information, as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, unless
such statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the indemnity of the
Fund in favor of the Distributor and any such controlling persons to be deemed
to protect such Distributor or any such controlling persons thereof against any
liability to the
12
<PAGE> 13
Fund or its security holders to which the Distributor or any such controlling
persons would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this Agreement; or
(ii) is the Fund to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Distributor or any such
controlling persons, unless the Distributor or such controlling persons, as the
case may be, shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the Distributor or such controlling
persons (or after the Distributor or such controlling persons shall have
received notice of such service on any designated agent), but failure to notify
the Fund of any such claim shall not relieve it from any liability which it may
have to the person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund will
be entitled to participate at its own expense in the defense or, if it so
elects, to assume the defense of any suit brought to enforce any such
liability, but if the Fund elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the Distributor or such
controlling person or persons, defendant or defendants in the suit. In the
event the Fund elects to assume the defense of any such suit and retain such
counsel, the
13
<PAGE> 14
Distributor or such controlling person or persons, defendant or defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them, but in case the Fund does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of
any counsel retained by them. The Fund shall promptly notify the Distributor
of the commencement of any litigation or proceedings against it or any of its
officers or Directors in connection with the issuance or sale of any of the
Class D shares.
(b) The Distributor shall indemnify and hold harmless the Fund and
each of its Directors and officers and each person, if any, who controls the
Fund against any loss, liability, claim, damage or expense described in the
foregoing indemnity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the annual or interim reports to Class D shareholders. In case any
action shall be brought against the Fund or any person so indemnified, in
respect of which indemnity may be sought against the Distributor, the
Distributor shall have the rights and duties given to the Fund, and the Fund
and each person so indemnified
14
<PAGE> 15
shall have the rights and duties given to the Distributor by the provisions of
subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized
to offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This
Agreement shall become effective as of the date first above written and shall
remain in force until August __, 1995 and thereafter, but only for so long as
such continuance is specifically approved at least annually by (i) the
Directors or by the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This
15
<PAGE> 16
Agreement shall automatically terminate in the event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments of this Agreement. This Agreement may be
amended by the parties only if such amendment is specifically approved by (i)
the Directors or by the vote of a majority of outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors of the Fund who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
Section 13. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment
Company Act. To the extent that the applicable law of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MERRILL LYNCH DRAGON FUND, INC.
By
-------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
17
<PAGE> 18
EXHIBIT A
MERRILL LYNCH DRAGON FUND, INC.
CLASS D SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Dragon Fund, Inc, a Maryland corporation (the
"Fund"), pursuant to which it acts as the distributor for the sale of Class D
shares of common stock, par value $0.10 per share (herein referred to as "Class
D shares"), of the Fund and as such has the right to distribute Class D shares
of the Fund for resale. The Fund is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and its Class D shares
being offered to the public are registered under the Securities Act of 1933, as
amended. You have received a copy of the Class D Shares Distribution Agreement
(the "Distribution Agreement") between ourself and the Fund and reference is
made herein to certain provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used herein refer to the
prospectus and statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most recent
effective registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected Dealers Group,
Class D shares of the Fund upon the following terms and conditions:
1. In all sales of these Class D shares to the public, you shall
act as dealer for your own account and in no transaction shall you have any
authority to act as agent for the Fund, for us or for any other member of the
Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time to time agree,
in which case you shall have authority to offer and sell shares, as agent for
the Fund, to participants in such program.
2. Orders received from you will be accepted through us only at
the public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 5 hereof and
instructions which we or the Fund shall forward from time to time to you. All
1
<PAGE> 19
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.
3. The sales charges for sales to the public, computed as
percentages of the public offering price and the amount invested, and the
related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
------------------ -------------- ---------- -----------
<S> <C> <C> <C>
Less than $10,000.... 5.25% 5.54% 5.00%
$10,000 but less
than $25,000........ 5.25% 5.54% 5.00%
$25,000 but less
than $50,000........ 3.75% 4.99% 4.50%
$50,000 but less
than $100,000....... 3.25% 4.17% 3.75%
$100,000 but less
than $250,000....... 2.50% 3.09% 2.75%
$250,000 but less
than $1,000,000.. 1.50% 2.04% 1.80%
$1,000,000 and over**.. 0.75% 0.76% 0.65%
</TABLE>
- -------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as
set forth in the current Prospectus and Statement of Additional Information.
2
<PAGE> 20
The term "purchase" refers to a single purchase by an individual, or
to concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing Class D shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class D shares for
a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company" as that term is defined in the Investment Company Act of 1940, as
amended, but does not include purchases by any such company which has not been
in existence for at least six months or which has no purpose other than the
purchase of Class D shares of the Fund or Class D shares of other registered
investment companies at a discount; provided, however, that it shall not
include purchases by any group of individuals whose sole organizational nexus
is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase Class D
shares of the Fund at the offering price applicable to the total of (a) the
public offering price of the shares then being purchased plus (b) an amount
equal to the then current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of Class A, Class B, Class C and Class D shares
of the Fund and of any other investment company with an initial sales charge
for which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$10,000 or more of Class A shares or of Class D shares of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor made through you within a thirteen-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent letter executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made pursuant to
the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to the public qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the
3
<PAGE> 21
right of accumulation or a Letter of Intention is set forth in the Prospectus
and Statement of Additional Information.
4. You shall not place orders for any of the Class D shares
unless you have already received purchase orders for such Class D shares at the
applicable public offering prices and subject to the terms hereof and of the
Distribution Agreement. You agree that you will not offer or sell any of the
Class D shares except under circumstances that will result in compliance with
the applicable Federal and state securities laws and that in connection with
sales and offers to sell Class D shares you will furnish to each person to whom
any such sale or offer is made a copy of the Prospectus and, if requested, the
Statement of Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class D shares of the
Fund which is inconsistent in any respect with the information contained in the
Prospectus and Statement of Additional Information (as then amended or
supplemented) or cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class D shares of the Fund to be resold by us
to you subject to the applicable terms and conditions governing the placement
of orders by us set forth in Section 3 of the Distribution Agreement and
subject to the compensation provisions of Section 3 hereof and (ii) to tender
Class D shares directly to the Fund or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding: e.g., by a
change in the "net asset value" from that used in determining the offering
price to your customers.
7. If any Class D shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the Fund or
are tendered for redemption within seven business days after the date of the
confirmation of the original purchase by you, it is agreed that you shall
forfeit your right to, and refund to us, any discount received by you on such
Class D shares.
8. No person is authorized to make any representations concerning
Class D shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class D
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's
4
<PAGE> 22
Prospectus, Statement of Additional Information, periodic reports and proxy
solicitation material is our sole responsibility and not the responsibility of
the Fund, and you agree that the Fund shall have no liability or responsibility
to you in these respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if requested, the
Statement of Additional Information at or prior to the time of offering or sale
and you agree thereafter to deliver to such purchasers copies of the annual and
interim reports and proxy solicitation materials of the Fund. You further
agree to endeavor to obtain proxies from such purchasers. Additional copies of
the Prospectus and Statement of Additional Information, annual or interim
reports and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class D shares entirely or to certain
persons or entities in a class or classes specified by us. Each party hereto
has the right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph shall
not in any way whatsoever constitute, a waiver by you of compliance with any
provision of the Securities Act of 1933, as amended, or of the rules and
regulations of the Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association
of Securities Dealers, Inc. and, with respect to any sales in the United
States, we both hereby agree to abide by the Rules of Fair Practice of such
Association.
13. Upon application to us, we will inform you as to the states in
which we believe the Class D shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your right to sell Class D
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class D shares, if necessary.
14. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
5
<PAGE> 23
15. Your first order placed pursuant to this Agreement for the
purchase of Class D shares of the Fund will represent your acceptance of this
Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
[MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011]
Accepted:
Firm Name: [Merrill Lynch, Pierce, Fenner & Smith Inc.]
----------------------------------------------
By:
-----------------------------------------------------
Address: [800 Scudders Mill Road]
------------------------------------------------
[Plainsboro, New Jersey 08536]
--------------------------------------------------------
Date: , 1994
---------------------------------------------------
6
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Dragon Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 4 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.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 10, 1994
<PAGE> 1
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH DRAGON FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21 day of October 1994, by and
between Merrill Lynch Dragon Fund, Inc., a Maryland corporation (the "Fund"),
and Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class C Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class C
shares of common stock, par value $0.10 per share (the "Class C shares"), of
the Fund to the public; and
WHEREAS, the Fund desires to adopt this Class C Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Fund's Class C shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 under the Investment Company
Act on the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the
Plan at the end of each month at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class C shares to compensate MLFD and securities
firms with which MLFD enters
<PAGE> 2
into related agreements pursuant to Paragraph 3 hereof ("Sub-Agreements") for
providing account maintenance activities with respect to Class C shareholders
of the Fund. Expenditures under the Plan may consist of payments to financial
consultants for maintaining accounts in connection with Class C shares of the
Fund and payment of expenses incurred in connection with such account
maintenance activities including the costs of making services available to
shareholders including assistance in connection with inquiries related to
shareholder accounts.
2. The Fund shall pay MLFD a distribution fee under the Plan at
the end of each month at the annual rate of .75% of average daily net assets of
the Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related Sub-Agreements for providing sales and
promotional activities and services. Such activities and services will relate
to the sale, promotion and marketing of the Class C shares of the Fund. Such
expenditures may consist of sales commissions to financial consultants for
selling Class C shares of the Fund, compensation, sales incentives and payments
to sales and marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising expenditures related to
the Fund and the costs of preparing and distributing promotional materials.
The distribution fee may also be used to pay the financing costs of carrying
the unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements
with certain securities firms ("Securities Firms"), including Merrill Lynch,
Pierce, Fenner & Smith Incorporated, to provide compensation to such Securities
Firms for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the
above-mentioned activities and services. Such Sub-Agreement shall provide that
the Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of
[Trustees or Directors], and the Directors shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1 regarding the
disbursement of the account maintenance fee and the distribution fee during
such period.
2
<PAGE> 3
5. This Plan shall not take effect until it has been approved by a
vote of at least a majority, as defined in the Investment Company Act, of the
outstanding Class C voting securities of the Fund.
6. This Plan shall not take effect until it has been approved,
together with any related agreements, by votes of a majority of both (a) the
Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund, as defined in the Investment Company Act, and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a
meeting or meetings called for the purpose of voting on the Plan and such
related agreements.
7. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of
the Rule 12b-1 Directors, or by vote of a majority of the outstanding Class C
voting securities of the Fund.
9. The Plan may not be amended to increase materially the rate of
payments provided for herein unless such amendment is approved by at least a
majority, as defined in the Investment Company Act, of the outstanding Class C
voting securities of the Fund, and by the Directors of the Fund in the manner
provided for in Paragraph 6 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
11. The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Paragraph 4 hereof, for a period of
not less than six years from the date of the Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH DRAGON FUND, INC.
By
---------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------------
Title:
4
<PAGE> 5
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 1994, by and between
Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation
("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Dragon
Fynd Inc., a Maryland corporation (the "Fund"), pursuant to which it acts as
the exclusive distributor for the sale of Class C shares of common stock, par
value $0.10 per share (the "Class C shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class C Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a distribution fee from
the Fund at the annual rate of .75% of average daily net assets of the Fund
relating to Class C shares for providing sales and promotional activities and
services related to the distribution of Class C shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for
the Fund's Class C shareholders and the Securities Firm is willing to perform
such activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class C shares of the Fund and incur
expenditures in connection with such activities and services of the types
referred to in Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional
activities and services with respect to the sale of the Class C shares of the
Fund, and incur distribution expenditures, of the types referred to in
Paragraph 2 of the Plan.
<PAGE> 6
3. As compensation for its activities and services performed under
this Agreement, MLFD shall pay the Securities Firm an account maintenance fee
and a distribution fee at the end of each calendar month in an amount agreed
upon by the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 [Trustees or Directors]"), cast in person at a
meeting or meetings called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
---------------------------------------
Title:
2
<PAGE> 1
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH DRAGON FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of August 1994, by and
between Merrill Lynch Dragon Fund, Inc., a Maryland corporation (the "Fund"),
and Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
WHEREAS, the Fund is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class D Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class D
shares of common stock par value $0.10 per share (the "Class D shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class D Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee to MLFD with respect to the
Fund's Class D shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 under the Investment Company
Act on the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the
Plan at the end of each month at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class D shares to compensate MLFD and securities
firms with which MLFD enters into related agreements ("Sub-Agreements")
pursuant to Paragraph
<PAGE> 2
2 hereof for providing account maintenance activities with respect to Class D
shareholders of the Fund. Expenditures under the Plan may consist of payments
to financial consultants for maintaining accounts in connection with Class D
shares of the Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making services available
to shareholders including assistance in connection with inquiries related to
shareholder accounts.
2. The Fund hereby authorizes MLFD to enter into Sub-Agreements
with certain securities firms ("Securities Firms"), including Merrill Lynch,
Pierce, Fenner & Smith Incorporated, to provide compensation to such Securities
Firms for activities of the type referred to in Paragraph 1. MLFD may
reallocate all or a portion of its account maintenance fee to such Securities
Firms as compensation for the above-mentioned activities. Such Sub-Agreement
shall provide that the Securities Firms shall provide MLFD with such
information as is reasonably necessary to permit MLFD to comply with the
reporting requirements set forth in Paragraph 3 hereof.
3. MLFD shall provide the Fund for review by the Board of
Directors, and the Directors shall review, at least quarterly, a written
report complying with the requirements of Rule 12b-1 regarding the disbursement
of the account maintenance fee during such period.
4. This Plan shall not take effect until it has been approved by a
vote of at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund.
5. This Plan shall not take effect until it has been approved,
together with any related agreements, by votes of a majority of both (a) the
Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund, as defined in the Investment Company Act, and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a
meeting or meetings called for the purpose of voting on the Plan and such
related agreements.
6. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a majority of
the Rule 12b-1 Directors, or by vote of a majority of the outstanding Class D
voting securities of the Fund.
2
<PAGE> 3
8. The Plan may not be amended to increase materially the rate of
payments provided for in Paragraph 1 hereof unless such amendment is approved
by at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund, and by the Directors of the
Fund in the manner provided for in Paragraph 5 hereof, and no material
amendment to the Plan shall be made unless approved in the manner provided for
approval and annual renewal in Paragraph 5 hereof.
9. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the [Trustees or
Directors] who are not interested persons.
10. The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Paragraph 3 hereof, for a period of
not less than six years from the date of the Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH DRAGON FUND, INC.
By
---------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------------
Title:
3
<PAGE> 4
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21 day of October 1994, by and between
Merrill Lynch Funds Distributor, Inc. a Delaware corporation ("MLFD"), and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation
("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Dragon
Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it acts as
the exclusive distributor for the sale of Class D shares of common stock, par
value $0.10 per share (the "Class D shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class D Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class D shares for providing account
maintenance activities and services with respect to Class D shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and services, including assistance in connection with
inquiries related to shareholder accounts, for the Fund's Class D shareholders
and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class D shares of the Fund and incur
expenditures in connection with such activities and services, of the types
referred to in Paragraph 1 of the Plan.
2. As compensation for its services performed under this
Agreement, MLFD shall pay the Securities Firm a fee at the end of each calendar
month in an amount agreed upon by the parties hereto.
3. The Securities Firm shall provide MLFD, at least quarterly,
such information as reasonably requested by MLFD to enable MLFD to comply with
the reporting requirements of Rule
<PAGE> 5
12b-1 regarding the disbursement of the fee during such period referred to in
Paragraph 3 of the Plan.
4. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
---------------------------------------
2
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