<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1995
SECURITIES ACT FILE NO. 33-46216
INVESTMENT COMPANY ACT FILE NO. 811-6581
================================================================================
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. 5 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 6 /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)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a)(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 February 28, 1995.
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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
PricingSM 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 PricingSM
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
APRIL 27, 1995
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. For more information on the Fund's
investment objective and policies, please see "Investment Objective and
Policies" on page 15.
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, were
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 April 27, 1995 (the "Statement of Additional Information"), has been
filed with the Securities and Exchange Commission and is available, without
charge, by calling or by writing the Fund at the above telephone number or
address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C CLASS D
---------- ------------------------- ----------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)..................... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments....................... None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower).............................. None(d) 4.0% during the first 1% for one None(d)
year, decreasing 1.0% year
annually thereafter to
0.0% after the fourth year
Exchange Fee.......................... None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)(E):
Management Fees(f).................... 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(g):
Account Maintenance Fees............ None 0.25% 0.25% 0.25%
Distribution Fees................... None 0.75% 0.75% None
(Class B shares convert
to Class D shares
automatically after
approximately eight years
and cease being subject
to distribution fees)
Other Expenses:
Custodial Fees...................... 0.18% 0.18% 0.18% 0.18%
Shareholder Servicing Costs(h)...... 0.11% 0.13% 0.13% 0.11%
Other............................... 0.09% 0.09% 0.09% 0.09%
----- ----- ----- -----
Total Other Expenses........... 0.38% 0.40% 0.40% 0.38%
----- ----- ----- -----
Total Fund Operating Expenses......... 1.38% 2.40% 2.40% 1.63%
===== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and certain investment programs. 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 35.
(c) 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.
(d) 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 are not
subject to an initial sales charge may instead be subject to a CDSC of 1.0%
of amounts redeemed within the first year after purchase.
(e) Information for Class B and Class D shares is stated for the fiscal year
ended December 31, 1994. Information under "Other Expenses" for Class A and
Class C shares is estimated for the fiscal year ending December 31, 1995.
(f) See "Management of the Fund -- Management and Advisory Arrangements" -- page
29.
(g) See "Purchase of Shares -- Distribution Plans" -- page 39.
(h) See "Management of the Fund -- Transfer Agency Services" -- page 31.
2
<PAGE> 5
EXAMPLE:
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<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
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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........................................ $ 66 $ 94 $ 124 $210
Class B........................................ $ 64 $ 95 $ 128 $255*
Class C........................................ $ 34 $ 75 $ 128 $274
Class D........................................ $ 68 $ 101 $ 137 $236
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of the period:
Class A........................................ $ 66 $ 94 $ 124 $210
Class B........................................ $ 24 $ 75 $ 128 $255*
Class C........................................ $ 24 $ 75 $ 128 $274
Class D........................................ $ 68 $ 101 $ 137 $236
</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. ("ML & Co."). The Manager, or an affiliate, Fund
Asset Management, L.P. ("FAM"), acts as the investment adviser for more than 130
other registered investment companies. The Manager and FAM also offer portfolio
management and portfolio analysis services to individuals and institutions. As
of March 31, 1995, the Manager and FAM had a total of approximately $170.3
billion in investment company and other portfolio assets under management,
including
4
<PAGE> 7
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 PricingSM 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 15 minutes after the close of business on the New York Stock Exchange
(generally, 4:00 p.m., New York time) on each day during which such exchange is
open for business. See "Additional Information -- Determination of Net Asset
Value".
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select PricingSM System is used by more than 50
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, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
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>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------------
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 of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares. Investors that currently own Class A shares in a shareholder
account are entitled to purchase additional Class A shares of the Fund
in that account. Other eligible investors include certain retirement
plans and participants in certain investment programs. In addition,
Class A shares will be offered to ML & Co. and its subsidiaries (the
term "subsidiaries" when used herein with respect to ML & Co. includes
MLAM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.) and their directors and employees and
to members of
6
<PAGE> 9
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 1.0% CDSC if the shares are redeemed within one year
after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% and
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert 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".
7
<PAGE> 10
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B 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 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
year ended December 31, 1994, and the independent auditors' report thereon are
included in the Statement of Additional Information. Further information about
the performance of the Fund is contained in the Fund's most recent annual report
to shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------- --------------------------------------------
FOR THE FOR THE FOR THE
PERIOD FOR THE TEN MONTHS PERIOD
OCT. 21, 1994+ YEAR ENDED ENDED MAY 29, 1992+
TO DEC. 31, DEC. 31, DEC. 31, TO FEB 28,
1994## 1994## 1993## 1993##
-------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $17.43 $ 18.74 $ 11.01 $ 10.00
------ -------- -------- --------
Investment income
(loss) -- net.............. .02 (.07) (.02) (.02)
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net........ (1.91) (3.28) 7.86 1.05
------ -------- -------- --------
Total from investment
operations..................... (1.89) (3.35) 7.84 1.03
------ -------- -------- --------
Less dividends and distributions
Investment income -- net..... -- -- --++ --
In excess of investment
income -- net.............. (.13) -- --++ (.02)
Realized gain on
investments -- net......... (.27) (.27) (.11) --++
In excess of realized gain on
investments -- net......... (.09) (.09) -- --
------ -------- -------- --------
Total dividends and
distributions.................. (.49) (.36) (.11) (.02)
------ -------- -------- --------
Net asset value, end of
period......................... $15.05 $ 15.03 $ 18.74 $ 11.01
====== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.......................... (10.82)%# (17.86)% 71.27%# 10.32%#
====== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account
maintenance and
distribution fees.............. 1.54%* 1.40% 1.35%* 1.49%*
====== ======== ======== ========
Expenses........................ 1.54%* 2.40% 2.35%* 2.49%*
====== ======== ======== ========
Investment income
(loss) -- net.................. .84%* (.42)% (.15)%* (.08)%*
====== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)..................... $3,383 $917,384 $990,843 $365,430
====== ======== ======== ========
Portfolio turnover.............. 16.45% 16.45% 16.62% 4.65%
====== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CLASS C CLASS D
-------------- --------------------------------------------
FOR THE FOR THE FOR THE
PERIOD FOR THE TEN MONTHS PERIOD
OCT. 21, 1994+ YEAR ENDED ENDED MAY 29, 1992+
TO DEC. 31, DEC. 31, DEC. 31, TO FEB 28,
1994## 1994## 1993## 1993##
-------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $17.29 $ 18.77 $ 11.01 $ 10.00
------ -------- -------- --------
Investment income
(loss) -- net.............. (.01) .06 .07 .05
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net........ (1.89) (3.30) 7.88 1.04
------ -------- -------- --------
Total from investment
operations..................... (1.90) (3.24) 7.95 1.09
------ -------- -------- --------
Less dividends and distributions
Investment income -- net..... -- -- (.01) --++
In excess of investment
income -- net.............. (.11) (.09) (.07) (.08)
Realized gain on
investments -- net......... (.27) (.27) (.11) --
In excess of realized gain on
investments -- net......... (.09) (.09) -- --
------ -------- -------- --------
Total dividends and
distributions.................. (.47) (.45) (.19) (.08)
------ -------- -------- --------
Net asset value, end of
period......................... $14.92 $ 15.08 $ 18.77 $ 11.01
====== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.......................... (10.98)%# (17.24)% 72.31%# 10.99%#
====== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account
maintenance and
distribution fees.............. 1.57%* 1.38% 1.34%* 1.48%*
====== ======== ======== ========
Expenses........................ 2.57%* 1.63% 1.59%* 1.73%*
====== ======== ======== ========
Investment income
(loss) -- net.................. (.17)%* .34% .61%* .69%*
====== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)..................... $5,329 $249,903 $311,848 $111,180
====== ======== ======== ========
Portfolio turnover.............. 16.45% 16.45% 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.
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 total 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 total 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.
Legal standards applicable 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 not fully established 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. The Fund's ability to pursue the
collection of such debts by means of legal process following a default may be
limited by sovereign immunity or other legal concepts.
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% (10% to the extent required by
certain state laws) of the Fund's total 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 other investment companies, not more
than 5% of which may be invested in any one such company. The Fund's ability to
make such investments may be further limited by certain state laws. These
restrictions 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 other investment companies, shareholders would
bear both their proportionate share of expenses of the Fund (including
management and advisory fees) and, indirectly, the expenses of such other
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 currently may borrow up to 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. The Fund will not purchase
securities while borrowings exceed 5% of its total assets except (a) to honor
prior commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained, exclusively for settlements of other securities
transactions. The purchase of securities while borrowings are outstanding will
have the effect
14
<PAGE> 17
of leveraging the Fund. Such leveraging increases the Fund's exposure to capital
risk, and borrowed funds are subject to interest costs which will reduce net
income.
NON-DIVERSIFIED STATUS
As a non-diversified investment company, the Fund may invest a larger
percentage of its assets in individual issuers than a diversified investment
company. In this regard, the Fund is not subject to the general limitation that
it 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,
15
<PAGE> 18
Malaysia and Indonesia, which, together with Singapore, the Philippines and
Brunei, are members of the Association of Southeast Asian Nations ("ASEAN"),
began to emerge, making significant economic progress. More recently, southern
China, particularly the province of Guangdong, experienced rapid economic
growth. This regional growth has resulted from government policies directed
towards market-oriented economic reform and, in particular, seeking to encourage
the development of labor-intensive, export-oriented industries. There also has
been growth resulting from an increase in domestic demand. In addition, the
governments have been introducing deregulatory reforms to encourage development
of their securities markets and, in varying degrees, permit foreign investment.
A number of these securities markets have been undergoing rapid growth. While
investments in developing Asia-Pacific securities are subject to considerable
risks (see "Risk Factors and Special Considerations"), the objective of the Fund
reflects the belief that the emerging economies and securities markets of
developing Asia-Pacific countries present attractive investment opportunities.
The Fund will generally seek to diversify investments on a geographic basis
within the developing Asia-Pacific countries. Under certain adverse investment
conditions, however, the Fund may restrict the developing Asia-Pacific
securities markets in which its assets are invested. The allocation of the
Fund's assets among the various securities markets of the developing
Asia-Pacific countries will be determined by the Manager.
Many investors, particularly individuals, lack the information, capability
or inclination to invest in the developing Asia-Pacific countries. It also may
not be permissible for such investors to invest directly in certain developing
Asia-Pacific capital markets. Unlike many intermediary investment vehicles, such
as closed-end investment companies that invest in a single country, the Fund
intends to diversify investment risk among the capital markets of a number of
countries.
The Fund may also seek capital appreciation through investment in
developing Asia-Pacific debt securities. Capital appreciation in debt securities
may arise as a result of a favorable change in relative foreign exchange rates,
in relative interest rate levels or in the creditworthiness of issuers. The
receipt of income from such debt securities is incidental to the Fund's
objective of long-term capital appreciation. In accordance with its investment
objective, the Fund will not seek to benefit from anticipated short-term
fluctuations in currency exchange rates. The Fund may, from time to time, invest
in debt securities with relatively high yields (as compared to other debt
securities meeting the Fund's investment criteria), notwithstanding that the
Fund may not anticipate that such securities will experience substantial capital
appreciation. Such income can be used, however, to offset the operating expenses
of the Fund. For a description of the risks involved in investing in high yield
debt see "Certain Risks of Debt Securities" below.
The Fund may invest in debt securities ("sovereign debt") issued or
guaranteed by developing Asia-Pacific governments (including developing
Asia-Pacific countries, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), debt securities issued or
guaranteed by international organizations designated or supported by multiple
foreign governmental entities (which are not obligations of foreign governments)
to promote economic reconstruction or development ("supranational entities"),
debt securities issued by corporations or financial institutions or debt
securities issued by the U.S. Government or an agency or instrumentality
thereof.
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
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make initial capital contributions to the supranational entity and in many cases
are committed to make additional capital contributions if the supranational
entity is unable to repay its borrowings.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in developing Asia-Pacific
countries, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities including money market securities
denominated in U.S. dollars or foreign currencies ("Temporary Investments"). The
Fund may invest in the securities of developing Asia-Pacific issuers in the form
of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs),
Global Depositary Receipts (GDRs) or other securities convertible into
securities of developing Asia-Pacific issuers. The Fund may invest in
unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose
material information in the United States, and therefore, there may not be a
correlation between such information and the market value of such ADRs. The Fund
may also invest in venture capital investments and illiquid privately placed
securities, provided that such investments, together with other illiquid
securities held by the Fund, do not exceed 15% of the Fund's net assets (or 10%,
as presently required by state law).
CERTAIN RISKS OF DEBT SECURITIES
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest and such securities may
not be rated at all for creditworthiness. Securities rated in the medium to low
rating categories of nationally recognized statistical rating organizations such
as Standard & Poor's 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.
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High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers of
prices for actual sales. The Fund's Directors, or the Manager, will carefully
consider the factors affecting the market for high yield/high risk, lower rated
securities in determining whether any particular security is liquid or illiquid
and whether current market quotations are readily available.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Fund's net asset value. In addition, the Fund may
incur additional expenses to the extent it is required to seek recovery upon a
default on a portfolio holding or participate in the restructuring of the
obligation.
Sovereign Debt. Certain developing Asia-Pacific countries 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. When the Fund engages in transactions denominated
in foreign currencies, it will be subject to the risks of adverse changes in the
exchange rates between such foreign currencies and the U.S. dollar, the currency
used to value the Fund's assets. 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.
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The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written. The
Fund will not write put options if the aggregate value of the obligations
underlying the put options shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security at the stated
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of any offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if as a result of such purchase,
the aggregate cost of all outstanding options on securities held by the Fund
would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase or
write put and call options on stock indices to hedge against the risks of
market-wide stock price movement in the securities in which the Fund invests.
Options on indices are similar to options on securities except that on exercise
or assignment, the parties to the contract pay or receive an amount of cash
equal to the difference between the closing value of the index and the exercise
price of the option times a specified multiple. The Fund may invest in stock
index options based on a broad market index or based on a narrow index
representing an industry or market segment.
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
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<PAGE> 23
by the Fund in stock index futures and financial futures are subject to
limitations as described below under "Restrictions on the Use of Futures
Transactions".
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
it may purchase futures in order to gain rapid market exposure that may in part
or entirely offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, an equivalent amount of futures contracts
will be terminated by offsetting sales. The Manager does not consider purchases
of futures contracts to be a speculative practice under these circumstances. It
is anticipated that, in a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the long futures position,
whether the long position is the purchase of a futures contract or the purchase
of a call option or the writing of a put option on a future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies are utilized under the same market and market sector
conditions (i.e., conditions relating to specific types of investments) in which
the Fund enters into futures transactions. The Fund may purchase put options or
write call options on futures contracts and stock indices rather than selling
the underlying futures contract in anticipation of a decrease in the market
value of its securities. Similarly, the Fund may purchase call options, or write
put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated by
the buyer and seller. See "Restrictions on OTC Options" below for information as
to restrictions on the use of OTC options.
To trade futures contracts, the Fund is not required to deposit funds equal
to the value of the futures contract. The Fund need only make a deposit, called
an "initial margin deposit", equal to a percentage (typically 15% or less) of
the value of the futures contract. As a result, a relatively small adverse move
in the price of a futures contract may result in a substantial loss. For
example, if at the time of purchase 10% of the price of a futures contract is
deposited as margin, a 10% decrease in the price of that contract would, if the
contract were then closed out, result in a total loss of the initial margin
deposit before any deduction for brokerage commissions and other transaction
costs. A decrease of more than 10% would result in a loss of more than the total
initial margin deposit. Options on futures contracts are generally similarly or
even more highly leveraged. However, 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 minimizing the effect of leverage from such
futures contract.
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Foreign Currency Hedging. The Fund has authority to deal in forward
foreign exchange among currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rates among these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date and price set at the time of the contract. The Fund's
dealings in forward foreign exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with the purchase and
sale of its portfolio securities, the sale and redemption of shares of the Fund
or the payment of dividends and distributions by the Fund. Position hedging is
the sale of forward foreign currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The Fund has no
limitation on transaction hedging. The Fund will not speculate in foreign
forward exchange. If the Fund enters into a position hedging transaction, the
Fund's custodian will place cash or liquid debt securities in a separate account
of the Fund in an amount equal to the value of the Fund's total assets committed
to the consummation of such forward contract. If the value of the securities
placed in the separate account declines, additional cash or securities will be
placed in the account so that the value of the account will equal the amount of
the Fund's commitment with respect to such contracts. Hedging against a decline
in the value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the value of the
hedged currency should rise. Moreover, it may not be possible for the Fund to
hedge against a devaluation that is so generally anticipated that the Fund is
not able to contract to sell the currency at a price above the devaluation level
it anticipates. 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
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<PAGE> 25
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.
In connection with its trading in forward foreign currency contracts, the
Fund will contract with a foreign or domestic bank, or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks
and dealers have refused to quote prices for such forward contracts or have
quoted prices with an unusually wide spread between the price at which the bank
or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward contract
trading. With respect to its trading of forward contracts, if any, the Fund will
be subject to the risk of bank or dealer failure and the inability of, or
refusal by, a bank or dealer to perform with respect to such contracts. Any such
default would deprive the Fund of any profit potential or force the Fund to
cover its commitments for resale, if any, at the then-market price and could
result in a loss to the Fund.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission applicable to the Fund provide that the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool" under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell futures contracts
and options thereon (i) for bona fide hedging purposes and (ii) for non-hedging
purposes, if the aggregate initial margin and premiums required to establish
positions in such contracts and options does not exceed 5% of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts and options. These restrictions are in
addition to other restrictions on the Fund's hedging activities mentioned
herein.
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% (10% to the extent
required by certain state laws) of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
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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".
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
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for the special tax treatment afforded regulated investment companies under 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
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, 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
25
<PAGE> 28
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 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% (10% to
the extent required by certain state laws) of its total 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
26
<PAGE> 29
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 15% (10% to the extent required by certain state laws) of its
total assets in repurchase agreements or purchase and sale contracts maturing in
more than seven days, together with all other illiquid securities.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. 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 assets, taken at market value, in the securities of issuers
in any particular industry (excluding the U.S. Government and its agencies or
instrumentalities). In addition, the Fund has adopted non-fundamental
restrictions which may be changed by the Board of Directors. Among its
non-fundamental policies, the Fund may not:
-- Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, 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. As
explained further in the Statement
27
<PAGE> 30
of Additional Information, under state law the Fund is presently limited
with respect to investment in certain illiquid securities to 10% of its
total assets.
-- Notwithstanding the less restrictive fundamental investment
restriction recited in the Statement of Additional Information, borrow
amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from a bank as a temporary
measure for extraordinary or emergency purposes including to meet
redemptions or to settle securities transactions. 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.
The purchase of securities while borrowings are outstanding will have the
effect of leveraging the Fund. Such leveraging or borrowing increases the Fund's
exposure to capital risk, and borrowed funds are subject to interest costs which
will reduce net income.
While the Fund may not purchase illiquid securities in an amount exceeding
15% (10% to the extent required by certain state laws) of its total assets, 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.
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 the first non-fundamental restriction
recited 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.
28
<PAGE> 31
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL* -- President of the Manager and FAM; President and Director
of Princeton Services, Inc.; Executive Vice President of ML & Co.; Executive
Vice President of Merrill Lynch; Director of the Distributor.
DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).
EDWARD H. MEYER -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.; 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.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
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 ML & 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 130 other registered investment companies. The Manager or FAM also
offers portfolio management and portfolio analysis services to individuals and
institutions. As of March 31, 1995, the Manager and FAM had a total of
approximately $170.3 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.
29
<PAGE> 32
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 year ended
December 31, 1994, the Manager received a fee of $11,490,030 (based on average
net assets of approximately $1.2 billion). At March 31, 1995, the net assets of
the Fund aggregated $1.1 billion. At this asset level, the annual management fee
would aggregate approximately $11.2 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 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 year ended December 31, 1994, the Fund
reimbursed the Manager $162,198 for accounting services. For the fiscal year
ended December 31, 1994, the ratio of total expenses to average net assets for
each class of shares was as follows: Class A, 1.54% (annualized) (for the period
October 21, 1994 (commencement of operations) to December 31, 1994); Class B,
2.40% (for the fiscal year); Class C, 2.57% (annualized) (for the period October
21, 1994 (commencement of operations) to December 31, 1994); and Class D, 1.63%
(for the fiscal year and giving effect to the October 21, 1994, redesignation of
outstanding Class A shares as Class D shares).
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition,
30
<PAGE> 33
no employee may purchase or sell any security which at the time is being
purchased or sold (as the case may be), or to the knowledge of the employee is
being considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
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 year
ended December 31, 1994, the fee paid by the Fund to the Transfer Agent was
$1,455,457. At March 31, 1995, the Fund had 1,085 Class A shareholder accounts,
95,648 Class B shareholder accounts, 1,377 Class C shareholder accounts and
21,566 Class D shareholder accounts. At this level of accounts, the annual fee
payable to the Transfer Agent would aggregate approximately $1.6 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
PricingSM System, as described below. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined after
receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (generally, 4:00 p.m., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the New York Stock Exchange on that day, provided
the Distributor in turn receives the order from the securities dealer prior to
30 minutes after the close of business on the New York Stock Exchange, on that
day. If the purchase orders are not received prior to 30 minutes after the close
of business on the New York Stock Exchange 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
31
<PAGE> 34
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Transfer Agent are not subject to the processing
fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and Class
C are sold to investors choosing the deferred sales charge alternatives.
Investors should determine whether under their particular circumstances it is
more advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a 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 PricingSM System is
set forth under "Merrill Lynch Select PricingSM 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 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.
32
<PAGE> 35
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
- -------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
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.
33
<PAGE> 36
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 Employer Sponsored Retirement or Savings Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
As noted above, as a result of the implementation of the Merrill Lynch
Select PricingSM System, Class A shares of the Fund outstanding prior to October
21, 1994, were 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 year ended December 31, 1994, the Fund sold 703,677 of
its new Class A shares for aggregate net proceeds to the Fund of $11,334,140.
The gross sales charges for the sale of its Class A shares for the period were
$99, of which $7 and $92 were received by the Distributor and Merrill Lynch,
respectively. During such period, the Distributor received no CDSCs with respect
to redemptions within one year after purchase of the Class A shares purchased
subject to front-end sales charge waivers.
During the fiscal year ended December 31, 1994, the Fund sold 5,213,331 of
its Class D shares (including redesignated Class A shares) for aggregate net
proceeds to the Fund of $85,671,153. The gross sales charges for the sale of its
Class D shares for the period were $1,099,314, of which $63,868 and $1,035,446
were received by the Distributor and Merrill Lynch, respectively. During such
period, the Distributor received no CDSCs with respect to redemptions within one
year after purchase of Class D shares (including redesignated Class A shares)
purchased subject to front-end sales charge waivers.
34
<PAGE> 37
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors who currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
BlueprintSM Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMASM Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services and certain purchases made in connection with the Merrill Lynch
Mutual Fund Adviser program. In addition, Class A shares are offered at net
asset value to ML&Co. and its subsidiaries and their directors and employees and
to members of the Boards of MLAM-advised investment companies, including the
Fund. Certain persons who acquired shares of certain MLAM-advised closed-end
funds who wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in shares of the Fund also may purchase Class A shares of
the Fund if certain conditions set forth in the Statement of Additional
Information are met. For example, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Merrill Lynch
Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class 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
35
<PAGE> 38
time of purchase. As discussed below, Class B shares are subject to a four year
CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On the
other hand, approximately eight years after Class B shares are issued, such
Class B shares, together with shares issued upon dividend reinvestment with
respect to those shares, are automatically converted into Class D shares of the
Fund and thereafter will be subject to lower continuing fees. See "Conversion of
Class B Shares to Class D Shares" below. Both Class B and Class C shares are
subject to an account maintenance fee of 0.25% of net assets and a distribution
fee of 0.75% of net assets as discussed below under "Distribution Plans". The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment 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.
36
<PAGE> 39
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 year ended December 31, 1994, the Distributor received CDSCs of
$2,008,623 with respect to the redemption of Class B shares, all of which was
paid to Merrill Lynch. For the fiscal period October 21, 1994 (commencement of
public offering) to December 31, 1994, the Distributor received CDSCs of $141
with respect to the redemption of Class C 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 a 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 for shares purchased after
October 21, 1994).
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.
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<PAGE> 40
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not 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
38
<PAGE> 41
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D shares
of the appropriate funds. Subsequent to such conversion, that Class B Retirement
Plan will be sold Class D shares of the appropriate funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended December 31, 1994, the Fund paid the Distributor
$8,860,392 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $888.5
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. During the fiscal period October 21, 1994 (commencement of
public offering) to December 31, 1994, the Fund paid the Distributor $7,180
pursuant to the Distribution Plan relating to the Class C shares (based on
average net assets subject to such Distribution Plan of approximately $3.7
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended December 31, 1994, the Fund paid the
Distributor $654,292 pursuant to the Distribution Plan relating to the Class D
shares (including the redesignated Class A shares) (based on average net assets
subject to such Distribution Plan of approximately $262.4 million), all of which
was paid to Merrill Lynch for providing account maintenance services in
connection with such shares. At March 31, 1995, the net assets of the Fund
subject to the Class B Distribution Plan aggregated approximately $836.5
million. At this asset level,
39
<PAGE> 42
the annual fee payable pursuant to the Class B Distribution Plan would aggregate
approximately $8.4 million. At March 31, 1995, the net assets of the Fund
subject to the Class C Distribution Plan aggregated approximately $6.9 million.
At this asset level, the annual fee payable pursuant to the Class C Distribution
Plan would aggregate approximately $69,448. At March 31, 1995, the net assets of
the Fund subject to the Class D Distribution Plan aggregated approximately
$268.9 million. At this asset level, the annual fee payable pursuant to the
Class D Distribution Plan would aggregate approximately $672,319.
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, 1994, for Class B shares, direct cash revenues for the period since
commencement of the offering of Class B shares exceeded direct cash expenses by
$5,828,573 (0.64% 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
$10,994,000 (1.20% of Class B net assets at that date). Similar fully allocated
accrual data is not yet available with respect to Class C shares which the Fund
commenced offering to the public on October 21, 1994. As of December 31, 1994,
for Class C shares, direct cash expenses for the period since October 21, 1994
(commencement of public offering) exceeded direct cash revenues by $19,136
(0.36% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares".
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
40
<PAGE> 43
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.
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.
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 signatures of all persons in whose names the shares are registered,
signed exactly as their names appear on the Transfer Agent's register or on the
certificate, as the case may be. The signatures 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 "Exchange Act"), 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
41
<PAGE> 44
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 the close of business on the New
York Stock Exchange on the day received and that such request is received by the
Fund from such dealer not later than 30 minutes after the close of business on
the New York Stock Exchange (generally, 4:00 p.m., New York time), on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the New York
Stock Exchange, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares.
Redemptions directly through the Transfer Agent are not subject to the
processing fee. The Fund reserves the right to reject any order for repurchase,
which right of rejection might affect adversely shareholders seeking redemption
through the repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Fund may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
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.
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<PAGE> 45
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-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 PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
43
<PAGE> 46
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The 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.
44
<PAGE> 47
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
CMA(R)/CBA(R) Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and 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) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R)/CBA(R) Automated Investment Program.
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
45
<PAGE> 48
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, Inc., Morningstar Publications,
Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. In addition, from time to time the Fund may include the Fund's
risk adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid at least annually.
All net realized long- or short-term capital gains, if any, are distributed to
the Fund's shareholders at least annually. 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
46
<PAGE> 49
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 income dividend distributions, and (b) distributions made
before the losses were realized would be recharacterized as a return of capital
to shareholders, rather than as an ordinary income dividend, reducing each
shareholder's tax basis in 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 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 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 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 the higher transfer agency fees applicable with respect to Class B and Class
C shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately the
amount of the expense accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than
47
<PAGE> 50
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).
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.
48
<PAGE> 51
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to include their proportionate shares of such withholding
taxes in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be treated
as owning shares in a passive foreign investment company ("PFIC") for U.S.
Federal income tax purposes. The Fund may be subject to U.S. Federal income tax,
and an additional tax in the nature of interest (the "interest charge"), on a
portion of the distributions from such a company and on gain from the
disposition of the shares of such a company (collectively referred to as "excess
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
income dividend
49
<PAGE> 52
distributions, and any distributions made before the losses were realized but in
the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund shares, and
resulting in a capital gain for any shareholder who received a distribution
greater than such shareholder's basis in Fund shares (assuming the shares were
held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on 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
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<PAGE> 53
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.
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
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[This page is intentionally left blank.]
<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)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
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. .................................. 4. ...................................
2. .................................. 5. ...................................
3. .................................. 6. ...................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
....................................................... Date..................
(Zip Code)
<TABLE>
<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>
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.
........................................... .................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
.................., 19 . . . .
Date of initial purchase
Dear Sir/Madam:
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.
........................................... .................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1) Name ........................... (2) Name................................
Account Number ..................... Account Number..........................
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
*****************************************
* *
* *
* *
*****************************************
This form when completed should be mailed to:
Merrill Lynch 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
/ / / / / / ..............................
Branch-Code F/C No. F/C Last Name
/ / / / / / /
Dealer's Customer Account No.
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
***********************************************
* *
* Social Security No. *
* or Taxpayer Identification No. *
* *
***********************************************
(PLEASE PRINT)
Name of Owner..................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
............................................ Account Number...................
(Zip Code) (if existing account)
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information.)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch 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
[This page is intentionally left blank.]
<PAGE> 60
[This page is intentionally left blank.]
<PAGE> 61
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 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 62
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 Pricing(SM)
System.............................. 5
Financial Highlights.................. 9
Risk Factors and Special
Considerations...................... 10
Investment Objective and Policies..... 15
Management of the Fund................ 29
Board of Directors.................. 29
Management and Advisory
Arrangements..................... 29
Code of Ethics...................... 30
Transfer Agency Services............ 31
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..................... 35
Distribution Plans.................. 39
Limitations on the Payment of
Deferred Sales Charges........... 40
Redemption of Shares.................. 41
Redemption.......................... 41
Repurchase.......................... 42
Reinstatement Privilege -- Class A
and Class D Shares............... 42
Shareholder Services.................. 43
Performance Data...................... 45
Additional Information................ 46
Dividends and Distributions......... 46
Determination of Net Asset Value.... 47
Taxes............................... 48
Organization of the Fund............ 50
Shareholder Inquiries............... 51
Shareholder Reports................. 51
Authorization Form.................. A-1
Code # 16261-0495
</TABLE>
[LOGO]
MERRILL LYNCH
DRAGON FUND, INC.
[ART WORK]
PROSPECTUS
April 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 63
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 Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated April
27, 1995 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is April 27, 1995.
<PAGE> 64
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. 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 rates for the fiscal periods March 1, 1993, to
December 31, 1993, and January 1, 1994, to December 31, 1994, were 16.62% and
16.45%, respectively. 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 be derived from gains from the sale or other disposition of
securities held for less than three months.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes in
the investment objective or fundamental policies set forth under "Investment
Restrictions" below 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
2
<PAGE> 65
Fund may also deal in forward foreign exchange transactions, foreign currency
options and futures and related options on such futures. Each of such portfolio
strategies is described in the Prospectus. Although certain risks are involved
in options and futures transactions (as discussed in the Prospectus and below),
the Manager believes that, because the Fund will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions. While
the Fund's use of hedging strategies is intended to reduce the volatility of the
net asset value of its shares, the net asset value of the Fund's shares will
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective. Suitable hedging instruments may not be available with respect to
developing Asia-Pacific securities on a timely basis and on acceptable terms.
The following is further information relating to portfolio strategies involving
options and futures the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the underlying
security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of the
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written. The
Fund will not write a put option if the aggregate value of the obligations
underlying the put shall exceed 50% of the Fund's net assets.
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
3
<PAGE> 66
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the Options Clearing Corporation (the "Clearing Corporation") may not, at all
times, be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
The Fund may also enter into over-the-counter options transactions ("OTC
options"), which are two party contracts with prices and terms negotiated
between the buyer and seller. The staff of the Securities and Exchange
Commission has taken the position that OTC options and the assets used as cover
for written OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund may purchase
either exchange-traded options or OTC options. The Fund will not purchase
options on securities (including stock index options discussed below) if as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A 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
4
<PAGE> 67
contract market, which varies, but is typically between 2% and 15% of the value
of the futures contract, must be deposited with the broker. This amount is known
as "initial margin" and represents a "good faith" deposit assuring the
performance of both the purchaser and seller under the futures contract.
Subsequent payments to and from the broker, called "variation margin", are
required to be made on a daily basis as the price of the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "mark to 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.
5
<PAGE> 68
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund may use such techniques to hedge the stated value
in U.S. dollars of an investment in a Philippine peso denominated security. In
such circumstances, for example, the Fund may purchase a foreign currency put
option enabling it to sell a specified amount of Philippine pesos for dollars at
a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the Philippine pesos relative to the dollar will tend to be
offset by an increase in the value of the put option. To offset, in whole or 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 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
6
<PAGE> 69
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the currency or security underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is theoretically
unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits,
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and positions limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments will be limited, however,
in order to qualify for the special tax treatment afforded regulated investment
companies under 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
7
<PAGE> 70
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
amount of its commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement the Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.50% of
the aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price that is
considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and presently will limit
its investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% (10% to
the extent required by certain state laws) of its total assets taken at the time
of acquisition of such commitment or security. The Fund will at all times
maintain a segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt 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
8
<PAGE> 71
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market values of such securities
and the accrued interest on the securities. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
resulting from market fluctuations following the failure of the seller to
perform. The Fund may not invest more than 15% (10% to the extent required by
certain state laws) 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 the investment restriction
stated below, the Fund may lend securities from its portfolio to approved
borrowers and receive collateral therefor in cash or securities issued or
guaranteed by the U.S. Government which are maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities. The
purpose of such loans is to permit the borrower to use such securities for
delivery to purchasers when such borrower has sold short. If cash collateral is
received by the Fund, it is invested in short-term money market securities, and
a portion of the yield received in respect of such investment is retained by the
Fund. Alternatively, if securities are delivered to the Fund as collateral, the
Fund and the borrower negotiate a rate for the loan premium to be received by
the Fund for lending its portfolio securities. In either event, the total yield
on the Fund's portfolio is increased by loans of its portfolio securities. The
Fund will have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights, subscription rights and rights
to dividends, interest or other distributions. Such loans are terminable at any
time, and the borrower, after notice, will be required to return borrowed
securities within five business days. The Fund may pay reasonable finder's,
administrative and custodial fees in connection with such loans. With respect to
the lending of portfolio securities, there is the risk of failure by the
borrower to return the securities involved in such transactions.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares).
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<PAGE> 72
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making
of investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which
may be changed by the Board of Directors. Under the non-fundamental
investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
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<PAGE> 73
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a "Rule 144A security") and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in this
investment restriction (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 50% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities or in
securities of issuers having a record, together with predecessors, of less
than three years of continuous operation.
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Manager, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
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<PAGE> 74
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 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.)
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased over-the-counter options ("OTC options") and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options if, as a result of such transaction, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceeds 15% (10% to the extent
required by certain state laws) 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
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<PAGE> 75
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 in which such
firms or any of their affiliates participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (62) -- President and Director(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch since 1990 and a Senior Vice President thereof from
1985 to 1990; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.")
since 1990; Director of the Distributor.
DONALD CECIL (68) -- Director(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER (68) -- Director(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (63) -- 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 (57) -- Director(2) -- 482 Tepi Drive, Southbury,
Connecticut 06488. Professor of Finance since 1984, and Dean from 1984 to 1993,
New York University Leonard N. Stern School of Business Administration; Director
of Re Capital Corp. (reinsurance holding company), Bowne & Co., Inc. (financial
printers), Vornado, Inc. (real estate holding company), Smith-Corona Corporation
(manufacturer of typewriters and word processors) and Alexander's Inc. (real
estate company).
EDWARD D. ZINBARG (60) -- Director(2) -- 5 Hardwell Road, Short Hills, New
Jersey, 07078-2117, Executive Vice President of The Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
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<PAGE> 76
TERRY K. GLENN (54) -- 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 (61) -- 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 (35) -- 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 (34) -- 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 (45) -- 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 (42) -- 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 March 31, 1995, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund owned less than 1% of the outstanding shares of common stock of ML &
Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Manager 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. For the
fiscal year ended December 31, 1994, fees and expenses paid to such
nonaffiliated Directors aggregated $36,034.+
The following table sets forth for the fiscal year ended December 31, 1994,
compensation paid by the Fund to the non-interested Directors and the aggregate
compensation paid by all investment companies advised by the Manager and its
affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested Directors.
- ---------------
+During most of the fiscal year ended December 31, 1994, the Board consisted of
five Directors, four of whom were non-interested.
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<PAGE> 77
<TABLE>
<CAPTION>
PENSION TOTAL
OR COMPENSATION
RETIREMENT FROM
BENEFITS FUND AND
ACCRUED OTHER
AS MLAM/FAM
AGGREGATE PART ADVISED
COMPENSATION OF FUNDS
FROM FUND PAID TO
NAME OF DIRECTOR FUND EXPENSES DIRECTORS(1)
- --------------------------------------------------- ------ ----- --------
<S> <C> <C> <C>
Donald Cecil....................................... $9,750 None $276,350
Edward H. Meyer.................................... $8,500 None $251,600
Charles C. Reilly.................................. $8,500 None $276,900
Richard R. West.................................... $8,500 None $300,900
Edward D. Zinbarg*................................. $8,500 None $125,500
</TABLE>
- ---------------
* Projected annual compensation for the Fund's current fiscal year. Mr.
Zinbarg was elected to the Fund's Board of Directors effective October 25,
1994.
(1) In addition to the Fund, the Directors serve on the boards of other MLAM/FAM
Advised Funds as follows: Mr. Cecil (34 boards); Mr. Meyer (34 boards); Mr.
Reilly (40 boards); and Mr. Zinbarg (16 boards).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As discussed in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the annual rate of
1.00% of the average daily net assets of the Fund. For the fiscal period May 29,
1992 (commencement of operations) to February 28, 1993, the total management
fees paid by the Fund to the Manager aggregated $2,516,278. For the fiscal
period March 1, 1993, to December 31, 1993, the total management fees paid by
the Fund to the Manager aggregated $5,988,153. For the fiscal year ended
December 31, 1994, the management fees paid by the Fund to the Manager
aggregated $11,490,030.
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
15
<PAGE> 78
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, March 1, 1993, to
December 31, 1993, and for the fiscal year ended December 31, 1994, the amount
of such reimbursement was $58,639, $78,380 and $162,198, respectively. The
Distributor will pay certain promotional expenses of the Fund incurred in
connection with the offering of its shares. Certain expenses will be financed by
the Fund pursuant to distribution plans in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares -- Distribution Plans".
ML & Co. 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 contract is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
16
<PAGE> 79
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests in
the investment portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
The Merrill Lynch Select PricingSM System is used by more than 50 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.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select PricingSM
System, Class A shares of the Fund outstanding prior to October 21, 1994, were
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. The gross sales charges for the sale of its former
Class A shares for the fiscal period May 29, 1992 (commencement of operations)
to February 28, 1993, were $2,992,104, of which $48,308 and $2,943,796 were
received by the Distributor and Merrill Lynch, respectively. The gross sales
charges for the sale of its former Class A shares for the fiscal period March 1,
1993, to December 31, 1993, were $2,948,376, of which $183,544 and $2,764,832
were received by the Distributor and Merrill Lynch, respectively. The gross
sales charges for the sale of its Class D shares (including redesignated Class A
shares) for the fiscal year ended December 31, 1994, were $1,099,314, of which
the Distributor received $63,868, and Merrill Lynch received $1,035,446. The
gross sales charges for the sale of its new Class A shares for the fiscal period
October 21, 1994 (commencement of operations) to December 31, 1994, were $99, of
which the Distributor received $7, and Merrill Lynch received $92. During such
periods, the Distributor received no contingent deferred sales charges ("CDSCs")
with respect to redemptions within one year after purchase of Class A or Class D
shares purchased subject to front-end sales charge waivers.
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
17
<PAGE> 80
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 (the date
the Merrill Lynch Select PricingSM System commenced operations), and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A 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
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
18
<PAGE> 81
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 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
19
<PAGE> 82
exchange from a MLAM-advised money market fund into the Fund that creates a
sales charge will count toward completing a new or existing Letter of Intention
from the Fund.
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 or Class D shares at net
asset value has the option of (i) purchasing Class D shares at the initial sales
charge schedule disclosed in the Prospectus for purchases of up to $1,000,000
and at 0.75% for purchases of $1,000,000 or more, (ii) 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 (iii) if the Employer
Sponsored Retirement or Savings Plan does not qualify to purchase Class B shares
with a waiver upon redemption, purchasing Class B or Class C shares at their
respective CDSC schedule disclosed in the Prospectus.
Certain Employer Sponsored Retirement or Savings Plans, which were
permitted prior to October 21, 1994, to purchase Class A shares at the initial
sales charge schedule in the then current prospectus for purchases up to
$1,000,000 and at 0.75% for purchases of $1,000,000 or more, may purchase Class
A shares at the initial sales charge schedule disclosed in the Prospectus for
purchases of up to $1,000,000 and at 0.75% for purchases of $1,000,000 or more.
The minimum initial and subsequent purchase requirements are waived in
connection with all the above referenced Employer Sponsored Retirement or
Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co. and its subsidiaries (the term
20
<PAGE> 83
"subsidiaries" when used herein with respect to ML & Co., includes MLAM, FAM and
certain other entities directly or indirectly wholly owned and controlled by
ML & Co.), and any trust, pension, profit-sharing or other benefit plan for such
persons may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. 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 the shares of
such other fund were 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 are 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 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
21
<PAGE> 84
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 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
22
<PAGE> 85
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 December 31,
1994, with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1994
--------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE FEE AT
INTEREST AMOUNTS CURRENT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE NET
GROSS SALES UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- ------- ---------- --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares (for the fiscal period May
29, 1992 (commencement of operations) to
December 31, 1994):
Under NASD Rule as Adopted............ $811,554 $50,722 $5,058 $55,780 $14,583 $41,197 $6,880
-------- ------- ------ ------- ------- ------- ------
Under Distributor's Voluntary
Waiver.............................. $811,554 $50,722 $4,058 $54,780 $14,583 $ 4,019 $6,880
-------- ------- ------ ------- ------- ------- ------
Class C Shares (for the fiscal period
October 21, 1994 (commencement of public
offering) to December 31, 1994):
Under NASD Rule as Adopted............ $ 5,526 $ 345 $ 3 $ 349 $ 6 $ 343 $ 40
-------- ------- ------ ------- ------- ------- ------
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during period
indicated other than shares acquired through dividend reinvestment and the
exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to June
28, 1993, under the distribution plan in effect at that time, at the 1.00%
rate, 0.75% of average daily net assets has been treated as a distribution
fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to Class B shares, the
voluntary maximum.
23
<PAGE> 86
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.
CONTINGENT DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or on 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 CDSCs of
$236,960 and $807,253, respectively, with respect to Class B shares, all of
which was paid to Merrill Lynch. For the fiscal year ended December 31, 1994,
the Distributor received CDSCs of $2,008,623 with respect to Class B shares, all
of which was paid to Merrill Lynch. Similarly, for the fiscal period October 21,
1994 (commencement of operations) to December 31, 1994, the Distributor received
CDSCs of $141 with respect to Class C shares, 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 Sections 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
24
<PAGE> 87
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 shares which are purchased by an Eligible
401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the above referenced
Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices -- 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 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
25
<PAGE> 88
compared to the fee or commission received by non-affiliated brokers in
connection with comparable transactions.
For the fiscal year ended December 31, 1994, the Fund paid total brokerage
commissions of $3,637,132, of which $74,666, or 2.1%, was paid to Merrill Lynch
for effecting 3.1% of the aggregate amount of transactions on which the Fund
paid brokerage commissions. 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 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 p.m., New York time), on each day the New York
Stock Exchange is open for trading. The New York Stock Exchange is not open on
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities
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<PAGE> 89
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 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 (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the time
of valuation. 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.
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<PAGE> 90
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.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he be issued certificates for his shares and
then must turn the certificates over to the new firm for re-registration as
described in the preceding sentence.
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 Fund's
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) or CBA(R) account may arrange to
have periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R)/CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions 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
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<PAGE> 91
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make 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 as of
15 minutes after the close of business of the New York Stock Exchange
(generally, 4:00 p.m., New York time) on the 24th day of each month or the 24th
day of the last month of each quarter, whichever is applicable. If the Exchange
is not open for business on such date, the 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.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month, bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The
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<PAGE> 92
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the CMA(R)/CBA(R) 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 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 are 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 are also exchangeable for shares of certain MLAM-advised money market
funds specifically designated below as available for exchange by holders of
Class A, Class B, Class C or Class D shares. Shares with a net asset value of at
least $100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for at least 15
days. It is contemplated that the exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales 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,
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<PAGE> 93
of another MLAM-advised mutual fund ("new Class B or Class C shares") on the
basis of relative net asset value per Class B or Class C share, without the
payment of any CDSC that might otherwise be due on redemption of the outstanding
shares. Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares of the fund from which the exchange has been made. For purposes of
computing the sales charge that may be payable on a disposition of the new Class
B or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Fund Class B shares to the three year
holding period for the Special Value Fund Class B shares, the investor will be
deemed to have held the new Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of the Fund may, in turn,
be exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of 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:
<TABLE>
<S> <C>
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC............. High current income consistent with a policy of limiting
the degree of fluctuation in net asset value by
investing primarily in a portfolio of adjustable rate
securities, consisting principally of mortgage- backed
and asset-backed securities.
</TABLE>
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<PAGE> 94
<TABLE>
<S> <C>
MERRILL LYNCH AMERICAS INCOME FUND,
INC. ............................ A high level of current income, consistent with prudent
investment risk, by investing primarily in debt
securities denominated in a currency of a country
located in the Western Hemisphere (i.e., North and South
America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income exempt
from Federal and Arizona income taxes as is consistent
with prudent investment management through investment in
a portfolio primarily of intermediate-term investment
grade Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide 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, INC.................. 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.
</TABLE>
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<PAGE> 95
<TABLE>
<S> <C>
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.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC. .............. Long-term capital appreciation through investments in
securities, principally equities, of issuers in
countries having smaller capital markets.
</TABLE>
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<PAGE> 96
<TABLE>
<S> <C>
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
above-average growth rates in earnings.
MERRILL LYNCH FUNDAMENTAL VALUE
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)....................... A portfolio of Merrill Lynch Retirement Asset Builder
Program, Inc., a series fund, whose objective is to
provide capital appreciation and income by investing in
securities, with at least 65% of the portfolio's assets
being invested in equities.
</TABLE>
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MERRILL LYNCH GLOBAL
ALLOCATION FUND, INC. ........... High total return consistent with prudent risk, through
a fully managed investment policy utilizing United
States and foreign equity, debt and money market
securities, the combination of which will be varied from
time to time both with respect to the types of
securities and markets in response to changing market
and economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT........ High total investment return from investment in a global
portfolio of debt instruments denominated in various
currencies and multi-national currency units.
MERRILL LYNCH GLOBAL
CONVERTIBLE FUND, INC. .......... High total return from investment primarily in an
internationally diversified portfolio of convertible
debt securities, convertible preferred stock and
"synthetic" convertible securities consisting of a
combination of debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet
investor suitability
standards)....................... The highest total investment return consistent with
prudent risk through worldwide investment in an
internationally diversified portfolio of securities.
MERRILL LYNCH GLOBAL OPPORTUNITY
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)....................... A portfolio of Merrill Lynch Retirement Asset Builder
Program, Inc., a series fund, whose objective is to
provide a high total investment return through an
investment policy utilizing United States and foreign
equity, debt and money market securities, the
combination of which will vary depending upon changing
market and economic trends.
MERRILL LYNCH GLOBAL
RESOURCES TRUST.................. Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural resource
assets.
</TABLE>
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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.
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.
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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.
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.
</TABLE>
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MERRILL LYNCH NEW JERSEY MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and New Jersey income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND ............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and New Mexico income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income exempt
from Federal, New York State and New York City income
taxes as is consistent with prudent investment
management through investment in a portfolio primarily
of intermediate-term investment grade New York Municipal
Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal,
New York State and New York City income taxes as is
consistent with prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and North Carolina income taxes as is consistent with
prudent investment management.
MERRILL LYNCH OHIO MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Ohio income taxes as is consistent with prudent
investment management.
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.
</TABLE>
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MERRILL LYNCH PACIFIC
FUND, INC. ...................... Capital appreciation by investing in equity securities
of corporations domiciled in Far Eastern and Western
Pacific countries, including Japan, Australia, Hong Kong
and Singapore.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income exempt
from Federal and Pennsylvania income taxes as is
consistent with prudent investment management through
investment in a portfolio of intermediate-term
investment grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Pennsylvania income taxes as is consistent with
prudent 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 QUALITY BOND
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)....................... A portfolio of Merrill Lynch Retirement Asset Builder
Program, Inc., a series fund, whose objective is to
provide a high level of current income through
investment in a diversified portfolio of debt
obligations, such as corporate bonds and notes,
convertible securities, preferred stocks and
governmental obligations.
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.
</TABLE>
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MERRILL LYNCH STRATEGIC DIVIDEND
FUND............................. Long-term total return from investment in dividend
paying common stocks which yield more than Standard &
Poor's 500 Composite Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND,
INC. ............................ Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their sales
from products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
income taxes as is consistent with prudent investment
management by investing primarily in a portfolio of
long-term, investment grade obligations issued by the
State of Texas, its political subdivisions, agencies and
instrumentalities.
MERRILL LYNCH U.S. GOVERNMENT
SECURITIES PORTFOLIO (available
only for exchanges by certain
individual retirement accounts
for which Merrill Lynch acts as
custodian)....................... A portfolio of Merrill Lynch Retirement Asset Builder
Program, Inc., a series fund, whose objective is to
provide a high current return through investments in
U.S. Government and government agency securities,
including GNMA mortgage-backed certificates and other
mortgage-backed government securities.
MERRILL LYNCH UTILITY INCOME FUND,
INC. ............................ High current income through investment in equity and
debt securities issued by companies which are primarily
engaged in the ownership or operation of facilities used
to generate, transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME FUND,
INC. ............................ High current income by investing in a global portfolio
of fixed income securities denominated in various
currencies, including multinational currencies.
Class A Share
Money Market Funds:
MERRILL LYNCH READY ASSETS
TRUST ........................... Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing
objectives from the short-term money market securities
in which the Trust invests.
</TABLE>
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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 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.
</TABLE>
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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 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
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<PAGE> 105
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 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
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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 any sales charge
paid to the Fund on the exchanged shares 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.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield securities may be purchased at a discount and may
therefore cause the Fund to accrue income before amounts due under the
obligations are paid. In addition, a portion of the interest payments on such
high yield securities may be treated as dividends for Federal income tax
purposes; in such case, if the issuer of such high yield/high risk securities is
a domestic corporation, dividend payments by the Fund will be eligible for the
dividends received deduction to the extent of the deemed dividend portion of
such interest payments.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be treated
as owning shares in a passive foreign investment company ("PFIC") for U.S.
Federal income tax purposes. The Fund may be subject to U.S. Federal income tax,
and an additional tax in the nature of interest (the "interest charge"), on a
portion of the distributions from such a company and on gain from the
disposition of the shares of such a company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid the
taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs. Alternatively, under proposed regulations, the Fund 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
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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 and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. The mark-to-market rules
outlined above, however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of changes in price or interest or currency
exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign 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
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ordinary income or loss under Code Section 988. In certain circumstances, the
Fund may elect capital gain or loss treatment for such transactions. Regulated
futures contracts, as described above, will be taxed under Code Section 1256
unless application of Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Fund would
not be able to make any ordinary income dividend distributions, and any
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than the
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark to market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain developing Asia-Pacific 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.
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
46
<PAGE> 109
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.
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select PricingSM System, Class
A shares of the Fund outstanding prior to October 21, 1994, were redesignated
Class D shares, and historical performance data pertaining to such shares are
provided below under the caption "Class D Shares".
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------- ----------------------
REDEEMABLE REDEEMABLE
VALUE VALUE OF
EXPRESSED OF 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
- ----------------------------- ---------- ------ ---------- ------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994)
to December 31, 1994....... (57.94)% $845.00
One Year Ended December 31,
1994....................... (21.06)% $ 789.40
Inception (May 29, 1992) to
December 31, 1994.......... 17.89% $1,532.10
</TABLE>
47
<PAGE> 110
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------ ----------------------------
REDEEMABLE REDEEMABLE
VALUE VALUE OF
EXPRESSED OF 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
- ----------------------------- ------------ ------------ ------------- ------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994)
to December 31, 1994....... (10.82)% $891.80
One Year Ended December 31,
1994....................... (17.86)% $ 821.40
One Year Ended December 31,
1993....................... 86.15% $1,861.50
Inception (May 29, 1992) to
December 31, 1992.......... 1.50% $1,015.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994)
to December 31, 1994....... (15.50)% $845.00
Inception (May 29, 1992) to
December 31, 1994.......... 53.21% $1,532.10
</TABLE>
<TABLE>
<CAPTION>
CLASS C CLASS D
--------------------------- ----------------------------
REDEEMABLE REDEEMABLE
VALUE VALUE OF
EXPRESSED OF 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>
Inception (October 21, 1994)
to December 31, 1994....... (47.70)% $881.50
One Year Ended December 31,
1994....................... (21.59)% $ 784.10
Inception (May 29, 1992) to
December 31, 1994.......... 16.92% $1,499.60
</TABLE>
48
<PAGE> 111
<TABLE>
<S> <C> <C> <C> <C>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994)
to December 31, 1994....... (10.98)% $890.20
One Year Ended December 31,
1994....................... (17.24)% $ 827.60
One Year Ended December 31,
1993....................... 87.46% $1,874.60
Inception (May 29, 1992) to
December 31, 1992.......... 2.02% $1,020.20
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994)
to December 31, 1994....... (11.85)% $881.50
Inception (May 29, 1992) to
December 31, 1994.......... 49.96% $1,499.60
</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.
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
49
<PAGE> 112
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.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on December 31, 1994, and its shares outstanding on that date is set
forth below. The offering price for Class B and Class C shares of the Fund is
the net asset value of Class B and Class C shares, respectively.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net Assets................................ $3,382,590 $917,383,802 $5,329,210 $249,902,778
========= =========== ========= ===========
Number of Shares Outstanding.............. 224,805 61,049,528 357,245 16,568,025
========= =========== ========= ===========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)............................ $ 15.05 $ 15.03 $ 14.92 $ 15.08
Sales Charge (for Class A and Class D
shares: 5.25% of offering price (5.54%
of net amount invested))*............... 0.83 ** ** 0.84
---------- ------------ ---------- ------------
Offering Price............................ $ 15.88 $ 15.03 $ 14.92 $ 15.92
========= =========== ========= ===========
</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
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the Fund's shareholders. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
50
<PAGE> 113
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
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 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 March 31, 1995.
51
<PAGE> 114
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.
52
<PAGE> 115
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 or issued in
conformity with any other applicable law or regulation. 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.
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
53
<PAGE> 116
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.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("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.
54
<PAGE> 117
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 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
55
<PAGE> 118
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.
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
56
<PAGE> 119
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.
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.
57
<PAGE> 120
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> 121
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, 1994, the related statements of operations for the year then ended, and
changes in net assets for the year then ended and the period ended December 31,
1993 and the financial highlights for the year then ended, the period ended
December 31, 1993 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, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Dragon
Fund, Inc. as of December 31, 1994, 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 15, 1995
59
<PAGE> 122
<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> <S> <C> <C> <C>
HONG KONG BANKING 2,052,500 Dah Sing Financial Holdings Ltd. $ 6,435,482 $ 4,351,215 0.4%
2,197,606 HSBC Holdings, Ltd. 18,872,742 23,720,282 2.0
------------- -------------- ------
25,308,224 28,071,497 2.4
-----------------------------------------------------------------------------------------------------------
CONGLOMERATES 22,408,000 Guangdong Investments, Ltd. 9,510,303 11,079,447 0.9
$ 3,436,000 Guangdong Investments, Ltd.,
4.50% due 10/07/1998 4,364,557 3,470,360 0.3
4,323,000 Hutchison Whampoa, Ltd. 12,516,919 17,490,938 1.5
897,800 Jardine Matheson Holdings Ltd. 7,511,867 6,412,028 0.5
3,227,000 Swire Pacific Ltd. 'A' 17,817,938 20,106,179 1.7
------------- -------------- ------
51,721,584 58,558,952 4.9
-----------------------------------------------------------------------------------------------------------
ELECTRICAL 18,211,000 Innovative International
EQUIPMENT Holdings Ltd. 7,882,226 5,178,930 0.4
4,225,000 Johnson Electric Holdings Ltd. 8,157,249 9,694,125 0.8
------------- -------------- ------
16,039,475 14,873,055 1.2
-----------------------------------------------------------------------------------------------------------
ELECTRONICS 16,600,000 ASM Pacific Technology 5,454,485 9,870,734 0.8
-----------------------------------------------------------------------------------------------------------
FINANCE 4,380,000 Guoco Group, Ltd. 16,323,506 18,740,693 1.6
5,500,000 Peregrine Investment Holdings 10,274,868 6,469,752 0.5
------------- -------------- ------
26,598,374 25,210,445 2.1
-----------------------------------------------------------------------------------------------------------
INSURANCE 19,767,000 National Mutual Asia, Ltd. 7,969,425 13,031,502 1.1
-----------------------------------------------------------------------------------------------------------
LEISURE 6,370,000 Hong Kong & Shanghai Hotels 5,697,738 7,369,635 0.6
5,918,400 Shangri-La Asia, Ltd. 8,792,206 8,339,007 0.7
$ 3,005,000 Shangri-La Asia, Ltd., 2.875%
due 12/16/2000 2,330,884 2,343,900 0.2
3,816,000 Television Broadcasts Ltd. 15,283,220 15,242,296 1.3
------------- -------------- ------
32,104,048 33,294,838 2.8
-----------------------------------------------------------------------------------------------------------
MISCELLANEOUS-- 17,912,000 C.P. Pokphand Co., Ltd. 7,227,529 4,190,889 0.4
CONSUMER
-----------------------------------------------------------------------------------------------------------
NEWSPAPER/ 8,750,000 Oriental Press Group 5,834,025 4,100,149 0.3
PUBLISHING 8,500,000 South China Morning Post Holdings 4,966,435 4,971,885 0.4
------------- -------------- ------
10,800,460 9,072,034 0.7
-----------------------------------------------------------------------------------------------------------
PACKAGING 14,000,000 M.C. Packaging (HK), Ltd. 6,547,529 5,429,162 0.5
-----------------------------------------------------------------------------------------------------------
REAL ESTATE 7,940,000 Amoy Properties Ltd. 6,819,474 7,184,592 0.6
2,183,000 Cheung Kong Holdings Ltd. 8,152,206 8,888,896 0.8
3,326,813 Hong Kong Land Holdings Ltd. 6,561,275 6,493,650 0.6
3,628,020 New World Development Co., Ltd. 9,331,350 9,684,412 0.8
2,790,100 Sun Hung Kai Properties, Ltd. 12,644,845 16,662,696 1.4
1,795,000 Wharf Holdings Ltd. 6,952,014 6,056,037 0.5
$9,840,000 ++++Wharf Holdings Ltd.,
5.00% due 7/15/2000 9,335,976 10,332,000 0.9
------------- -------------- ------
59,797,140 65,302,283 5.6
-----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 12,220,000 ABC Communications Holdings Ltd. 3,501,176 5,370,734 0.5
-----------------------------------------------------------------------------------------------------------
TRANSPORTATION 1,154,000 Hong Kong Aircraft Engineering Co. 6,558,828 3,848,656 0.3
-----------------------------------------------------------------------------------------------------------
UTILITIES 2,225,200 China Light & Power Co., Ltd. 9,301,633 9,492,192 0.8
</TABLE>
60
<PAGE> 123
<TABLE>
<S> <S> <S> <C> <C> <C>
5,908,880 Hong Kong & China Gas Co. (The) 8,402,958 9,547,699 0.8
11,336,800 Hong Kong Telecommunications, Ltd. 19,430,788 21,615,538 1.8
16,500,000 ++Hong Kong Telecommunications,
Ltd. (Warrants) (a) 1,644,721 693,188 0.1
------------- -------------- ------
38,780,100 41,348,617 3.5
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG KONG 298,408,377 317,473,398 26.8
==================================================================================================================================
INDIA CHEMICALS 960,000 Mardia Chemicals Ltd. 4,415,127 5,509,326 0.5
960,000 ++Mardia Chemicals Ltd. (Rights) 0 0 0.0
------------- -------------- ------
4,415,127 5,509,326 0.5
-----------------------------------------------------------------------------------------------------------
CONGLOMERATES 243,300 ++++Reliance Industries (ADR)*++ 6,667,743 4,683,525 0.4
-----------------------------------------------------------------------------------------------------------
CONSUMER--DURABLES 456,000 ++IFB Industries Ltd. 3,998,087 4,070,780 0.3
-----------------------------------------------------------------------------------------------------------
FOREIGN BONDS $ 2,600,000 ++++SCICI Ltd., 3.50% due 4/01/2004 2,699,375 2,262,000 0.2
-----------------------------------------------------------------------------------------------------------
MISCELLANEOUS 66,210 Housing Development Finance 6,347,114 5,382,927 0.5
-----------------------------------------------------------------------------------------------------------
STEEL MILLS 540,000 Essar Gujarat Limited 1,967,410 1,635,581 0.1
-----------------------------------------------------------------------------------------------------------
TOBACCO 32,000 Indian Tobacco Co. (GDR)** 408,000 320,000 0.0
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDIA 26,502,856 23,864,139 2.0
==================================================================================================================================
INDONESIA BANKING 1,744,000 P.T. Bank International Indonesia 7,223,733 5,556,668 0.5
-----------------------------------------------------------------------------------------------------------
FOOD 1,959,672 P.T. Mayorah Indah 5,799,651 9,633,344 0.8
-----------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 5,359,200 P.T. Indah Kiat Pulp & Paper Corp. 6,453,834 6,342,249 0.5
-----------------------------------------------------------------------------------------------------------
MISCELLANEOUS-- 1,941,250 P.T. Modern Photo Film 5,119,000 8,217,399 0.7
CONSUMER
-----------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 1,774,500 P.T. Kalbe Farma 5,381,680 7,309,615 0.6
-----------------------------------------------------------------------------------------------------------
REAL ESTATE 3,217,500 P.T. Duta Anggada Realty 5,056,298 2,196,746 0.2
-----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 86,190 P.T. Indonesia Satellite Corp.
(Indosat) (ADR)* 3,054,420 3,081,292 0.3
-----------------------------------------------------------------------------------------------------------
TOBACCO 5,425,000 P.T. Hanjaya Mandala Sampoerna 4,892,468 26,668,184 2.3
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDONESIA 42,981,084 69,005,497 5.9
==================================================================================================================================
</TABLE>
61
<PAGE> 124
<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> <S> <C> <C> <C>
MALAYSIA BANKING 4,256,000 Affin Holdings BHD $ 6,646,052 $ 6,969,669 0.6%
2,054,000 Arab-Malaysian Merchant
Bank BHD 7,932,519 19,473,771 1.7
MYR 1,969,000 Arab-Malaysian Merchant Bank
BHD, 7.50% due 10/05/1999 768,090 971,965 0.1
2,850,000 Malayan Banking BHD 6,748,454 17,194,907 1.5
2,700,000 Public Bank BHD 'Foreign' 2,361,655 5,598,352 0.5
------------- -------------- ------
24,456,770 50,208,664 4.4
-----------------------------------------------------------------------------------------------------------
BUILDING & 1,300,000 Bandar Raya Developments BHD 2,962,152 2,200,196 0.2
CONSTRUCTION 1,532,000 Ekran BHD 3,676,793 4,531,479 0.4
1,912,500 George Kent Holdings BHD 2,694,743 4,570,519 0.4
382,500 George Kent Holdings
BHD (Rights) (b) 100,463 274,231 0.0
2,355,000 I.J.M. Corp. BHD 5,257,205 7,888,443 0.7
4,671,000 Malayan Cement BHD 5,232,118 8,051,871 0.7
------------- -------------- ------
19,923,474 27,516,739 2.4
-----------------------------------------------------------------------------------------------------------
CONGLOMERATES 9,000,000 Renong BHD 8,454,940 11,142,018 0.9
CONSTRUCTION & 650,000 Golden Plus Holdings BHD 2,997,527 2,457,395 0.2
HOUSING
-----------------------------------------------------------------------------------------------------------
FINANCE 938,000 Hong Leong Credit BHD 6,877,505 4,556,787 0.4
3,440,000 MBF Capital BHD 5,461,287 3,611,832 0.3
2,850,000 United Merchant Group BHD 7,467,775 5,247,796 0.4
------------- -------------- ------
19,806,567 13,416,415 1.1
-----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 980,000 Pan Pacific Asia BHD 5,892,045 4,146,523 0.4
-----------------------------------------------------------------------------------------------------------
FOOD 1,721,700 Nestle Malaysia BHD 7,333,320 11,466,758 1.0
-----------------------------------------------------------------------------------------------------------
FOREST PRODUCTS $ 2,000,000 Aokam Perdana, 3.50%
due 6/13/2004 2,345,000 1,930,000 0.2
2,739,000 Aokam Perdana BHD (Ordinary) 8,368,426 16,954,437 1.4
3,944,000 ++Land & General BHD 8,186,738 16,378,609 1.4
986,000 Land & General BHD (Rights) (c) 0 1,931 0.0
736,000 Pacific Chemical BHD 4,004,307 3,114,123 0.3
------------- -------------- ------
22,904,471 38,379,100 3.3
-----------------------------------------------------------------------------------------------------------
LEISURE 3,300,000 Berjaya Sports TOTO BHD 7,410,648 4,524,975 0.4
848,500 Genting BHD 7,511,393 7,279,980 0.6
4,000,000 Pernas International Hotels &
Properties BHD 3,815,457 6,080,313 0.5
3,216,000 Resorts World BHD 10,967,664 18,899,119 1.6
2,504,000 Tanjong PLC 7,760,037 7,455,593 0.6
------------- -------------- ------
37,465,199 44,239,980 3.7
-----------------------------------------------------------------------------------------------------------
SHIPYARDS 830,000 Westmont BHD 6,278,222 5,170,225 0.4
-----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 5,925,000 Leader Universal Cable BHD 8,791,618 19,034,280 1.6
1,532,000 Technology Resources
Industries BHD 2,767,725 4,891,596 0.4
1,611,000 Telekom Malaysia BHD 8,939,145 10,918,825 0.9
------------- -------------- ------
20,498,488 34,844,701 2.9
-----------------------------------------------------------------------------------------------------------
TRANSPORTATION 1,199,000 Malaysian Airlines System BHD 3,345,381 3,593,477 0.3
</TABLE>
62
<PAGE> 125
<TABLE>
<S> <S> <S> <C> <C> <C>
612,800 Malaysian Helicopter Services BHD 300,328 1,152,376 0.1
2,957,333 Malaysian International Shipping
Co. BHD 6,043,232 8,457,799 0.7
------------- -------------- ------
9,688,941 13,203,652 1.1
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MALAYSIA 185,699,964 256,192,170 21.8
==================================================================================================================================
PAKISTAN TELECOMMUNICATIONS 41,905 ++++Pakistan Telecommunications
(GDR)** 7,533,262 5,447,650 0.5
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PAKISTAN 7,533,262 5,447,650 0.5
==================================================================================================================================
PHILIPPINES BEVERAGES 4,804,800 San Miguel Corp. 'B' 10,222,586 25,205,508 2.1
-----------------------------------------------------------------------------------------------------------
CONGLOMERATES 414,500 ++Benpres Holdings Corp.++++ 4,587,400 3,730,500 0.3
-----------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 3,210,000 ++Universal Robina Corp. 2,874,306 2,302,254 0.2
-----------------------------------------------------------------------------------------------------------
INTERNATIONAL 13,253,416 International Container Terminal 8,867,496 10,591,869 0.9
TRADE
-----------------------------------------------------------------------------------------------------------
OIL 6,570,000 Petron Corp. 5,609,882 5,789,139 0.5
-----------------------------------------------------------------------------------------------------------
REAL ESTATE 3,480,000 Ayala Land, Inc. 5,004,038 5,419,672 0.5
-----------------------------------------------------------------------------------------------------------
RETAIL 30,960,750 ++SM Prime Holdings 7,735,729 10,151,066 0.9
-----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 78,880 Philippine Long Distance
Telephone Co. (ADR)* 4,027,836 4,348,260 0.4
-----------------------------------------------------------------------------------------------------------
UTILITIES-- 1,145,300 Manila Electric Co.
ELECTRIC (MERALCO) 'B' 7,460,188 15,724,406 1.3
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THE PHILIPPINES 56,389,461 83,262,674 7.1
==================================================================================================================================
SINGAPORE AIRLINES 1,040,000 Singapore Airlines 'Foreign' Ltd. 6,170,157 9,568,143 0.8
-----------------------------------------------------------------------------------------------------------
AUTOMOTIVE 1,352,000 Cycle & Carriage, Ltd. 5,687,875 12,160,110 1.0
-----------------------------------------------------------------------------------------------------------
BANKING 1,370,000 Development Bank of Singapore Ltd. 12,362,598 14,109,166 1.2
1,366,866 Overseas Chinese Banking Corp.
'Foreign' 8,900,801 14,076,890 1.2
220,000 Overseas Chinese Banking Corp.
'Foreign' (Warrants) (a) 1,156,680 853,416 0.1
1,533,587 United Overseas Bank 11,313,601 16,215,063 1.4
------------- -------------- ------
33,733,680 45,254,535 3.9
-----------------------------------------------------------------------------------------------------------
BEVERAGES 190,000 ++Fraser & Neave Ltd.
(Warrants) (a) 1,139,529 821,833 0.1
-----------------------------------------------------------------------------------------------------------
CONGLOMERATES 2,616,000 ACMA Ltd. 8,074,466 8,585,294 0.7
-----------------------------------------------------------------------------------------------------------
ELECTRONICS 14,340,000 I.P.C. Corp. 10,159,282 9,796,292 0.8
MARINE/OFFSHORE 2,807,500 Sembawang Maritime Ltd. 8,560,245 13,589,341 1.2
OIL SERVICES SG$ 2,090,000 Sembawang Maritime Ltd.,
1.50% due 10/25/1998 1,325,469 3,156,883 0.3
1,130,000 Van Der Horst Ltd. 6,229,305 3,475,729 0.3
------------- -------------- ------
16,115,019 20,221,953 1.8
-----------------------------------------------------------------------------------------------------------
PUBLISHING & 762,000 Singapore Press Holdings Ltd. 8,194,511 13,864,058 1.2
BROADCASTING
-----------------------------------------------------------------------------------------------------------
REAL ESTATE 3,134,000 DBS Land Ltd. 9,439,475 9,338,524 0.8
1,000,000 ++DBS Land Ltd. (Warrants) (a) 1,013,666 865,088 0.1
------------- -------------- ------
10,453,141 10,203,612 0.9
-----------------------------------------------------------------------------------------------------------
SHIPPING 1,644,000 Sembawang Corp. (d) 13,268,668 12,303,193 1.0
-----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 10,380,000 Goldtron, Ltd. 7,286,316 11,473,944 1.0
1,635,000 ++Goldtron, Ltd. (Warrants) (a) 1,194,319 667,920 0.1
------------- -------------- ------
8,480,635 12,141,864 1.1
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SINGAPORE 121,476,963 154,920,887 13.3
==================================================================================================================================
</TABLE>
63
<PAGE> 126
<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> <S> <C> <C> <C>
SOUTH KOREA AUTOMOTIVE 22,045 Dong ah Tire Industries Co. $ 840,416 $ 1,790,947 0.2%
-----------------------------------------------------------------------------------------------------------
BUILDING & 55,060 Samsung Heavy Industries 3,082,313 2,290,675 0.2
CONSTRUCTION 12,436 Samsung Heavy Industries (New) 404,639 504,759 0.0
------------- -------------- ------
3,486,952 2,795,434 0.2
-----------------------------------------------------------------------------------------------------------
RETAIL STORES 100,920 Shinsegae Department Stores Co. 3,492,485 11,267,096 1.0
-----------------------------------------------------------------------------------------------------------
STEEL 89,000 Pohang Iron & Steel Co., Ltd. 8,236,443 9,635,797 0.8
-----------------------------------------------------------------------------------------------------------
UTILITIES 7,862 Korea Mobile Telecommuni-
cations Corp. 2,735,092 5,654,178 0.5
246,000 Korean Electric & Power Corp. 6,197,512 9,335,769 0.8
------------- -------------- ------
8,932,604 14,989,947 1.3
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH KOREA 24,988,900 40,479,221 3.5
==================================================================================================================================
TAIWAN CLOSED-END FUNDS 343,300 The R.O.C. Taiwan (ADR)* 2,904,850 4,076,687 0.3
-----------------------------------------------------------------------------------------------------------
ELECTRICAL $ 4,000,000 ++++TECO Electric and Machinery,
EQUIPMENT 2.75% due 4/15/2004 4,000,000 3,640,000 0.3
-----------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 212,831 ++++President Enterprises (ADR)* 3,119,745 4,070,393 0.3
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TAIWAN 10,024,595 11,787,080 0.9
==================================================================================================================================
THAILAND BANKING 2,256,000 Bangkok Bank 8,127,594 24,092,767 2.0
-----------------------------------------------------------------------------------------------------------
5,853,333 Industrial Finance Corp. of
Thailand 10,224,432 12,478,713 1.1
1,434,000 Siam Commercial Bank, Ltd. (The) 7,125,609 13,142,857 1.1
110,000 Thai Farmers Bank, Ltd. 1,006,537 894,202 0.1
------------- -------------- ------
26,484,172 50,608,539 4.3
-----------------------------------------------------------------------------------------------------------
BUILDING & 1,097,000 Christiani & Nielsen 'Local' 7,169,983 8,043,355 0.7
CONSTRUCTION 329,100 ++Christiani & Nielsen
'Local' (Warrants) (a) 647,325 885,206 0.1
936,000 Land & House Public Co. 7,122,664 16,709,623 1.4
------------- -------------- ------
14,939,972 25,638,184 2.2
-----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 452,600 Finance One Co., Ltd. 'Foreign' 8,693,175 7,033,831 0.6
1,082,000 Phatra Thanakit Co., Ltd. 9,718,270 8,364,535 0.7
------------- -------------- ------
18,411,445 15,398,366 1.3
-----------------------------------------------------------------------------------------------------------
MUTUAL FUNDS 12,600,000 Ruam Pattana Fund II 4,999,163 7,280,335 0.6
-----------------------------------------------------------------------------------------------------------
OIL & GAS 871,000 PTT Exploration 8,099,662 9,024,108 0.8
-----------------------------------------------------------------------------------------------------------
PUBLISHING & 283,700 Post Publishing Public Co. Ltd. 2,672,649 1,865,332 0.2
BROADCASTING
-----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 510,000 Advanced Information Service 7,561,746 7,072,325 0.6
747,000 International Engineering Co. Ltd. 3,347,314 6,548,715 0.6
------------- -------------- ------
10,909,060 13,621,040 1.2
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THAILAND 86,516,123 123,435,904 10.6
==================================================================================================================================
TOTAL LONG-TERM INVESTMENTS 860,521,585 1,085,868,620 92.4
==================================================================================================================================
</TABLE>
64
<PAGE> 127
<TABLE>
<CAPTION>
FACE AMOUNT SHORT-TERM INVESTMENTS
==================================================================================================================================
<S> <S> <C> <S> <C> <C> <C>
UNITED STATES COMMERCIAL $ 25,000,000 Ciesco L.P., 5.875% due 2/15/1995 24,812,326 24,812,326 2.1
PAPER*** 30,000,000 Corporate Asset Funding Co.,
5.90% due 1/05/1995 29,975,417 29,975,417 2.5
41,530,000 General Electric Capital Corp.,
5.80% due 1/03/1995 41,509,927 41,509,927 3.5
------------- -------------- ------
96,297,670 96,297,670 8.1
-----------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS 96,297,670 96,297,670 8.1
==================================================================================================================================
TOTAL INVESTMENTS $ 956,819,255 1,182,166,290 100.5
=============
LIABILITIES IN EXCESS OF OTHER ASSETS (6,167,910) (0.5)
-------------- ------
NET ASSETS $1,175,998,380 100.0%
============== ======
==================================================================================================================================
</TABLE>
*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.
(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)The rights may be exercised until November 17, 1999.
(c)The rights may be exercised until January 6, 1995.
(d)Previously held as Sembawang Shipyard Ltd.
++Non-income producing security.
++++Restricted securities as to resale. The value of the
Fund's investment in restricted securities was
approximately $34,166,000, representing 2.91% of net
assets.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
AQUISITION VALUE
ISSUE DATE(S) COST (NOTE 1a)
---------------------------------------------------------------------------
<S> <C> <C> <C>
Benpres Holdings Corp. 10/25/1994 $ 4,587,400 $ 3,730,500
Pakistan Telecommunications (GDR) 9/16/1994 7,533,262 5,447,650
President Enterprises (ADR) 11/17/1992 3,119,745 4,070,393
Reliance Industries (ADR) 8/25/1994 6,667,743 4,683,525
SCICI Ltd., 3.50% due 4/01/2004 10/18/1993 2,699,375 2,262,000
TECO Electric and Machinery,
2.75% due 4/15/2004 11/03/1994 4,000,000 3,640,000
Wharf Holdings Ltd., 5.00%
due 7/15/2000 12/12/1994 9,335,976 10,332,000
---------------------------------------------------------------------------
Total $37,943,501 $34,166,068
=========== ===========
---------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
65
<PAGE> 128
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AS OF DECEMBER 31, 1994
========================================================================================================================
<S> <S> <C> <C>
ASSETS: Investments, at value (identified cost--$956,819,255)(Note 1a) $1,182,166,290
Foreign cash (Note 1c) 141,887
Receivables:
Capital shares sold $ 2,121,139
Dividends 1,579,199
Interest 407,847 4,108,185
-------------
Deferred organization expenses (Note 1f) 41,728
Prepaid registration fees and other assets (Note 1f) 87,333
--------------
Total assets 1,186,545,423
--------------
========================================================================================================================
LIABILITIES: Payables:
Capital shares redeemed 6,964,068
Investment adviser (Note 2) 964,477
Distributor (Note 2) 806,162 8,734,707
-------------
Accrued expenses and other liabilities 1,812,336
--------------
Total liabilities 10,547,043
--------------
========================================================================================================================
NET ASSETS: Net assets $1,175,998,380
==============
========================================================================================================================
NET ASSETS Class A Shares of Common Stock, $0.10 par value,
CONSIST OF: 100,000,000 shares authorize $ 22,481
Class B Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 6,104,953
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 35,724
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 1,656,803
Paid-in capital in excess of par 956,061,507
Accumulated investment loss--net (2,783,327)
Accumulated dividends in excess of investment income--net (3,799,142)
Accumulated distributions in excess of realized capital gains--net (6,634,036)
Unrealized appreciation on investments and foreign currency
transactions--net 225,333,417
--------------
Net assets $1,175,998,380
==============
========================================================================================================================
NET ASSET Class A--Based on net assets of $3,382,590 and 224,805
VALUE: shares outstanding $ 15.05
==============
Class B--Based on net assets of $917,383,802 and 61,049,528
shares outstanding $ 15.03
==============
Class C--Based on net assets of $5,329,210 and 357,245
shares outstanding $ 14.92
==============
Class D--Based on net assets of $249,902,778 and 16,568,025
shares outstanding $ 15.08
==============
========================================================================================================================
See Notes to Financial Statements.
</TABLE>
66
<PAGE> 129
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
========================================================================================================================
<S> <S> <C> <C>
INVESTMENT Dividends (net of $2,559,899 foreign withholding tax) $ 18,007,792
INCOME Interest and discount earned 4,787,645
(Notes 1d & 1e): --------------
Total income 22,795,437
--------------
========================================================================================================================
EXPENSES: Investment advisory fees (Note 2) $ 11,490,030
Distribution fees--Class B (Note 2) 8,860,392
Custodian fees 2,112,779
Transfer agent fees--Class B (Note 2) 1,155,482
Account maintenance fees--Class D (Note 2) 654,292
Registration fees (Note 1f) 334,406
Printing and shareholder reports 317,780
Transfer agent fees--Class D (Note 2) 297,766
Accounting services (Note 2) 162,198
Professional fees 107,682
Directors' fees and expenses 36,034
Amortization of organization expenses (Note 1f) 17,267
Pricing fees 8,638
Distribution fees--Class C (Note 2) 7,180
Transfer agent fees--Class C (Note 2) 1,368
Transfer agent fees--Class A (Note 2) 841
Other 14,629
-------------
Total expenses 25,578,764
--------------
Investment loss--net (2,783,327)
--------------
========================================================================================================================
REALIZED & Realized gain (loss) from:
UNREALIZED GAIN Investments--net $ 7,265,772
(LOSS) ON Foreign currency transactions--net (382,751) 6,883,021
INVESTMENTS & ------------- --------------
FOREIGN CURRENCY Change in unrealized appreciation/depreciation on:
TRANSACTIONS--NET Investments--net (242,296,005)
(NOTES 1b, 1c, Foreign currency transactions--net 175,695 (242,120,310)
1e & 3): ------------- --------------
Net realized and unrealized loss on investments and
foreign currency transactions (235,237,289)
--------------
Net Decrease in Net Assets Resulting from Operations $ (238,020,616)
==============
========================================================================================================================
See Notes to Financial Statements.
</TABLE>
67
<PAGE> 130
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE FOR THE TEN
YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1994 1993
========================================================================================================================
<S> <C> <C> <C>
OPERATIONS: Investment income (loss)--net $ (2,783,327) $ 167,916
Realized gain on investments and foreign currency
transactions--net 6,883,021 22,356,982
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net (242,120,310) 423,968,150
-------------- -------------
Net increase (decrease) in net assets resulting from operations (238,020,616) 446,493,048
-------------- -------------
========================================================================================================================
DIVIDENDS & Investment income--net:
DISTRIBUTIONS TO Class B -- (22,033)
SHAREHOLDERS Class D -- (145,883)
(NOTE 1g): In excess of investment income--net:
Class A (26,417) --
Class B -- (144,731)
Class C (34,041) --
Class D (1,471,448) (958,265)
Realized gain on investments--net:
Class A (56,223) --
Class B (16,559,524) (4,539,541)
Class C (87,816) --
Class D (4,524,481) (1,408,405)
In excess of realized gain on investments--net:
Class A (17,570) --
Class B (5,175,064) --
Class C (27,444) --
Class D (1,413,958) --
-------------- -------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (29,393,986) (7,218,858)
-------------- -------------
========================================================================================================================
BENEFICIAL INTEREST Net increase in net assets derived from capital
TRANSACTIONS share transactions 140,721,806 386,806,540
(NOTE 4): -------------- -------------
========================================================================================================================
NET ASSETS: Total increase (decrease) in net assets (126,692,796) 826,080,730
Beginning of period 1,302,691,176 476,610,446
-------------- --------------
End of period $1,175,998,380 $1,302,691,176
============== ==============
========================================================================================================================
See Notes to Financial Statements.
</TABLE>
68
<PAGE> 131
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS A CLASS B
--------- --------------------------------
FOR THE FOR THE
THE FOLLOWING PER SHARE DATA AND RATIOS PERIOD FOR THE FOR THE PERIOD
HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN OCT. 21, YEAR TEN MONTHS MAY 29,
THE FINANCIAL STATEMENTS. 1994++ TO ENDED ENDED 1992++ TO
DEC. 31, DEC. 31, DEC. 31, FEB. 28,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994++++ 1994++++ 1993++++ 1993++++
========================================================================================================================
<S> <S> <C> <C> <C> <C>
PER SHARE Net asset value, beginning of period $ 17.43 $ 18.74 $ 11.01 $ 10.00
OPERATING -------- -------- -------- --------
PERFORMANCE: Investment income (loss)--net .02 (.07) (.02) (.02)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (1.91) (3.28) 7.86 1.05
-------- -------- -------- --------
Total from investment operations (1.89) (3.35) 7.84 1.03
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- --+++++ --
In excess of investment income--net (.13) -- --+++++ (.02)
Realized gain on investments--net (.27) (.27) (.11) --+++++
In excess of realized gain on
investments--net (.09) (.09) -- --
-------- -------- -------- --------
Total dividends and distributions (.49) (.36) (.11) (.02)
-------- -------- -------- --------
Net asset value, end of period $ 15.05 $ 15.03 $ 18.74 $ 11.01
======== ======== ======== ========
========================================================================================================================
TOTAL INVESTMENT Based on net asset value per share (10.82%)+++ (17.86%) 71.27%+++ 10.32%+++
RETURN:** ======== ======== ======== ========
========================================================================================================================
RATIOS TO AVERAGE Expenses, excluding distribution fees 1.54%* 1.40% 1.35%* 1.49%*
NET ASSETS: ======== ======== ======== ========
Expenses 1.54%* 2.40% 2.35%* 2.49%*
======== ======== ======== ========
Investment income (loss)--net .84%* (.42%) (.15%)* (.08%)*
======== ======== ======== ========
========================================================================================================================
SUPPLEMENTAL Net assets, end of period (in thousands) $ 3,383 $917,384 $990,843 $365,430
DATA: ======== ======== ======== ========
Portfolio turnover 16.45% 16.45% 16.62% 4.65%
======== ======== ======== ========
========================================================================================================================
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
+++++Amount was less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
69
<PAGE> 132
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONCLUDED)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C CLASS D
--------- ---------------------------------
FOR THE FOR THE
THE FOLLOWING PER SHARE DATA AND RATIOS PERIOD FOR THE FOR THE PERIOD
HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN OCT. 21, YEAR TEN MONTHS MAY 29,
THE FINANCIAL STATEMENTS. 1994++ TO ENDED ENDED 1992++ TO
DEC. 31, DEC. 31, DEC. 31, FEB. 28,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994++++ 1994++++ 1993++++ 1993++++
========================================================================================================================
<S> <S> <C> <C> <C> <C>
PER PER SHARE Net asset value, beginning of period $ 17.29 $ 18.77 $ 11.01 $ 10.00
OPERATING -------- -------- -------- --------
PERFORMANCE: Investment income--net (.01) .06 .07 .05
Realized and unrealized gain on investments and
foreign currency transactions--net (1.89) (3.30) 7.88 1.04
-------- -------- -------- --------
Total from investment operations (1.90) (3.24) 7.95 1.09
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.01) --+++++
In excess of investment income--net (.11) (.09) (.07) (.08)
Realized gain on investments--net (.27) (.27) (.11) --
In excess of realized gain on investments--net (.09) (.09) -- --
-------- -------- -------- --------
Total dividends and distributions (.47) (.45) (.19) (.08)
-------- -------- -------- --------
Net asset value, end of period $ 14.92 $ 15.08 $ 18.77 $ 11.01
======== ======== ======== ========
========================================================================================================================
TOTAL INVESTMENT Based on net asset value per share (10.98%)+++ (17.24%) 72.31%+++ 10.99%+++
RETURN:** ======== ======== ======== ========
========================================================================================================================
RATIOS TO AVERAGE Expenses, excluding account maintenance and
NET ASSETS: distribution fees 1.57%* 1.38% 1.34%* 1.48%*
======== ======== ======== ========
Expenses 2.57%* 1.63% 1.59%* 1.73%*
======== ======== ======== ========
Investment income (loss)--net (.17%)* .34% .61%* .61%*
======== ======== ======== ========
========================================================================================================================
SUPPLEMENTAL Net assets, end of period (in thousands) $ 5,329 $249,903 $311,848 $111,180
DATA: ======== ======== ======== ========
Portfolio turnover 16.45% 16.45% 16.62% 4.65%
======== ======== ======== ========
========================================================================================================================
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
+++++Amount was less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
70
<PAGE> 133
- -------------------------------------------------------------------------------
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 Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of 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. 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. Short-term securities with
a remaining maturity of sixty days or less are valued at amortized
cost, which approximates market value. Options written by the Fund
are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter
market, the average of the last asked price as obtained from one or
more dealers. Options purchased by the Fund are valued at the last
sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the 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) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Options--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.
(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
71
<PAGE> 134
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute 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.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS
WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co.") which is
a limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 1.0%, on an annual
basis, of the average daily value of the Fund's net assets. 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 limitations at
the time of such payment.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
- -----------------------------------------------------------
ACCOUNT DISTRIBUTION
MAINTENANCE FEE FEE
- -----------------------------------------------------------
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
- -----------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended December 31, 1994, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
- -------------------------------------------------------
MLFD MLPF&S
- -------------------------------------------------------
Class A $ 7 $ 92
Class D $63,868 $1,035,446
- -------------------------------------------------------
72
<PAGE> 135
MLPF&S received contingent deferred sales charges of $2,008,623
relating to transactions in Class B Shares of beneficial interest,
$141 relating to transactions in Class C Shares of beneficial
interest, and $74,612 in commissions on the execution of portfolio
security transactions for the Fund for the year ended December 31,
1994.
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 MLAM, PSI, MLPF&S, FDS, MLFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1994 were $423,655,198 and
$172,834,766, respectively.
Net realized and unrealized gains (losses) as of December 31, 1994
were as follows:
- -----------------------------------------------------------------
REALIZED UNREALIZED
GAINS (LOSSES) GAINS (LOSSES)
- -----------------------------------------------------------------
Long-term investments $ 7,261,566 $225,347,035
Short-term investments 4,206 --
Foreign currency transactions (382,751) (13,618)
----------- ------------
Total $ 6,883,021 $225,333,417
=========== ============
- -----------------------------------------------------------------
As of December 31, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $219,356,813, of which $279,235,407
related to appreciated securities and $59,878,594 related to
depreciated securities. At December 31, 1994, the aggregate cost of
investments for Federal income tax purposes was $962,809,477.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions
for the year ended December 31, 1994 and the ten months ended
December 31, 1993 were $140,721,806 and $386,806,540, respectively.
Transactions in capital shares for each class were as follows:
- ---------------------------------------------------------------------
CLASS A SHARES FOR THE PERIOD DOLLAR
OCTOBER 21, 1994++ TO DECEMBER 31, 1994 SHARES AMOUNT
- ---------------------------------------------------------------------
Shares sold 703,677 $ 11,334,140
Shares issued to shareholders in rein-
vestment of dividends and distributions 5,563 83,383
----------- -------------
Total issued 709,240 11,417,523
Shares redeemed (484,435) (7,719,173)
----------- -------------
Net increase 224,805 $ 3,698,350
=========== =============
- ---------------------------------------------------------------------
[FN]
++Commencement of Operations.
- ---------------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED DECEMBER 31, 1994 SHARES AMOUNT
- ---------------------------------------------------------------------
Shares sold 21,626,213 $ 354,250,510
Shares issued to shareholders
in reinvestment of distributions 1,207,843 18,081,410
----------- ------------
Total issued 22,834,056 372,331,920
Shares redeemed (14,613,098) (239,406,135)
Conversion of shares (47,440) (716,815)
----------- -------------
Net increase 8,173,518 $ 132,208,970
=========== =============
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
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 rein-
vestment 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 C SHARES FOR THE PERIOD DOLLAR
OCT. 21, 1994++ TO DEC. 31, 1994 SHARES AMOUNT
- ---------------------------------------------------------------------
Shares sold 381,246 $ 6,281,385
Shares issued to shareholders in rein-
vestment of dividends and distributions 8,965 133,227
----------- -------------
Total issued 390,211 6,414,612
Shares redeemed (32,966) (508,889)
----------- -------------
Net increase 357,245 $ 5,905,723
=========== =============
- ---------------------------------------------------------------------
[FN]
++Commencement of Operations.
73
<PAGE> 136
- ---------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
CLASS D SHARES FOR THE YEAR ENDED DOLLAR
DECEMBER 31, 1994 SHARES AMOUNT
- ---------------------------------------------------------------------
Shares sold 5,213,331 $ 85,671,153
Conversion of shares 47,252 716,815
Shares issued to shareholders in
reinvestment of dividends and
distributions 405,832 6,095,592
----------- -------------
Total issued 5,666,415 92,483,560
Shares redeemed (5,709,447) (93,574,797)
----------- -------------
Net decrease (43,032) $ (1,091,237)
=========== =============
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
CLASS D 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
=========== =============
- ---------------------------------------------------------------------
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 to Class D Shares. There
were 2,997,993 shares redesignated amounting to $29,941,279.
74
<PAGE> 137
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies..... 2
Management of the Fund................ 13
Directors and Officers.............. 13
Compensation of Directors........... 14
Management and Advisory
Arrangements..................... 15
Purchase of Shares.................... 16
Redemption of Shares.................. 24
Portfolio Transactions and
Brokerage........................... 25
Determination of Net Asset Value...... 26
Shareholder Services.................. 27
Dividends, Distributions and Taxes.... 42
Dividends and Distributions......... 42
Taxes............................... 42
Performance Data...................... 46
General Information................... 49
Description of Shares............... 49
Computation of Offering Price
Per Share........................ 50
Independent Auditors................ 50
Custodian........................... 51
Transfer Agent...................... 51
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.................. 60
</TABLE>
Code # 16260-0495
[LOGO]
MERRILL LYNCH
DRAGON FUND, INC.
ART WORK
STATEMENT OF
ADDITIONAL INFORMATION
April 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 138
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- --------------------
Compass plate, circular Back cover of Prospectus and
graphic paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE> 139
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for the periods ended December 31, 1994, the ten
months ended December 31, 1993, and the period May 29, 1992 (commencement
of operations) to February 28, 1993.
Contained in Part B:
FINANCIAL STATEMENTS:
Schedule of Investments as of December 31, 1994.
Statement of Assets and Liabilities as of December 31, 1994.
Statement of Operations for the fiscal year ended December 31, 1994.
Statements of Changes in Net Assets for the fiscal year ended December
31, 1994, and the period March 1, 1993, to December 31, 1993.
Financial Highlights for the periods ended December 31, 1994, the ten
months ended December 31, 1993, and the period May 29, 1992 (commencement
of operations) to February 28, 1993.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C> <C>
1 (a) -- Articles of Incorporation of Registrant.(c)
(b) -- Articles of Amendment to the Articles of Incorporation.
(c) -- Articles Supplementary to the Articles of Incorporation.
2 -- By-Laws of Registrant.(c)
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.(b)
5 (a) -- Management Agreement between Registrant and Merrill Lynch Asset Management.(c)
(b) -- Supplement to Management Agreement between Registrant and Merrill Lynch Asset
Management, L.P. dated January 3, 1994.(a)
6 (a) -- Class A Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)
(b) -- Class B Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc.
with respect to the Merrill Lynch Mutual Fund Adviser Program.(a)
(d) -- Class C Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)
(e) -- Class D Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)
7 -- None.
8 -- Custody Agreement between Registrant and Brown Brothers Harriman & Co.(c)
9 (a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services, Inc.(c)
(b) -- Agreement between Merrill Lynch & Co., Inc. and Registrant relating to Registrant's
use of Merrill Lynch name.(c)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management.(c)
14 -- None.
15 (a) -- Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of
Registrant.(c)
</TABLE>
C-1
<PAGE> 140
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C>
(b) -- Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of
Registrant.(c)
(c) -- Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of
Registrant.(c)
16 (a) -- Schedule for computation of each performance quotation relating to Class A shares
provided in the Registration Statement in response to Item 22.
(b) -- Schedule for computation of each performance quotation relating to Class B shares
provided in the Registration Statement in response to Item 22.(c)
(c) -- Schedule for computation of each performance quotation relating to Class C shares
provided in the Registration Statement in response to Item 22.
(d) -- Schedule for computation of each performance quotation relating to Class D shares
provided in the Registration Statement in response to Item 22.(c)
17 (a) -- Financial Data Schedule for Class A shares for the year ended December 31, 1994.
(b) -- Financial Data Schedule for Class B shares for the year ended December 31, 1994.
(c) -- Financial Data Schedule for Class C shares for the year ended December 31, 1994.
(d) -- Financial Data Schedule for Class D shares for the year ended December 31, 1994.
18 -- Power of Attorney for Edward D. Zinbarg.
</TABLE>
- ---------------
(a) 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.
(b) Reference is made to Article II (Sections 3,4 and 5), Article IV (Sections
1, 2, 3, 4, 5, 6, 7, 8, 9 and 10), Article V (Sections 2, 3, 4, 5 and 6),
Article VI, Article VII and Article IX of the Registrant's Articles of
Incorporation filed as Exhibit (1)(a) to the Registrant's Registration
Statement; the Articles of Amendment to the Articles of Incorporation filed
as Exhibit (1)(b) to the Registrant's Registration Statement; the Articles
Supplementary to the Articles of Incorporation filed as Exhibit (1)(c) to
the Registrant's Registration Statement; and Article II (Sections 1, 2, 3,
4, 5, 6, 7, 8, 9, 10 and 11), Article III (Sections 1, 3, 5, 6 and 17),
Article VI, Article VII (Sections 1, 2, 3, 4, 5, 6 and 7), Article XII,
Article XIII and Article XIV of the Registrant's By-Laws previously filed as
Exhibit (2) to the Registrant's Registration Statement.
(c) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
(EDGAR) phase-in requirements.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS MARCH 31, 1995
-------------- -----------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share..................... 20
Class B Shares of Common Stock, par value $0.10 per share..................... 1,674
Class C Shares of Common Stock, par value $0.10 per share..................... 16
Class D Shares of Common Stock, par value $0.10 per share..................... 525
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution 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
C-2
<PAGE> 141
used, for the preparation or presentation of a defense to the action, including
costs connected with the preparation of a settlement; (ii) advances may be made
only on receipt of a written promise by, or on behalf of, the recipient to repay
that amount of the advance which exceeds the amount to which it is ultimately
determined that he is entitled to receive from the Registrant by reason of
indemnification; and (iii) (a) such promise must be secured by a surety bond,
other suitable insurance or an equivalent form of security which assumes that
any repayments may be obtained by the Registrant without delay or litigation,
which bond, insurance or other form of security must be provided by the
recipient of the advance and (b) a majority of a quorum of the Registrant's
disinterested non-party Directors, or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the 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 SmallCap Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Asset Builder Program, Inc., 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
C-3
<PAGE> 142
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World
Income Fund, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund
II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is 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, 1992, for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph, and Messrs.
Durnin, Giordano, Harvey, 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
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, L.P.
Bernard J. Durnin.............. Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
</TABLE>
C-4
<PAGE> 143
<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
Ronald L. Welburn.............. Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Anthony Wiseman................ Senior Vice President Senior Vice President of Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund,
Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, MuniYield Arizona Fund
II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio II, Inc., Senior
Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
C-5
<PAGE> 144
(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
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> 145
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 26th day of April 1995.
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 April 26, 1995
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and April 26, 1995
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
DONALD CECIL* Director April 26, 1995
- -----------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director April 26, 1995
- -----------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director April 26, 1995
- -----------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director April 26, 1995
- -----------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Director April 26, 1995
- -----------------------------------
(Edward D. Zinbarg)
*By: /s/ ARTHUR ZEIKEL April 26, 1995
------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-7
<PAGE> 146
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------------------- ----
<S> <C> <C> <C>
1(a) -- Articles of Incorporation of Registrant(c)..................................
(b) -- Articles of Amendment to the Articles of Incorporation......................
(c) -- Articles Supplementary to the Articles of Incorporation.....................
2 -- By-Laws of Registrant(c)....................................................
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(b)......
5(a) -- Management Agreement between Registrant and Merrill Lynch
Asset Management(c).........................................................
(b) -- Supplement to Management Agreement between Registrant and Merrill Lynch
Asset Management, L.P. dated January 3, 1994(a).............................
6(a) -- Class A Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)........................................................
(b) -- Class B Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)........................................................
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc. with respect to the Merrill Lynch Mutual Fund Adviser Program(a).......
(d) -- Class C Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)........................................................
(e) -- Class D Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)........................................................
7 -- None........................................................................
8 -- Custody Agreement between Registrant and Brown Brothers Harriman & Co.(c)...
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services, Inc.(c)...........
(b) -- Agreement between Merrill Lynch & Co., Inc. and Registrant relating to
Registrant's use of Merrill Lynch name(c)...................................
10 -- None........................................................................
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.......
12 -- None........................................................................
13 -- Certificate of Merrill Lynch Asset Management(c)............................
14 -- None........................................................................
15(a) -- Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of
Registrant(c)...............................................................
(b) -- Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of
Registrant(c)...............................................................
(c) -- Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of
Registrant(c)...............................................................
16(a) -- Schedule for computation of each performance quotation relating to Class A
shares provided in the Registration Statement in response to Item 22........
(b) -- Schedule for computation of each performance quotation relating to Class B
shares provided in the Registration Statement in response to Item 22(c).....
(c) -- Schedule for computation of each performance quotation relating to Class C
shares provided in the Registration Statement in response to Item 22........
(d) -- Schedule for computation of each performance quotation relating to Class D
shares provided in the Registration Statement in response to Item 22(c).....
</TABLE>
<PAGE> 147
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------------------- ----
<S> <C> <C> <C>
17(a) -- Financial Data Schedule for Class A shares for the year ended December 31,
1994........................................................................
(b) -- Financial Data Schedule for Class B shares for the year ended December 31,
1994........................................................................
(c) -- Financial Data Schedule for Class C shares for the year ended December 31,
1994........................................................................
(d) -- Financial Data Schedule for Class D shares for the year ended December 31,
1994........................................................................
18 -- Power of Attorney for Edward D. Zinbarg.....................................
</TABLE>
- ---------------
(a) 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.
(b) Reference is made to Article II (Sections 3,4 and 5), Article IV (Sections
1, 2, 3, 4, 5, 6, 7, 8, 9 and 10), Article V (Sections 2, 3, 4, 5 and 6),
Article VI, Article VII and Article IX of the Registrant's Articles of
Incorporation filed as Exhibit (1)(a) to the Registrant's Registration
Statement; the Articles of Amendment to the Articles of Incorporation filed
as Exhibit (1)(b) to the Registrant's Registration Statement; the Articles
Supplementary to the Articles of Incorporation filed as Exhibit (1)(c) to
the Registrant's Registration Statement; and Article II (Sections 1, 2, 3,
4, 5, 6, 7, 8, 9, 10 and 11), Article III (Sections 1, 3, 5, 6 and 17),
Article VI, Article VII (Sections 1, 2, 3, 4, 5, 6 and 7), Article XII,
Article XIII and Article XIV of the Registrant's By-Laws previously filed as
Exhibit (2) to the Registrant's Registration Statement.
(c) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
(EDGAR) phase-in requirements.
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Dragon Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-46216 of our report dated February 15, 1995 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
April 24, 1995
<PAGE> 1
Dragon Fund - Class A
10/21/94 - 12/31/94
EXHIBIT 99.16A
<TABLE>
<CAPTION>
Since Since
Inception Inception
Avg Annual Total
Return Return*
---------- ----------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum
Offering Price 18.40
---------
Divided by Net Asset Value 17.43
---------
Equals Shares Purchased 54.36 57.37
Plus Shares Acquired through
Dividend Reinvestment 1.78 1.89
--------- ---------
Equals Shares Held at 12/31/94 56.14 59.26
Multiplied by Net Asset Value at
12/31/94 15.05 15.05
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 12/31/94 $844.97 $891.79
Divided by $1,000 (P) 0.8450 0.8918
Subtract 1 -0.1550 -0.1082
Expressed as a percentage equals
the Aggregate Total Return for the
Period (T) -15.50%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -10.82%
=======
ERV divided by P 0.8450
Raise to the power of 5.1409
Equals 0.4206
Subtract 1 -0.5794
Expressed as a percentage equals
the Average Annualized Total
Return -57.94%
=========
</TABLE>
* Does not include sales charge for the period
<PAGE> 1
Dragon Fund - Class C
10/21/94 - 12/31/94
EXHIBIT 99.16C
<TABLE>
<CAPTION>
Since Since
Inception Inception
Avg Annual Total
Return Return*
---------- ----------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 17.29 17.29
--------- ---------
Equals Shares Purchased 57.84 57.84
Plus Shares Acquired through
Dividend Reinvestment 1.82 1.82
--------- ---------
Equals Shares Held at 12/31/94 59.66 59.66
Multiplied by Net Asset Value at
12/31/94 14.92 14.92
--------- ---------
Equals Ending Value before
deduction for contingent deferred
sales charge 890.17 890.17
Less deferred sales charge (8.63) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 12/31/93 $881.54 $890.17
--------- ---------
Divided by $1,000 (P) 0.8815 0.8902
Subtract 1 -0.1185 -0.1098
Expressed as a percentage equals
the Aggregate Total Return for the
Period (T) -11.85%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -10.98%
=======
ERV divided by P 0.8815
Raise to the power of 5.1414
Equals 0.5230
Subtract 1 -0.4770
Expressed as a percentage equals
the Average Annualized Total
Return -47.70%
=========
</TABLE>
* Does not include sales charge for the period
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000884842
<NAME> MERRILL LYNCH DRAGON FUND, INC.
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> OCT-21-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 956819255
<INVESTMENTS-AT-VALUE> 1182166290
<RECEIVABLES> 4108185
<ASSETS-OTHER> 270948
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1186545423
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10547043
<TOTAL-LIABILITIES> 10547043
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 963881468
<SHARES-COMMON-STOCK> 224805
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (2783327)
<OVERDISTRIBUTION-NII> 3799142
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6634036
<ACCUM-APPREC-OR-DEPREC> 225333417
<NET-ASSETS> 3382590
<DIVIDEND-INCOME> 18007792
<INTEREST-INCOME> 4787645
<OTHER-INCOME> 0
<EXPENSES-NET> 25578764
<NET-INVESTMENT-INCOME> (2783327)
<REALIZED-GAINS-CURRENT> 6883021
<APPREC-INCREASE-CURRENT> (242120310)
<NET-CHANGE-FROM-OPS> (238020616)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 26417
<DISTRIBUTIONS-OF-GAINS> 73793
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 703677
<NUMBER-OF-SHARES-REDEEMED> 484435
<SHARES-REINVESTED> 5563
<NET-CHANGE-IN-ASSETS> (126692796)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 14345023
<OVERDISTRIB-NII-PRIOR> 2267236
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11490030
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25578764
<AVERAGE-NET-ASSETS> 2758606
<PER-SHARE-NAV-BEGIN> 17.43
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> (1.91)
<PER-SHARE-DIVIDEND> .13
<PER-SHARE-DISTRIBUTIONS> .36
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.05
<EXPENSE-RATIO> 1.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000884842
<NAME> MERRILL LYNCH DRAGON FUND, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 956819255
<INVESTMENTS-AT-VALUE> 1182166290
<RECEIVABLES> 4108185
<ASSETS-OTHER> 270948
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1186545423
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10547043
<TOTAL-LIABILITIES> 10547043
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 963881468
<SHARES-COMMON-STOCK> 61049528
<SHARES-COMMON-PRIOR> 52876010
<ACCUMULATED-NII-CURRENT> (2783327)
<OVERDISTRIBUTION-NII> 3799142
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6634036
<ACCUM-APPREC-OR-DEPREC> 225333417
<NET-ASSETS> 917383802
<DIVIDEND-INCOME> 18007792
<INTEREST-INCOME> 4787645
<OTHER-INCOME> 0
<EXPENSES-NET> 25578764
<NET-INVESTMENT-INCOME> (2783327)
<REALIZED-GAINS-CURRENT> 6883021
<APPREC-INCREASE-CURRENT> (242120310)
<NET-CHANGE-FROM-OPS> (238020616)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 21734588
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21626213
<NUMBER-OF-SHARES-REDEEMED> 14660538
<SHARES-REINVESTED> 1207843
<NET-CHANGE-IN-ASSETS> (126692796)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 14345023
<OVERDISTRIB-NII-PRIOR> 2267236
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11490030
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25578764
<AVERAGE-NET-ASSETS> 888473349
<PER-SHARE-NAV-BEGIN> 18.74
<PER-SHARE-NII> (.07)
<PER-SHARE-GAIN-APPREC> (3.28)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .36
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.03
<EXPENSE-RATIO> 2.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000884842
<NAME> MERRILL LYNCH DRAGON FUND, INC.
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> OCT-21-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 956819255
<INVESTMENTS-AT-VALUE> 1182166290
<RECEIVABLES> 4108185
<ASSETS-OTHER> 270948
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1186545423
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10547043
<TOTAL-LIABILITIES> 10547043
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 963881468
<SHARES-COMMON-STOCK> 357245
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (2783327)
<OVERDISTRIBUTION-NII> 3799142
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6634036
<ACCUM-APPREC-OR-DEPREC> 225333417
<NET-ASSETS> 5329210
<DIVIDEND-INCOME> 18007792
<INTEREST-INCOME> 4787645
<OTHER-INCOME> 0
<EXPENSES-NET> 25578764
<NET-INVESTMENT-INCOME> (2783327)
<REALIZED-GAINS-CURRENT> 6883021
<APPREC-INCREASE-CURRENT> (242120310)
<NET-CHANGE-FROM-OPS> (238020616)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 34041
<DISTRIBUTIONS-OF-GAINS> 115260
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 381246
<NUMBER-OF-SHARES-REDEEMED> 32966
<SHARES-REINVESTED> 8965
<NET-CHANGE-IN-ASSETS> (126692796)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 14345023
<OVERDISTRIB-NII-PRIOR> 2267236
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11490030
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25578764
<AVERAGE-NET-ASSETS> 3743814
<PER-SHARE-NAV-BEGIN> 17.29
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> (1.89)
<PER-SHARE-DIVIDEND> .11
<PER-SHARE-DISTRIBUTIONS> .36
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.92
<EXPENSE-RATIO> 2.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000884842
<NAME> MERRILL LYNCH DRAGON FUND, INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 956819255
<INVESTMENTS-AT-VALUE> 1182166290
<RECEIVABLES> 4108185
<ASSETS-OTHER> 270948
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1186545423
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10547043
<TOTAL-LIABILITIES> 10547043
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 963881468
<SHARES-COMMON-STOCK> 16568025
<SHARES-COMMON-PRIOR> 16611057
<ACCUMULATED-NII-CURRENT> (2783327)
<OVERDISTRIBUTION-NII> 3799142
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6634036
<ACCUM-APPREC-OR-DEPREC> 225333417
<NET-ASSETS> 249902778
<DIVIDEND-INCOME> 18007792
<INTEREST-INCOME> 4787645
<OTHER-INCOME> 0
<EXPENSES-NET> 25578764
<NET-INVESTMENT-INCOME> (2783327)
<REALIZED-GAINS-CURRENT> 6883021
<APPREC-INCREASE-CURRENT> (242120310)
<NET-CHANGE-FROM-OPS> (238020616)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1471448
<DISTRIBUTIONS-OF-GAINS> 5938439
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5260583
<NUMBER-OF-SHARES-REDEEMED> 5709447
<SHARES-REINVESTED> 405832
<NET-CHANGE-IN-ASSETS> (126692796)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 14345023
<OVERDISTRIB-NII-PRIOR> 2267236
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11490030
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25578764
<AVERAGE-NET-ASSETS> 262435747
<PER-SHARE-NAV-BEGIN> 18.77
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> (3.30)
<PER-SHARE-DIVIDEND> .09
<PER-SHARE-DISTRIBUTIONS> .36
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.08
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.18
POWER OF ATTORNEY
I, Edward D. Zinbarg, hereby authorize Arthur Zeikel, Terry K.
Glenn, Gerald M. Richard, Mark B. Goldfus, Robert Harris or Michael J.
Hennewinkel, or any of them, as attorney-in-fact, to sign on my behalf any
amendments to the Registration Statement for each of the following registered
investment companies and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission: Emerging Tigers Fund, Inc.; Merrill Lynch
Americas Income Fund, Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.;
Merrill Lynch Dragon Fund, Inc.; Merrill Lynch EuroFund; Merrill Lynch Global
Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for Investment and
Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch Global SmallCap
Fund, Inc.; Merrill Lynch Healthcare Fund, Inc.; Merrill Lynch International
Equity Fund; Merrill Lynch Latin America Fund, Inc.; Merrill Lynch Middle
East/Africa Fund, Inc.; Merrill Lynch Pacific Fund, Inc.; Merrill Lynch
Short-Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.; and
Worldwide DollarVest Fund, Inc.
Dated: February 21, 1995 /s/ Edward D. Zinbarg
----------------------------------
Edward D. Zinbarg
(Director of each above referenced
Maryland corporation and Trustee
of each above referenced
Massachusetts business trust)
<PAGE> 1
EXHIBIT 1A
ARTICLES OF INCORPORATION
MERRILL LYNCH DRAGON FUND, INC.
THE UNDERSIGNED, BRIAN M. KAPLOWITZ, whose post-office
address is One World Trade Center, New York, Now York 10048-0557,
being at least eighteen years of age, does hereby act as an
incorporator, under and by virtue of the General Laws of the
state of Maryland authorizing the formation of corporations and
with the intention of forming a corporation.
ARTICLE I
The name of the corporation is MERRILL LYNCH DRAGON FUND,
INC.
ARTICLE II
PURPOSES AND POWERS
The purpose or purposes for which the Corporation is formed
and the business or objects to be transacted, carried on and
promoted by it are as follows:
(1) To conduct and carry on the business of an investment
company of the management type.
(2) To hold, invest and reinvest its assets in securities,
and in connection therewith to hold part or all of its assets in
cash.
(3) To issue and sell shares of its own capital stock in
such amounts and on such terms and conditions, for such purposes
<PAGE> 2
and for such amount or kind of consideration now or hereafter
permitted by the General Laws of the State of Maryland and by
these Articles of Incorporation, as its Board of Directors may
determine; provided, however, that the value of the consideration
per share to be received by the Corporation upon the sale or
other disposition of any shares of its capital stock shall not be
less than the net asset value per share of such capital stock
outstanding at the time of such event.
(4) To redeem, purchase or otherwise acquire, hold, dispose
of, resell, transfer, reissue or cancel (all without the vote or
consent of the stockholders of the Corporation) shares of its
capital stock, in any manner and to the extent now or hereafter
permitted by the General Laws of the State of Maryland and by
these Articles of Incorporation.
(5) To do any and all such further acts or things and to
exercise any and all such further powers or rights as may be
necessary, incidental, relative, conducive, appropriate or desir-
able for the accomplishment, carrying out or attainment of all or
any of the foregoing purposes or objects.
The Corporation shall be authorized to exercise and enjoy
all of the powers, rights and privileges granted to or conferred
upon, corporations by the General Laws of the State of Maryland
now or hereafter in force, and the enumeration of the foregoing
shall not be deemed to exclude any powers, rights or privileges
so granted or conferred.
2
<PAGE> 3
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Cor-
poration in the State of Maryland is c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202. The
name of the resident agent of the Corporation in this state is
The Corporation Trust Incorporated, a corporation of this State,
and the post office address of the resident agent is 32 South
Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
(1) The total number of shares of capital stock which the
Corporation shall have authority to issue is Two Hundred Million
(200,000,000) shares, of the par value of Ten Cents ($.10) per
share and of the aggregate par value of Twenty Million Dollars
($20,000,000). The capital stock initially is classified into two
classes, consisting of One Hundred Million (100,000,000) shares
of Class A Common Stock and One Hundred Million (100,000,000)
shares of Class B Common Stock.
(2) The Board of Directors may classify and reclassify any
unissued shares of capital stock into one or more additional or
other classes or series as may be established from time to time
by setting or changing in any one or more respects the designa-
tions, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of such shares of stock and
3
<PAGE> 4
pursuant to such classification or reclassification to increase
or decrease the number of authorized shares of any existing class
or series.
(3) The Board of Directors may redesignate a class of
shares of capital stock whether or not shares of such class are
issued and outstanding, provided that such redesignation does not
affect the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock.
(4) Unless otherwise expressly provided in the charter of
the corporation, including any Articles Supplementary creating
any class or series of capital stock, the holders of each class
or series of capital stock shall be entitled to dividends and
distributions in such amounts and at such times as may be deter-
mined by the Board of Directors, and the dividends and distri-
butions paid with respect to the various classes or series of
capital stock may vary among such classes and series. Dividends
on a class or series may be declared or paid only out of the net
assets of that class or series. Expenses related to the
distribution of, and other identified expenses that should
properly be allocated to, the shares of a particular class or
series of capital stock may be charged to and borne solely by
such class or series and the bearing of expenses solely by a
class or series of capital stock may be appropriately reflected
(in a manner determined by the Board of Directors) and cause
differences in the net asset value attributable to, and the
4
<PAGE> 5
dividend, redemption and liquidation rights of, the shares of
each class or series of capital stock.
(5) Unless otherwise expressly provided in the charter of
the Corporation, including any Articles Supplementary creating
any class or series of capital stock, on each matter submitted to
a vote of stockholders, each holder of a share of capital stock
of the Corporation shall be entitled to one vote for each share
standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of
all classes and series shall vote together as a single class;
provided, however, that (a) as to any matter with respect to
which a separate vote of any class or series is required by the
Investment Company Act of 1940, as amended, and in effect from
time to time, or any rules, regulations or orders issued there-
under, or by the Maryland General Corporation Law, such require-
ment as to a separate vote by that class or series shall apply in
lieu of a general vote of all classes and series as described
above, (b) in the event that the separate vote requirements re-
ferred to in (a) above apply with respect to one or more classes
or series, then, subject to paragraph (c) below, the shares of
all other classes and series not entitled to a separate class
vote shall vote as a single class, and (c) as to any matter which
does not affect the interest of a particular class or series,
such class or series shall not be entitled to any vote and only
the holders of shares of the one or more affected classes and
series shall be entitled to vote.
5
<PAGE> 6
(6) Notwithstanding any provision of the Maryland General
Corporation Law requiring a greater proportion than a majority of
the votes of all classes or series of capital stock of the Corpo-
ration (or of any class or series entitled to vote thereon as a
separate class or series) to take or authorize any action, the
Corporation is hereby authorized (subject to the requirements of
the Investment Company Act of 1940, as amended, and in effect
from time to time, and any rules, regulations and orders issued
thereunder) to take such action upon the concurrence of a
majority of the votes entitled to be cast by holders of capital
stock of the Corporation (or a majority of the votes entitled to
be cast by holders of a class or series entitled to vote thereon
as a separate class or series).
(7) Unless otherwise expressly provided in the charter of
the corporation, including any Articles Supplementary creating
any class or series of capital stock, in the event of any liqui-
dation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of each class or series of
capital stock of the Corporation shall be entitled, after
payment or provision for payment of the debts and other liabili-
ties of the Corporation, to share ratably in the remaining net
assets of the Corporation applicable to that class or series.
(8) Any fractional shares shall carry proportionately all
the rights of a whole share, excepting any right to receive a
certificate evidencing such fractional share, but including,
6
<PAGE> 7
without limitation, the right to vote and the right to receive
dividends.
(9) The presence in person or by proxy of the holders of
shares entitled to cast one-third of the votes entitled to be
cast shall constitute a quorum at any meeting of stockholders,
except with respect to any matter which requires approval by a
separate vote of one or more classes of stock, in which case the
presence in person or by proxy of the holders of shares entitled
to cast one-third of the votes entitled to be cast by each class
entitled to vote as a separate class shall constitute a quorum.
(10) All persons who shall acquire stock in the Corporation
shall acquire the same subject to the provisions of the charter
and By-Laws of the Corporation. As used in the charter-of the
Corporation, the terms "charter" and "Articles of Incorporation"
shall mean and include the Articles of Incorporation of the Cor-
poration as amended, supplemented and restated from time to time
by Articles of Amendment, Articles Supplementary, Articles of
Restatement or otherwise.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE DIRECTORS
AND STOCKHOLDERS
(1) The number of directors of the Corporation shall be
three (3), which number may be increased pursuant to the By-Laws
of the Corporation but shall never be less than three (3). The
names of the directors who shall act until their successors are
duly elected and qualify are:
7
<PAGE> 8
Philip L. Kirstein
Michael J. Hennewinkel
Jerry Weiss
(2) The Board of Directors of the Corporation is hereby
empowered to authorize the issuance from time to time of shares
of capital stock, whether now or hereafter authorized, for such
consideration as the Board of Directors may deem advisable, sub-
ject to such limitations as may be set forth in these Articles of
incorporation or in the By-Laws of the Corporation or in the
General Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such
holder, have any right to purchase or subscribe for any shares of
the capital stock of the Corporation or any other security of the
Corporation which it may issue or sell (whether out of the number
of shares authorized by these Articles of Incorporation, or out
of any shares of the capital stock of the corporation acquired by
it after the issue thereof, or otherwise) other than such right,
if any, as the Board of Directors, in its discretion, may deter-
mine.
(4) Each director and each officer of the Corporation shall
be indemnified by the Corporation to the full extent permitted by
the General Laws of the State of Maryland, subject to the re-
quirements of the Investment Company Act of 1940, as amended. No
amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided
to directors and officers under this provision in connection with
8
<PAGE> 9
any act or omission that occurred prior to such amendment or
repeal.
(5) To the fullest extent permitted by the General Laws of
the State of Maryland, subject to the requirements of the Invest-
ment Company Act of 1940, as amended, no director or officer of
the Corporation shall be personally liable to the Corporation or
its security holders for money damages. No amendment of these
Articles ofIncorporation or repeal of any provision hereof shall
limit or eliminate the benefits provided to directors and
officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation may make,
alter or repeal from time to time any of the By-Laws of the Cor-
poration.
ARTICLE VI
REDEMPTION
Each holder of shares of capital stock of the Corporation
shall be entitled to require the Corporation to redeem all or any
part of the shares of capital stock of the Corporation standing
in the name of such holder on the books of the Corporation, and
all shares of capital stock issued by the Corporation shall be
subject to redemption by the Corporation, at the redemption price
of such shares as in effect from time to time as may be deter-
mined by the Board of Directors of the Corporation in accordance
with the provisions hereof, subject to the right of the Board of
Directors of the Corporation to suspend the right of redemption
9
<PAGE> 10
of shares of capital stock of the Corporation or Postpone the
date of payment of such redemption price in accordance with pro-
visions of applicable law. The redemption price of shares of
capital stock of the Corporation shall be the net asset value
thereof as determined by the Board of Directors of the Corpo-
ration from time to time in accordance with the provisions of
applicable law, less such redemption fee or other charge, if any,
as may be fixed by resolution of the Board of Directors of the
Corporation. Payment of the redemption price shall be made in
cash by the Corporation at such time and in such manner as may be
determined from time to time by the Board of Directors of the
Corporation.
ARTICLE VII
DETERMINATION BINDING
Any determination made in good faith, so far as accounting
matters are involved, in accordance with accepted accounting
practice by or pursuant to the direction of the Board of Direc-
tors, as to the amount of assets, obligations or liabilities of
the Corporation, as to the amount of net income of the Corpo-
ration from dividends and interest for any period or amounts at
any time legally available for the payment of dividends, as to
the amount of any reserves or charges set up and the propriety
thereof, as to the time of or purpose for creating reserves or as
to the use, alteration or cancellation of any reserves or charges
(whether or not any obligation or liability for which such re-
serves or charges shall have been created, shall have been paid
10
<PAGE> 11
or discharged or shall be then or thereafter required to be paid
or discharged), as to the price of any security owned by the
Corporation or as to any other matters relating to the issuance,
sale, redemption or other acquisition or disposition of securi-
ties or shares of capital stock of the Corporation, and any rea-
sonable determination made in good faith by the Board of Direc-
tors as to whether any transaction constitutes a purchase of
securities on "margin," a sale of securities "short," or an
underwriting or the sale of, or a participation in any underwrit-
ing or selling group in connection with the public distribution
of, any securities, shall be final and conclusive, and shall be
binding upon the Corporation and all holders of its capital
stock, past, present and future, and shares of the capital stock
of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such
determinations shall be binding as aforesaid. No provision of
these Articles of Incorporation shall be effective to (a) require
a waiver of compliance with any provision of the Securities Act
of 1933, as amended, or the Investment Company Act of 1940, as
amended, or of any valid rule, regulation or order of the Securi-
ties and Exchange commission thereunder or (b) protect or purport
to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad
11
<PAGE> 12
faith, gross negligence or reckless disregard of the duties in-
volved in the conduct of his office.
ARTICLE VIII
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE IX
AMENDMENT
The Corporation reserves the right to amend, alter, change
or repeal any provision contained in these Articles of Incorpora-
tion, in any manner now or hereafter prescribed by statute, in-
cluding any amendment which alters the contract rights, as ex-
pressly set forth in the charter, of any outstanding stock and
substantially adversely affects the stockholder's rights, and all
rights conferred upon stockholders herein are granted subject to
this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL
LYNCH DRAGON FUND, INC. hereby executes the foregoing Articles of
Incorporation and acknowledges the same to be his act.
Dated this 11th day of February, 1992.
/s/ Brian M. Kaplowitz
-----------------------------
Brian M. Kaplowitz
12
<PAGE> 1
EXHIBIT 1B
MERRILL LYNCH DRAGON FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
MERRILL LYNCH DRAGON FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202
(hereinafter called the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended
by adding the following provision at the end of Article IV:
(11) The Board of Directors may classify and reclassify any
issued shares of capital stock into one or more additional or
other classes or series as may be established from time to time
by setting or changing in any one or more respects the
designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock and
pursuant to such classification or reclassification to increase
or decrease the number of authorized shares of any existing class
or series; provided, however, that any such classification or
reclassification shall not substantially adversely affect the
rights of holders of such issued shares. The Board's authority
pursuant to this paragraph shall include, but not be limited to,
the power to vary among all the holders of a particular class or
series (a) the length of time shares must be held prior to
reclassification to shares of another class or series (the
"Holding Period(s)"), (b) the manner in which the time for such
Holding Period(s) is determined and (c) the class or series into
which the particular class or series is being reclassified;
provided, however, that, subject to the first sentence of this
section, with respect to holders of the Corporation's shares
issued on or after the date of the Corporation's first effective
prospectus which sets forth Holding Period(s) (the "First Holding
Period Prospectus"), the Holding Period(s), the manner in which
the time for such Holding Period(s) is determined and the class
or series into which the particular class or series is being
reclassified shall be disclosed in the Corporation's prospectus
or statement of additional information in effect at the time such
shares, which are the subject of the reclassification, were
issued; and provided, further, that, subject to the first
sentence of this section, with respect to holders of the
Corporation's Class B shares issued prior to the date of the
Corporation's First Holding Period Prospectus, the Holding Period
<PAGE> 2
shall be ten (10) years for retirement plan (as recognized by the
Internal Revenue Code of 1986, as amended from time to time)
holders of issued Class B shares purchased without a contingent
deferred sales charge (a "CDSC-Waived Retirement Plan") and shall
be the Holding Period set forth in the Corporation's First
Holding Period Prospectus, for all other holders of issued Class
B shares; Class B shares held by a CDSC-Waived Retirement Plan
shall be reclassified to Class D shares in the month following
the month in which the first Class B share of any mutual fund
advised by Merrill Lynch Asset Management, L.P., Fund Asset
Management, L.P., or their affiliates or successors, held by such
CDSC-Waived Retirement Plan has been held for the ten (10) year
Holding Period established by the Corporation's Board of
Directors for such CDSC-Waived Retirement Plan Class B
shareholder; and the Class B shares of every shareholder other
than CDSC-Waived Retirement Plans shall be reclassified to Class
D shares in the month following the month in which such shares
have been held for the Holding Period established by the
Corporation's Board of Directors for shareholders other than
CDSC-Waived Retirement Plans in the Corporation's First Holding
Period Prospectus.
SECOND: The foregoing amendment has been effected in the
manner and by the vote required by the Corporation's charter and
the laws of the State of Maryland. Pursuant to Section 2-604 of
the Maryland Corporations and Associations Code, the amendment
was advised by the Board of Directors of the Corporation and
approved by the stockholders.
THIRD: The charter of the Corporation is hereby amended by
substituting the words "Class D" in each place where the words
"Class A" appear.
FOURTH: The foregoing amendment has been effected in the
manner and by the vote required by the Corporation's charter and
the laws of the State of Maryland. The amendment is limited to a
change expressly permitted by Section 2-605(a)(4) of the Maryland
Corporations and Associations Code to be made without action by
the stockholders and was approved by a majority of the entire
Board of Directors of the Corporation. The Corporation is
registered as an open-end company under the Investment Company
Act of 1940, as amended.
FIFTH: Except as amended hereby, the Corporation's charter
shall remain in full force and effect.
SIXTH: The authorized capital stock of the Corporation has
not been increased by these Articles of Amendment.
2
<PAGE> 3
SEVENTH: These Articles of Amendment shall be effective at
the very beginning of the day on October 21, 1994.
The President acknowledges these Articles of Amendment to be
the corporate act of the Corporation and states that to the best
of his knowledge, information and belief, the matters set forth
in these Articles of Amendment with respect to the authorization
and approval of the amendment of the Corporation's charter are
true in all material respects, and that this statement is made
under the penalties for perjury.
3
<PAGE> 4
IN WITNESS WHEREOF, MERRILL LYNCH DRAGON FUND, INC. has
caused these Articles of Amendment to be signed in its name and
on its behalf by its President, a duly authorized officer of the
Corporation, and attested by its Secretary as of the 17th day of
October, 1994.
MERRILL LYNCH DRAGON FUND, INC.
/s/ Arthur Zeikel
-------------------------------
Arthur Zeikel
President
Attest:
/s/ Michael J. Hennewinkel
- -------------------------------------
Michael J. Hennewinkel, Secretary
4
<PAGE> 1
EXHIBIT 1C
MERRILL LYNCH DRAGON FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION AND CREATING TWO ADDITIONAL CLASSES
OF COMMON STOCK
MERRILL LYNCH DRAGON FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202
(hereinafter called the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation, that:
FIRST: The Corporation is registered as an open-end company
under the Investment Company Act of 1940, as amended, with
authority to issue TWO HUNDRED MILLION (200,000,000) shares of
capital stock. The Corporation has two classes of capital stock
consisting of ONE HUNDRED MILLION (100,000,000) shares of Class D
Common Stock and ONE HUNDRED MILLION (100,000,000) shares of
Class B Common Stock. All shares of all classes and series of
the Corporation's capital stock have a par value of Ten Cents
($.10) per share and an aggregate par value of TWENTY MILLION
Dollars ($20,000,000).
SECOND: The Board of Directors of the Corporation, acting
in accordance with Section 2-105(c) of the Maryland Corporations
and Associations Code, hereby increases the total number of
authorized shares of Class B Common Stock of the Corporation by
TWO HUNDRED MILLION (200,000,000) shares.
THIRD: After this increase in the number of authorized
shares of capital stock of the Corporation, the Corporation will
have authority to issue FOUR HUNDRED MILLION (400,000,000) shares
of capital stock and the capital stock will consist of ONE
HUNDRED MILLION (100,000,000) shares of Class D Common Stock and
THREE HUNDRED MILLION (300,000,000) shares of Class B Common
Stock.
FOURTH: After this increase in the number of authorized
shares of capital stock of the Corporation, all shares of all
classes and series of the Corporation's capital stock will have a
par value of Ten Cents ($.10) per share and an aggregate par
value of FORTY MILLION Dollars ($40,000,000).
FIFTH: Pursuant to authority expressly vested in the Board
of Directors of the Corporation by its charter, the Board of
Directors has reclassified ONE HUNDRED MILLION (100,000,000)
authorized and unissued shares of the Class B Common Stock of the
Corporation as Class C Common Stock of par value of Ten Cents
<PAGE> 2
($.10) per share and of the aggregate par value of TEN MILLION
Dollars ($10,000,000).
SIXTH: The preferences, designations, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of Class C
Common Stock are as follows:
The Class C Common Stock of the Corporation shall represent
the same interest in the Corporation and have identical
preferences, designations, conversion or other rights, voting
powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as the Class
B Common Stock as of the date of these Articles Supplementary,
except as otherwise set forth in the Corporation's charter and
further except that:
(i) Expenses related to the distribution of the Class C
Common Stock shall be borne solely by such class and such class
shall have exclusive voting rights with respect to matters
relating to the expenses being borne solely by such class;
(ii) Such distribution expenses borne solely by Class C
Common Stock shall be appropriately reflected (in the manner
determined by the Board of Directors) in the net asset value,
dividends, distribution and liquidation rights of the shares of
such class; and
(iii) Class C Common Stock shall not be reclassified into
Class D shares.
SEVENTH: Pursuant to authority expressly vested in the
Board of Directors of the Corporation by its charter, the Board
of Directors has reclassified ONE HUNDRED MILLION (100,000,000)
authorized and unissued shares of the Class B Common Stock of the
Corporation as Class A Common Stock of par value of Ten Cents
($.10) per share and of the aggregate par value of TEN MILLION
Dollars ($10,000,000).
EIGHTH: The preferences, designations, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of Class A
Common Stock are as follows:
The Class A Common Stock of the Corporation shall represent
the same interest in the Corporation and have identical
preferences, designations, conversion or other rights, voting
powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as the Class
B Common Stock as of the date of these Articles Supplementary,
2
<PAGE> 3
except as otherwise set forth in the Corporation's charter and
further except that:
(i) Expenses related to the distribution of the Class A
Common Stock shall be borne solely by such class and such class
shall have exclusive voting rights with respect to matters
relating to the expenses being borne solely by such class;
(ii) Such distribution expenses borne solely by Class A
Common Stock shall be appropriately reflected (in the manner
determined by the Board of Directors) in the net asset value,
dividends, distribution and liquidation rights of the shares of
such class; and
(iii) Class A Common Stock shall not be reclassified into
Class D shares.
3
<PAGE> 4
IN WITNESS WHEREOF, MERRILL LYNCH DRAGON FUND, INC. has
caused these Articles Supplementary to be signed in its name and
on its behalf by its President and attested by its Secretary on
October 17, 1994.
MERRILL LYNCH DRAGON FUND, INC.
By /s/ Arthur Zeikel
---------------------------------
Arthur Zeikel
President
Attest:
/s/ Michael J. Hennewinkel
- ---------------------------------
Michael J. Hennewinkel, Secretary
THE UNDERSIGNED, President of MERRILL LYNCH DRAGON FUND,
INC., who executed on behalf of said Corporation the foregoing
Articles Supplementary, of which this certificate is made a part,
hereby acknowledges, in the name and on behalf of said
Corporation, the foregoing Articles Supplementary to be the
corporate act of said Corporation and further certifies that, to
the best of his knowledge, information and belief, the matters
and facts set forth therein with respect to the authorization and
approval thereof are true in all material respects, and that this
statement is made under the penalties for perjury.
/s/ Arthur Zeikel
---------------------------
Arthur Zeikel
President
4
<PAGE> 1
EXHIBIT 2
BY-LAWS
OF
MERRILL LYNCH DRAGON FUND, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the
Merrill Lynch Dragon Fund, Inc. (the "Corporation") shall be in
the City of Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal
executive office of the Corporation shall be at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Section 3. Other Offices. The Corporation may have such
other offices in such places as the Board of Directors may from
time to time determine.
ARTICLE II
Meetings of Stockholders
Section 1. Annual Meeting. The Corporation shall not be
required to hold an annual meeting of its stockholders in any
year in which the election of directors is not required to be
acted upon under the Investment Company Act of 1940. In the
event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors by the Investment
Company Act of 1940, as amended, such meeting shall be held no
<PAGE> 2
later than 120 days after the occurrance of the event requiring
the meeting. Any stockholders' meeting held in accordance with
this Section shall for all purposes constitute the annual meeting
of stockholders for the year in which the meeting is held.
Section 2. Special Meetings. Special meetings of the
stockholders, unless otherwise provided by law, may be called for
any purpose or purposes by a majority of the Board of Directors,
the President, or on the written request of the holders of at
least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with
Section 2-502(b) or (c) of the Maryland General Corporation Law.
Section 3. Place of Meetings. Meetings of the stockholders
shall be held at such place within the United States as the Board
of Directors may from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of
the place, date and time of the holding of each stockholders'
meeting and, if the meeting is a special meeting, the purpose or
purposes of the special meeting, shall be given personally or by
mail, not less than ten nor more than ninety days before the date
of such meeting, to each stockholder entitled to vote at such
meeting and to each other stockholder entitled to notice of the
meeting. Notice by mail shall be deemed to be duly given when
deposited in the United States mail addressed to the stockholder
at his address as it appears on the records of the Corporation,
with postage thereon prepaid.
2
<PAGE> 3
Notice of any meeting of stockholders shall be deemed waived
by any stockholder who shall attend such meeting in person or by
proxy, or who shall, either before or after the meeting, submit a
signed waiver of notice which is filed with the records of the
meeting. When a meeting is adjourned to another time and place,
unless the Board of Directors, after the adjournment, shall fix a
new record date for an adjourned meeting, or the adjournment is
for more than one hundred and twenty days after the original
record date, notice of such adjourned meeting need not be given
if the time and place to which the meeting shall be adjourned
were announced at the meeting at which the adjournment is taken.
Section 5. Quorum. At all meetings of the stockholders,
the holders of shares of stock of the Corporation entitled to
cast one-third of the votes entitled to be cast, present in
person or by proxy, shall constitute a quorum for the transaction
of any business, except with respect to any matter which requires
approval by a separate vote of one or more classes of stock, in
which case the presence in person or by proxy of the holders of
shares entitled to cast one-third of the votes entitled to be
cast by each class entitled to vote as a separate class shall
constitute a quorum. In the absence of a quorum no business may
be transacted, except that the holders of a majority of the
shares of stock present in person or by proxy and entitled to
vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by
3
<PAGE> 4
these By-Laws, until the holders of the requisite amount of
shares of stock shall be so present. At any such adjourned
meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by
proxy, of holders of the number of shares of stock of the Corpo-
ration in excess of a majority thereof which may be required by
the laws of the State of Maryland, the Investment Company Act of
1940, as amended, or other applicable statute, the Articles of
Incorporation, or these By-Laws, for action upon any given matter
shall not prevent action at such meeting upon any other matter or
matters which may properly come before the meeting, if there
shall be present thereat, in person or by proxy, holders of the
number of shares of stock of the Corporation required for action
in respect of such other matter or matters.
Section 6. Organization. At each meeting of the stock-
holders, the Chairman of the Board (if one has been designated by
the Board), or in his absence or inability to act, the President,
or in the absence or inability to act of the Chairman of the
Board and the President, a Vice President, shall act as chairman
of the meeting. The Secretary, or in his absence or inability to
act, any person appointed by the chairman of the meeting, shall
act as secretary of the meeting and keep the minutes thereof.
4
<PAGE> 5
Section 7. Order of Business. The order of business at all
meetings of the stockholders shall be as determined by the
chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute
or the Articles of Incorporation, each holder of record of shares
of stock of the Corporation having voting power shall be entitled
at each meeting of the stockholders to one vote for every share
of such stock standing in his name on the record of stockholders
of the Corporation as of the record date determined pursuant to
Section 9 of this Article or if such record date shall not have
been so fixed, then at the later of (i) the close of business on
the day on which notice of the meeting is mailed or (ii) the
thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of
stockholders may authorize another person or persons to act for
him by a proxy signed by such stockholder or his
attorney-in-fact. No proxy shall be valid after the expiration
of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of
the stockholder executing it, except in those cases where such
proxy states that it is irrevocable and where an irrevocable
proxy is permitted by law. Except as otherwise provided by
statute, the Articles of Incorporation or these By-Laws, any
corporate action to be taken by vote of the stockholders (other
than the election of directors, which shall be by plurality vote)
5
<PAGE> 6
may be authorized by a majority of the total votes cast at a
meeting of stockholders by the holders of shares present in
person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the
election of directors, which shall be by written ballot, then
unless required by statute or these By-Laws, or determined by the
chairman of the meeting to be advisable, any such vote need not
be by ballot. On a vote by ballot, each ballot shall be signed
by the stockholder voting, or by his proxy, if there be such
proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors
may set a record date for the purpose of determining stockholders
entitled to vote at any meeting of the stockholders. The record
date, which may not be prior to the close of business on the day
the record date is fixed, shall be not more than ninety nor less
than ten days before the date of the meeting of the stockholders.
All persons who were holders of record of shares at such time,
and not others, shall be entitled to vote at such meeting and any
adjournment thereof.
Section 10. Inspectors. The Board may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at
such meeting or any adjournment thereof. If the inspectors shall
not be so appointed or if any of them shall fail to appear or
act, the chairman of the meeting may appoint inspectors. Each
6
<PAGE> 7
inspector, before entering upon the discharge of his duties, may
be required to take and sign an oath to execute faithfully the
duties of inspector at such meeting with strict impartiality and
according to the best of his ability. The inspectors may be
empowered to determine the number of shares outstanding and the
voting powers of each, the number of shares represented at the
meeting, the existence of a quorum, the validity and effect of
proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with
the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders.
On request of the chairman of the meeting or any stockholder
entitled to vote thereat, the inspectors shall make a report in
writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as
inspector of an election of directors. Inspectors need not be
stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting.
Except as otherwise provided by statute or the Articles of
Incorporation, any action required to be taken at any meeting of
stockholders, or any action which may be taken at any meeting of
such stockholders, may be taken without a meeting, without prior
notice and without a vote, if the following are filed with the
7
<PAGE> 8
records of stockholders meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder
entitled to vote on the matter and (ii) a written waiver of any
right to dissent signed by each stockholder entitled to notice of
the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise provided in
the Articles of Incorporation, the business and affairs of the
Corporation shall be managed under the direction of the Board of
Directors. All powers of the Corporation may be exercised by or
under authority of the Board of Directors except as conferred on
or reserved to the stockholders by law or by the Articles of
Incorporation or these By-Laws.
Section 2. Number of Directors. The number of directors
shall be fixed from time to time by resolution of the Board of
Directors adopted by a majority of the entire Board of Directors;
provided, however, that the number of directors shall in no event
be less than one nor more than fifteen. Any vacancy created by
an increase in Directors may be filled in accordance with Section
6 of this Article III. No reduction in the number of directors
shall have the effect of removing any director from office prior
to the expiration of his term unless such director is specifi-
8
<PAGE> 9
cally removed pursuant to Section 5 of this Article III at the
time of such decrease. Directors need not be stockholders.
Section 3. Election and Term of Directors. Directors shall
be elected annually at a meeting of stockholders held for that
purpose; provided, however, that if no meeting of the
stockholders of the corporation is required to be held in a
particular year pursuant to Section 1 of Article II of these
By-Laws, directors shall be elected at the next meeting held.
The term of office of each director shall be from the time-of his
election and qualification unt 1 the election of directors next
succeeding his election and until his successor shall have been
elected and shall have qualified, or until his death, or until
he shall have resigned, or have been removed as hereinafter
provided in these By-Laws, or as otherwise provided by statute or
the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may
resign at any time by giving written notice of his resignation to
the Board or the Chairman of the Board or the President or the
Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the
Corporation may be removed by the stockholders by a vote of a
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majority of the votes entitled to be cast for the election of
directors.
Section 6. Vacancies. Any vacancies in the Board, whether
arising from death, resignation, removal, an increase in the
number of directors or any other cause, may be filled by a vote
of the majority of the Board of Directors then in office even
though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors,
if after the filling of said vacancy or vacancies, less than
two-thirds of the directors then holding office shall have been
elected by the stockholders of the Corporation. In the event
that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a
special meeting of the stockholders shall be held as promptly as
possible and in any event within sixty days, for the purpose of
filling said vacancy or vacancies.
Section 7. Place of Meetings. Meetings of the Board may be
held at such place as the Board may from time to time determine
or as shall be specified in the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board
may be held without notice at such time and place as may be
determined by the Board of Directors.
Section 9. Special Meetings. Special meetings of the Board
may be called by two or more directors of the Corporation or by
the Chairman of the Board or the President.
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Section 10. Telephone Meetings. Members of the Board of
Directors or of any committee thereof may participate in a
meeting by means of a conference telephone or similar communica-
tions equipment if all persons participating in the meeting can
hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in
a meeting by these means constitutes presence in person at the
meeting.
Section 11. Notice of Special Meetings. Notice of each
special meeting of the Board shall be given by the Secretary as
hereinafter provided, in which notice shall be stated the time
and place of the meeting. Notice of each such meeting shall be
delivered to each director, either personally or by telephone or
any standard form of telecommunication, at least twenty-four
hours before the time at which such meeting is to be held, or by
first-class mail, postage prepaid, addressed to him at his resi-
dence or usual place of business, at least three days before the
day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any
special meeting need not be given to any director who shall,
either before or after the meeting, sign a written waiver of
notice which is filed with the records of the meeting or who
shall attend such meeting. Except as otherwise specifically
required by these By-Laws, a notice or waiver or notice of any
meeting need not state the purposes of such meeting.
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<PAGE> 12
Section 13. Quorum and Voting. One-third, but not less
than two, of the members of the entire Board shall be present in
person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and
except as otherwise expressly required by statute, the Articles
of Incorporation, these By-Laws, the Investment Company Act of
1940, as amended, or other applicable statute, the act of a
majority of the directors present at any meeting at which a
quorum is present shall be the act of the Board. In the absence
of a quorum at any meeting of the Board, a majority of the
directors present thereat may adjourn such meeting to another
time and place until a quorum shall be present thereat. Notice
of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the
adjournment and, unless such time and place were announced at the
meeting at which the adjournment was taken, to the other direc-
tors. At any adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at
the meeting as originally called.
Section 14. Organization. The Board may, by resolution
adopted by a majority of the entire Board, designate a Chairman
of the Board, who shall preside at each meeting of the Board. In
the absence or inability of the Chairman of the Board to preside
at a meeting, the President or, in his absence or inability to
act, another director chosen by a majority of the directors
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<PAGE> 13
present, shall act as chairman of the meeting and preside
thereat. The Secretary (or, in his absence or inability to act,
any person appointed by the Chairman) shall act as secretary of
the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a
Meeting. Subject to the provisions of the Investment Company Act
of 1940, as amended, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting if all members of the
Board or committee, as the case may be, consent thereto in
writing, and the writings or writing are filed with the minutes
of the proceedings of the Board or committee.
Section 16. Compensation. Directors may receive
compensation for services to the Corporation in their capacities
as directors or otherwise in such manner and in such amounts as
may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of
the Board of Directors to direct that the purchase, sale,
retention and disposal of portfolio securities and the other
investment practices of the Corporation are at all times consis-
tent with the investment policies and restrictions with respect
to securities investments and otherwise of the Corporation, as
recited in the Prospectus of the Corporation included in the
Registration Statement of the Corporation, as recited in the
current Prospectus and Statement of Additional Information of the
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<PAGE> 14
Corporation, as filed from time to time with the Securities and
Exchange Commission and as required by the Investment Company Act
of 1940, as amended. The Board however, may delegate the duty of
management of the assets and the administration of its day to day
operations to an individual or corporate management company
and/or investment adviser pursuant to a written contract or
contracts which have obtained the requisite approvals, including
the requisite approvals of renewals thereof, of the Board of
Directors and/or the stockholders of the Corporation in accor-
dance with the provisions of the Investment Company Act of 1940,
as amended.
ARTICLE IV
Committees
Section 1. Executive Committee. The Board may, by
resolution adopted by a majority of the entire board, designate
an Executive Committee consisting of two or more of the directors
of the corporation, which committee shall have and may exercise
all the powers and authority of the Board with respect to all
matters other than:
(a) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Articles
of Incorporation;
(b) the filling of vacancies on the Board of Directors;
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<PAGE> 15
(c) the fixing of compensation of the directors for serving
on the Board or on any committee of the Board, including the
Executive Committee;
(d) the approval or termination of any contract with an
investment adviser or principal underwriter, as such terms are
defined in the Investment Company Act of 1940, as amended, or the
taking of any other action required to be taken by the Board of
Directors by the Investment Company Act of 1940, as amended;
(e) the amendment or repeal of these By-Laws or the
adoption of new By-Laws;
(f) the amendment or repeal of any resolution of the Board
which by its terms may be amended or repealed only by the Board;
(g) the declaration of dividends and the issuance of
capital stock of the Corporation; and
(h) the approval of any merger or share exchange which does
not require stockholder approval.
The Executive Committee shall keep written minutes of its
proceedings and shall report such minutes to the Board. All such
proceedings shall be subject to revision or alteration by the
Board; provided, however, that third parties shall not be preju-
diced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of
Directors may from time to time, by resolution adopted by a
majority of the whole Board, designate one or more other com-
mittees of the Board, each such committee to consist of two or
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<PAGE> 16
more directors and to have such powers and duties as the Board of
Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of
the members of any committee shall be present in person at any
meeting of such committee in order to constitute a quorum for the
transaction of business at such meeting, and the act of a
majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or
any two members of any committee may fix the time and place of
its meetings unless the Board shall otherwise provide. In the
absence or disqualification of any member of any committee, the
member or members thereof present at any meeting and not dis-
qualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent
or disqualified member. The Board shall have the power at any
time to change the membership of any committee, to fill all
vacancies, to designate alternate members to replace any absent
or disqualified member, or to dissolve any such committee.
Nothing herein shall be deemed to prevent the Board from
appointing one or more committees consisting in whole or in part
of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any
authority or power of the Board in the management of the business
or affairs of the Corporation.
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ARTICLE V
Officers, Agents and Employees
Section 1. Number of Qualifications. The officers of the
Corporation shall be a President, a Secretary and a Treasurer,
each of whom shall be elected by the Board of Directors. The
Board of Directors may elect or appoint one or more Vice Presi-
dents and may also appoint such other officers, agents and
employees as it may deem necessary or proper. Any two or more
offices may be held by the same person, except the offices of
President and Vice President, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity.
Such officers shall be elected by the Board of Directors each
year at a meeting of the Board of Directors, each to hold office
for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he
shall have resigned, or have been removed, as hereinafter
provided in these By-Laws. The Board may from time to time
elect, or delegate to the President the power to appoint, such
officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries)
and such agents, as may be necessary or desirable for the busi-
ness of the Corporation. Such officers and agents shall have
such duties and shall hold their offices for such terms as may be
prescribed by the Board or by the appointing authority.
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<PAGE> 18
Section 2. Resignations. Any officer of the Corporation
may resign at any time by giving written notice of resignation to
the Board, the Chairman of the Board, President or the Secretary.
Any such resignation shall take effect at the time specified
therein or, if the time when it shall become effective shall not
be specified therein, immediately upon its receipt; and, unless
otherwise specified therein, the acceptance of such resignation
shall be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any
officer, agent or employee of the Corporation may be removed by
the Board of Directors with or without cause at any time, and the
Board may delegate such power of removal as to agents and
employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract
rights, if any, but the appointment of any person as an officer,
agent or employee of the Corporation shall not of itself create
contract rights.
Section 4. Vacancies. A vacancy in any office, whether
arising from death, resignation, removal or any other cause, may
be filled for the unexpired portion of the term of the office
which shall be vacant, in the manner prescribed in these By-Laws
for the regular election or appointment to such office.
Section 5. Compensation. The compensation of the officers
of the Corporation shall be fixed by the Board of Directors, but
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<PAGE> 19
this power may be delegated to any officer in respect of other
officers under his control.
Section 6. Bonds or Other Security. If required by the
Board, any officer, agent or employee of the Corporation shall
give a bond or other security for the faithful performance of his
duties, in such amount and with such surety or sureties as the
Board may require.
Section 7. President. The President shall be the chief
executive officer of the Corporation. In the absence of the
Chairman of the Board (or if there be none), he shall preside at
all meetings of the stockholders and of the Board Directors. He
shall have, subject to the control of the Board of Directors,
general charge of the business and affairs of the Corporation.
He may employ and discharge employees and agents of the
corporation, except such as shall be appointed by the Board, and
he may delegate these powers.
Section 8. Vice President. Each Vice President shall have
such powers and perform such duties as the Board of Directors or
the President may from time to time prescribe.
Section 9. Treasurer. The Treasurer shall
(a) have charge and custody of, and be responsible for, all
the funds and securities of the Corporation, except those which
the Corporation has placed in the custody of a bank or trust
company or member of a national securities exchange (as that term
is defined in the Securities Exchange Act of 1934, as amended)
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<PAGE> 20
pursuant to a written agreement designating such bank or trust
company or member of a national securities exchange as custodian
of the property of the Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) cause all moneys and other valuable to be deposited to
the credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable,
to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board,
taking proper vouchers therefor; and
(f) in general, perform all the duties incident to the
office of Treasurer and such other duties as from time to time
may be assigned to him by the Board or the President.
Section 10. Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided
for the purpose, the minutes of all meetings of the Board, the
committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock
certificates of the Corporation (unless the seal of the
Corporation on such certificates shall be a facsimile, as
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<PAGE> 21
hereinafter provided) and affix and attest the seal to all other
documents to be executed on behalf of the Corporation under its
seal;
(d) see that the books, reports, statements, certificates
and other documents and records required by law to be kept and
filed are properly kept and filed; and
(e) in general, perform all the duties incident to the
office of Secretary and such other duties as from time to time
may be assigned to him by the Board or the President.
Section 11. Delegation of Duties. In case of the absence
of any officer of the Corporation, or for any other reason that
the Board may deem sufficient, the Board may confer for the time
being the powers or duties, or any of them, of such officer upon
any other officer or upon any director.
ARTICLE VI
Indemnification
Each officer and director of the Corporation shall be
indemnified by the Corporation to the full extent permitted under
the Maryland General Corporation Law, except that such indemnity
shall not protect any such person against any liability to the
Corporation or any stockholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his office. Absent a court determination that an
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<PAGE> 22
officer or director seeking indemnification was not liable on the
merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office, the decision by the Corporation to
indemnify such person must be based upon the reasonable
determination of independent legal counsel or the vote of a
majority of a quorum of the directors who are neither "interested
persons," as defined in Section 2(a)(19) of the Investment
Company Act of 1940, as amended, nor parties to the proceeding
("non-party independent directors"), after review of the facts,
that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office.
Each officer and director of the Corporation claiming
indemnification within the scope of this Article VI shall be
entitled to advances from the Corporation for payment of the
reasonable expenses incurred by him in connection with
proceedings to which he is a party in the manner and to the full
extent permitted under the Maryland General Corporation Law
without a preliminary determination as to his or her ultimate
entitlement to indemnification (except as set forth below);
provided, however, that the person seeking indemnification shall
provide to the Corporation a written affirmation of his good
faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met and a written
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<PAGE> 23
undertaking to repay any such advance, if it should ultimately be
determined that the standard of conduct has not been met, and
provided further that at least one of the following additional
conditions is met: (a) the person seeking indemnification shall
provide a security in form and amount acceptable to the Corpo-
ration for his undertaking; (b) the Corporation is insured
against losses arising by reason of the advance; (c) a majority
of a quorum of non-party independent directors, or independent
legal counsel in a written opinion, shall determine, based on a
review of facts readily available to the Corporation at the time
the advance is proposed to be made, that there is reason to
believe that the person seeking indemnification will ultimately
be found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an
officer or director protecting such person to the full extent
permitted under the General Laws of the State of Maryland, from
liability arising from his activities as officer or director of
the Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation
that protects or purports to protect such person from liability
to the Corporation or to its stockholders to which such officer
or director would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
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<PAGE> 24
The Corporation may indemnify, make advances or purchase
insurance to the extent provided in this Article VI on behalf of
an employee or agent who is not an officer or director of the
Corporation.
ARTICLE VII
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon request to have a certificate
or certificates, in such form as shall be approved by the Board,
representing the number of shares of stock of the Corporation
owned by him, provided, however, that certificates for fractional
shares will not be delivered in any case. The certificates
representing shares of stock shall be signed by or in the name of
the Corporation by the Chairman, President or a Vice President
and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer and sealed with the seal of the
Corporation. Any or all of the signatures or the seal on the
certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate
shall be issued, it may be issued by the Corporation with the
same effect as if such officer, transfer agent or registrar were
still in office at the date of issue.
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Section 2. Books of Account and Record of Stockholders.
There shall be kept at the principal executive office of the
Corporation correct and complete books and records of account of
all the business and transactions of the Corporation. There
shall be made available upon request of any stockholder, in
accordance with Maryland law, a record containing the number of
shares of stock issued during a specified period not to exceed
twelve months and the consideration received by the Corporation
for each such share.
Section 3. Transfers of Shares. Transfers of shares of
stock of the Corporation shall be made on the stock records of
the Corporation only by the registered holder thereof, or by his
attorney thereunto authorized by power of attorney duly executed
and filed with the Secretary or with a transfer agent or transfer
clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a
duly executed stock transfer power and the payment of all taxes
thereon. Except as otherwise provided by law, the Corporation
shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all
purposes, including, without limitation, the rights to receive
dividends or other distributions, and to vote as such owner, and
the Corporation shall not be bound to recognize any equitable or
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<PAGE> 26
legal claim to or interest in any such share or shares on the
part of any other person.
Section 4. Regulations. The Board may make such additional
rules and regulations, not inconsistent with these By-Laws, as it
may deem expedient concerning the issue, transfer and
registration of certificates for shares of stock of the
Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer agents or one or more
transfer clerks and one or more registrars and may require all
certificates for shares of stock to bear the signature or
signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The
holder of any certificates representing shares of stock of the
Corporation shall immediately notify the Corporation of any loss,
destruction or mutilation of such certificate, and the
Corporation may issue a new certificate of stock in the place of
any certificate theretofore issued by it which the owner thereof
shall allege to have been lost or destroyed or which shall have
been mutilated, and the Board may, in its discretion, require
such owner or his legal representatives to give to the
Corporation a bond in such sum, limited or unlimited, and in such
form and with such surety or sureties, as the Board in its
absolute discretion shall determine, to indemnify the Corporation
against any claim that may be made against it on account of the
alleged loss or destruction of any such certificate, or issuance
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<PAGE> 27
of a new certificate. Anything herein to the contrary
notwithstanding, the Board, in its absolute discretion, may
refuse to issue any such new certificate, except pursuant to
legal proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and
Distributions. The Board may fix, in advance, a date not more
than ninety days preceding the date fixed for the payment of any
dividend or the making of any distribution or the allotment of
rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising
out of any change, conversion or exchange of common stock or
other securities, as the record date for the determination of the
stockholders entitled to receive any such dividend, distribution,
allotment, rights or interests, and in such case only the
stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or
interests.
Section 7. Information to Stockholders and Others. Any
stockholder of the Corporation or his agent may inspect and copy
during usual business hours the Corporation's By-Laws, minutes of
the proceedings of its stockholders, annual statements of its
affairs, and voting trust agreements on file at its principal
office.
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ARTICLE VIII
Seal
The seal of the Corporation shall be circular in form and
shall bear, in addition to any other emblem or device approved by
the Board of Directors, the name of the Corporation, the year of
its incorporation and the words "Corporate Seal" and "Maryland."
Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of
the Corporation shall end on the day of .
ARTICLE X
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation
shall be deposited with such banks or other depositories as the
Board of Directors of the Corporation may from time to time
determine.
Section 2. Custodians. All securities and other
investments shall be deposited in the safe keeping of such banks
or other companies as the Board of Directors of the Corporation
may from time to time determine. Every arrangement entered into
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<PAGE> 29
with any bank or other company for the safe keeping of the
securities and investments of the Corporation shall contain
provisions complying with the Investment Company Act of 1940, as
amended, and the general rules and regulations thereunder.
ARTICLE XI
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks, notes,
drafts, acceptances, bills of exchange and other orders or
obligations for the payment of money shall be signed by such
officer or officers or person or persons as the Board of
Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Stock
certificates, bonds or other securities at any time owned by the
Corporation may be held on behalf of the Corporation or sold,
transferred or otherwise disposed of subject to any limits
imposed by these By-Laws and pursuant to authorization by the
Board and, when so authorized to be held on behalf of the
Corporation or sold, transferred or otherwise disposed of, may be
transferred from the name of the Corporation by the signature of
the President or a Vice President or the Treasurer or pursuant to
any procedure approved by the Board of Directors, subject to
applicable law.
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ARTICLE XII
Independent Public Accountants
The firm of independent public accountants which shall sign
or certify the financial statements of the Corporation which are
filed with the Securities and Exchange Commission shall be
selected annually by the Board of Directors and, if required by
the provisions of the Investment Company Act of 1940, as amended,
ratified by the stockholders.
ARTICLE XIII
Annual Statement
The books of account of the Corporation shall be examined by
an independent firm of public accountants at the close of each
annual period of the Corporation and at such other times as-may
be directed by the Board. A report to the stockholders based
upon each such examination shall be mailed to each stockholder of
the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the
same appears on the books of the Corporation. Such annual
statement shall also be available at the annual meeting of
stockholders, if any, and, within 20 days after the meeting (or,
in the absence of an annual meeting, within 20 days after the end
of the month of following the end of the fiscal year), be placed
on file at the Corporation's principal office. Each such report
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<PAGE> 31
shall show the assets and liabilities of the Corporation as of
the close of the annual or quarterly period covered by the report
and the securities in which the funds of the Corporation were
then invested. Such report shall also show the Corporation's
income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the annual or
quarterly period covered by the report and any other information
required by the Investment Company Act of 1940, as amended, and
shall set forth such other matters as the Board or such firm of
independent public accountants shall determine.
ARTICLE XIV
Amendments
These By-Laws or any of them may be amended, altered or
repealed by the Board of Directors. The stockholders shall have
no power to make, amend, alter or repeal By-Laws.
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<PAGE> 1
EXHIBIT 5(a)
MANAGEMENT AGREEMENT
AGREEMENT made this 14th day of April, 1992, by and between
MERRILL LYNCH DRAGON FUND, INC., a Maryland corporation
(hereinafter referred to as the "Fund"), and MERRILL LYNCH ASSET
MANAGEMENT, a Delaware corporation (hereinafter referred to as
the "Manager").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (hereinafter referred to as the "Investment
Company Act"); and
WHEREAS, the Manager is engaged principally in rendering
management and investment advisory services and is registered as
an investment adviser under the Investment Advisers Act of 1940;
and
WHEREAS, the Fund desires to retain the Manager to render
management and investment advisory services to the Fund in the
manner and on the terms hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and
investment advisory services to the Fund on the terms and
conditions hereinafter set forth;
<PAGE> 2
NOW, THEREFORE, in consideration of the promises and the
covenants hereinafter contained, the Fund and the Manager hereby
agree as follows:
ARTICLE I
Duties of the Manager
The Fund hereby employs the Manager to act as an investment
manager and investment adviser of the Fund and to furnish or
arrange for affiliates to furnish, the management and investment
advisory services described below, subject to policies of, review
by and overall control of the Board of Directors of the Fund (the
"Directors"), for the period and on the terms and conditions set
forth in this Agreement. The Manager hereby accepts such
employment and agrees during such period, at its own expense, to
render, or arrange for the rendering of, such services and to
assume the obligations herein set forth for the compensation
provided for herein. The Manager and its affiliates shall for
all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund.
(a) Management Services. The Manager shall perform (or
arrange for the performance by affiliates of) the management and
administrative services necessary for the operation of the Fund
including administering shareholder accounts and handling
shareholder relations. The Manager shall provide the Fund with
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<PAGE> 3
office space, equipment and facilities and such other services as
the Manager, subject to review by the Directors, shall from time
to time determine to be necessary or useful to perform its
obligations under this Agreement. The Manager shall also, on
behalf of the Fund, conduct relations with custodians,
depositories, transfer agents, dividend disbursing agents, other
shareholder service agents, accountants, attorneys, underwriters,
brokers and dealers, corporate fiduciaries, insurers, banks and
such other persons in any such other capacity deemed to be
necessary or desirable. The Manager shall generally monitor the
Fund's compliance with investment policies-and restrictions as
set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under
the Securities Act of 1933, as amended (the "Prospectus" and
"Statement of Additional Information", respectively). The
Manager shall make reports to the Directors of its performance of
obligations hereunder and furnish advice and recommendations with
respect to such other aspects of the business and affairs of the
Fund as it shall determine to be desirable.
(b) Investment Advisory Services. The Manager shall
provide (or arrange for affiliates to provide) the Fund with such
investment research, advice and supervision as the latter may
from time to time consider necessary for the proper supervision
of the assets of the Fund, shall furnish continuously an
investment program for the Fund and shall determine from time to
3
<PAGE> 4
time which securities shall be purchased, sold or exchanged and
what portion of the assets of the Fund shall be held in the
various securities in which the Fund invests, options, futures,
options on futures or cash, subject always to the restrictions
set forth in the Articles of Incorporation and By-Laws of the
Fund, as amended from time to time, the provisions of the
Investment Company Act and the statements relating to the Fund's
investment objectives, investment policies and investment
restrictions as the same are set forth in the Prospectus and
Statement of Additional Information. The Manager shall also make
decisions for the Fund as to the manner in which voting rights,
rights to consent to corporate action and any other rights
pertaining to the Fund's portfolio securities shall be exercised.
Should the Directors at any time, however, make any definite
determination as to investment policy and notify the Manager
thereof in writing, the Manager shall be bound by such
determination for the period, if any, specified in such notice or
until similarly notified that such determination has been
revoked. The Manager shall take, on behalf of the Fund, all
actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place
all orders for the purchase or sale of portfolio securities for
the Fund's account with brokers or dealers selected by it, and to
that end, the Manager is authorized as the agent of the Fund to
give instructions to the Custodian of the Fund as to deliveries
4
<PAGE> 5
of securities and payments of cash for the account of the Fund.
In connection with the selection of such brokers or dealers and
the placing of such orders with respect to assets of the Fund,
the Manager is directed at all times to seek to obtain execution
and price within the policy guidelines determined by the
Directors as set forth in the Prospectus and Statement of
Additional Information. Subject to this requirement and the
provisions of the Investment Company Act, the securities Exchange
Act of 1934, as amended, and other applicable provisions of law,
the Manager may select brokers or dealers with which it or the
Fund is affiliated.
ARTICLE II
Allocation of Charges and Expenses
(a) The Manager. The Manager assumes and shall pay for
maintaining the staff and personnel necessary to perform its
obligations under this Agreement, and shall at its own expense,
provide the office space, equipment and facilities which it is
obligated to provide under Article I hereof, and shall pay all
compensation of officers of the Fund and all Directors who are
affiliated persons of the Manager.
(b) The Fund. The Fund assumes and shall pay or cause to
be paid all other expenses of the Fund (except for the expenses
paid by the Distributor), including, without limitation:
redemption expenses, expenses of portfolio transactions, expenses
of registering shares under federal and state securities laws,
5
<PAGE> 6
pricing costs (including the daily calculation of net asset
value), expenses of printing shareholder reports, stock
certificates, prospectuses and statements of additional
information, Securities and Exchange commission fees, interest,
taxes, custodian and transfer agency fees, fees and actual
out-of-pocket expenses of Directors who are not affiliated
persons of the Manager, fees for legal and auditing services,
litigation expenses, costs of printing proxies and other expenses
related to shareholder meetings, and other expenses properly
payable by the Fund. It is also understood that the Fund will
reimburse the Manager for its costs in providing accounting
services to the Fund. The Distributor will pay certain of the
expenses of the Fund incurred in connection with the continuous
offering of Fund shares.
ARTICLE III
Compensation of the Manager
(a) Investment Management Fee. For the services rendered,
the facilities furnished and expenses assumed by the Manager, the
Fund shall pay to the Manager at the end of each calendar month a
fee based upon the average daily value of the net assets of the
Fund, as determined and computed in accordance with the descrip-
tion of the determination of net asset value contained in the
Prospectus and Statement of Additional Information, at the annual
rate of 1.0% of the average daily net assets of the Fund,
commencing on the day following effectiveness hereof. If this
6
<PAGE> 7
Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calcula-
tion of the fee as set forth above. Subject to the provisions of
subsection (b) hereof, payment of the Manager's compensation for
the preceding month shall be made as promptly as possible after
completion of the computations contemplated by subsection (b)
hereof. During any period when the determination of net asset
value is suspended by the Directors, the net asset value of a
share as of the last business day prior to such suspension shall
for this purpose be deemed to be the net asset value at the close
of each succeeding business day until it is again determined.
(b) Expense-Limitations. In the event the operating
expenses of the Fund, including amounts payable to the Manager
pursuant to subsection (a) hereof, for any fiscal year ending on
a date on which this Agreement is in effect exceed the expense
limitations applicable to the Fund imposed by applicable state
securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Manager shall
reduce its management fee by the extent of such excess and, if
required pursuant to any such laws or regulations, will reimburse
the Fund in the amount of such excess; provided, however, to the
extent permitted by law, there shall be excluded from such
expenses the amount of any interest, taxes, brokerage
7
<PAGE> 8
commissions, distribution fees and extraordinary expenses
(including but not limited to legal claims and liabilities and
litigation costs and any indemnification related thereto) paid or
payable by the Fund. Whenever the expenses of the Fund exceed a
pro rata portion of the applicable annual expense limitations,
the estimated amount of reimbursement under such limitations
shall be applicable as an offset against the monthly payment of
the management fee due to the Manager. Should two or more such
expense limitations be applicable as at the end of the last
business day of the month, that expense limitation which results
in the largest reduction in the Manager's fee shall be
applicable.
ARTICLE IV
Limitation of Liability of the Manager
The Manager shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or
for any act or omission in the management of the Fund, except for
willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of reckless disregard of
its obligations and duties hereunder. As used in this Article
IV, the term "Manager" shall include any affiliates of the
Manager performing services for the Fund contemplated hereby and
directors, officers and employees of the Manager and such
affiliates.
8
<PAGE> 9
ARTICLE V
Activities of the Manager
The services of the Manager to the Fund are not to be deemed
to be exclusive, and the Manager and any person controlled by or
under common control with the Manager (for purposes of Article V
referred to as "affiliates") is free to render services to
others. It is understood that Directors, officers, employees and
shareholders of the Fund are or may become interested in the
Manager and its affiliates, as directors, officers, employees and
shareholders or otherwise and that directors, officers, employees
and shareholders of the Manager and its affiliates are or may
become similarly interested in the Fund, and that the Manager and
directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholder or
otherwise.
ARTICLE VI
Duration and Termination of this Contract
This Agreement shall become effective as of the date of the
commencement of operations of the Fund and shall remain in force
until March 31, 1994 and thereafter, but only so long as such
continuance is specifically approved at least annually by (i) the
Directors, or by'the vote of a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Directors
who are not parties to this Agreement or interested persons of
9
<PAGE> 10
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
Manager, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its
assignment.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the vote of a majority
of outstanding voting securities of the Fund, and (ii) a majority
of those Directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act and the Rules
and Regulations thereunder, subject, however, to such exemptions
as may be granted by the Securities and Exchange Commission under
the Investment Company Act.
10
<PAGE> 11
ARTICLE IX
Governing Law
This Agreement shall be construed in accordance with laws of
the State of New York and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws
of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company
Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first above
written.
MERRILL LYNCH DRAGON FUND, INC.
By
------------------------------------------
MERRILL LYNCH ASSET MANAGEMENT
By
------------------------------------------
<PAGE> 1
EXHIBIT 6A
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 distri-
butor of the Fund to sell Class A shares of common stock in the
Fund (sometimes herein referred to as "Class A shares") to
eligible investors (as defined below) and hereby agrees during
<PAGE> 2
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 prin-
cipal underwriter and distributor, except that:
(a) The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors 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 pur-
chase 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 sub-
stantially 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.
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<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 deter-
mined 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 Distri-
butor 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 repur-
chase within seven business days after the date of the confirma-
tion 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 Dis-
tributor may reasonably request for use in connection with the
distribution of Class A shares of the Fund, and this shall in-
clude, 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 addi-
tional 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 Securi-
ties 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 in-
vestment 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 Distri-
butor 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 mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required regis-
tration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
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 con-
sultants. 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 qualifi-
cation of the Class A shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
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
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 Distri-
butor 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 com-
mon 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 per-
formance 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 reim-
burse the Distributor or such controlling person or persons, de-
fendant 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 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 October 21, 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 Dis-
tributor, 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 specifi-
cally 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.
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 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 $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**......... .00% .00% .00%
- -------------------
</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
$25,000 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: October 21, 1994
--------------------------------------------------
6
<PAGE> 1
EXHIBIT 6(b)
CLASS B SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 14th day of April, 1992, 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 in-
terest 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 direct-
ly 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 B shares in order to promote the growth of
the Fund and facilitate the distribution of its Class B 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 B shares of common stock of
the Fund (sometimes herein referred to as "Class B 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 prin-
cipal underwriter and distributor of the Class B 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 B 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 B 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 rights granted to the Distributor to
purchase Class B shares from the Fund shall not apply to Class B
shares of the Fund issued in connection with the merger or conso-
lidation 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
B shares of any such company by the Fund.
2
<PAGE> 3
(c) Such exclusive rights also shall not apply to Class B
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
(d) Such exclusive rights also shall not apply to Class B
shares issued by the Fund pursuant to any reinstatement privilege
afforded redeeming shareholders.
Section 3. Purchase of Class B Shares from the Fund.
(a) Prior to the continuous offering of the Class B shares,
commencing on a date agreed upon by the Fund and the Distributor,
it is contemplated that the Distributor will solicit
subscriptions for Class B shares during a subscription period
which shall last for such period as may be agreed upon by the
parties hereto. The subscriptions will be payable within five
business days after the termination of the subscription period,
at which time the Fund will commence operations.
(b) After the Fund commences operations, the Fund will
commence an offering of its Class B shares and thereafter the
Distributor shall have the right to buy from the Fund the Class B
shares needed, but not more than the Class B shares needed (ex-
cept for clerical errors in transmission) to fill unconditional
orders for Class B shares of the Fund placed with the Distributor
by investors or securities dealers. The price which the Distri-
butor shall pay for the Class B shares so purchased from the Fund
shall be the net asset value, determined as set forth in Section
3(d) hereof.
3
<PAGE> 4
(c) The Class B shares are to be resold by the Distributor
to investors at net asset value, as set forth in Section 3(d)
hereof, or to securities dealers having agreements with the Dis-
tributor upon the terms and conditions set forth in Section 7
hereof.
(d) The net asset value of Class B 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 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"), and guidelines established by the Board of
Directors.
(e) The Fund shall have the right to suspend the sale of
its Class B 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 B
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 imprac-
ticable or inadvisable to sell the 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 B shares received by the Distributor. Any order
4
<PAGE> 5
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 B 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 B 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 B Shares bv
the Fund.
(a) Any of the outstanding Class B shares nay be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class B shares so tendered in accordance with its
obligations as set forth in Article VII of its Articles of Incor-
poration, as amended from time to time, and in accordance with
the applicable provisions set forth in the prospectus and state-
ment of additional information of the Fund. The price to be paid
to redeem or repurchase the Class B shares shall be equal to the
net asset value calculated in accordance with the provisions of
Section 3(d) hereof, less the redemption fee or other charge, if
any, set forth in the prospectus and statement of additional
5
<PAGE> 6
information of the Fund. All payments by the Fund hereunder
shall be made in the manner set forth below.
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 contingent deferred sales
charge 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 prospec-
tus and statement of additional information.
(b) Redemption of Class B shares or payment may be sus-
pended at times when the New York Stock Exchange is closed, when
trading on said Exchange is closed, 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
6
<PAGE> 7
distribution of Class B shares of the Fund, and this shall in-
clude, 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 its prospectus and statement of addi-
tional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
the 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 B
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
B 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 B 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 exclu-
sive and nothing herein contained shall prevent the Distributor
from entering into like arrangements with other investment com-
panies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class B shares of the Fund, the Distri-
butor 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 se-
lected 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 neces-
sary 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 B shares; provided,
that the Fund shall approve the forms of agreements with dealers.
Class B shares sold to selected dealers shall be for resale by
such dealers only at net asset value determined as set forth in
Section 3(d) hereof. The form of agreement with selected dealers
to be used during the subscription period described in Section
3(a) is attached hereto as Exhibit A and the initial form of
agreement with selected dealers to be used in the continuous
offering of the shares is attached hereto as Exhibit B.
(b) Within the United States, the Distributor shall offer
and sell Class B 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
9
<PAGE> 10
materials to Class B 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 con-
sultants. 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 B
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 B shares for sale to
the public and any expenses of advertising incurred by the Dis-
tributor in connection with such offering. It is understood and
agreed that, so long as the Fund's Class B Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor here-
under may be paid from amounts recovered by it from the Fund
under such Plan.
10
<PAGE> 11
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the Class B shares for sale pursuant to this Agreement,
and, if necessary or advisable in connection therewith, of quali-
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 Distri-
butor 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 B 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 B 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
11
<PAGE> 12
omission was made in reliance upon, and in conformity with, in-
formation 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
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
12
<PAGE> 13
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, 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 B 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 indem-
nity 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
13
<PAGE> 14
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 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 Distri-
butor, 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. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first
above written and shall remain in force until March 31, 1994 and
thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Directors, or by the vote
of a majority of the outstanding voting securities of the Fund,
and (ii) 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.
14
<PAGE> 15
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 11. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally 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 12. Governing Law. The provisions of this Agree-
ment shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
15
<PAGE> 16
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
-----------------------------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-----------------------------------------
16
<PAGE> 17
EXHIBIT A
MERRILL LYNCH DRAGON FUND, INC.
CLASS B SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
FOR SUBSCRIPTION PERIOD
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 B shares of common stock, par
value $0.10 per share (herein referred to as "Class B shares"),
of the Fund, and as such has the right to distribute Class B
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 B shares, being offered to the
public are registered under the Securities Act of 1933, as
amended. Such Class B shares and certain of the terms on which
they are being offered are more fully described in the enclosed
Prospectus and Statement of Additional Information. You have
received a copy of the Class B shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Fund and
reference is made herein to certain provisions of such Distribu-
tion Agreement. This Agreement relates solely to the subscrip-
tion period described in Section 3(a) of such Distribution Agree-
ment. Subject to the foregoing, as principal, we offer to sell
to you, as a member of the Selected Dealers Group, Class B shares
of the Fund upon the following terms and conditions:
1. The subscription period referred to in Section 3(a) of
the Distribution Agreement will continue through May 22, 1992.
The subscription period may be extended upon agreement between
the Fund and the Distributor. Subject to the provisions of such
Section and the conditions contained herein, we will sell to you
on the fifth business day following the termination of the sub-
scription period, or such other date as we may advise (the
"Closing Date"), such number of Class B shares as to which you
have placed orders with us not later than 5:00 P.M. on the second
full business day preceding the Closing Date.
2. In all sales of these Class B 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.
1
<PAGE> 18
3. You shall not place orders for any of the Class B shares
unless you have already received purchase orders for such Class B
shares at the applicable public offering prices and subject to
the terms hereof and of the Distribution Agreement. All orders
are subject to acceptance 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 Prospectus, as
amended from time to time. You agree that you will not offer or
sell any of the Class B 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 B 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 informa-
tion relating to the Class B shares of the Fund which is incon-
sistent 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. Payment for Class B shares purchased by you is to be
made by certified or official bank check at the office of Merrill
Lynch Funds Distributor, Inc., Box 9011, Princeton, New Jersey
08543-9011, on such date as we may advise, in New York Clearing
House funds payable to the order of Merrill Lynch Funds Distri-
butor, Inc. against delivery by us of non-negotiable share
deposit receipts ("Receipts") issued by Merrill Lynch Financial
Data Service, Inc., as shareholder servicing agent, acknowledging
the deposit with it of the Class B shares so purchased by you.
You agree that as promptly as practicable after the delivery of
such Class B shares you will issue appropriate written transfer
instructions to the Fund or to the shareholder servicing agent as
to the purchasers to whom you sold the Class B shares.
5. No person is authorized to make any representations
concerning class B 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 B
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Informa-
tion and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospectus
and Statement of Additional Information, periodic reports and
proxy solicitation material are 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.
6. 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.
7. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class B shares
entirely. Each party hereto has the right to cancel this Agree-
ment upon notice to the other party.
8. 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.
9. 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.
10. Upon application to us, we will inform you as to the
states in which we believe the Class B 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 B
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class B shares, if necessary.
11. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
3
<PAGE> 20
12. You agree that you will not sell any Class B shares of
the Fund to any account over which you exercise discretionary
authority.
13. This Agreement shall terminate at the close of business
on the Closing Date, unless earlier terminated, provided, how-
ever, this Agreement shall continue after termination for the
purpose of settlement of accounts hereunder.
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:
-----------------------------------------
By:
------------------------------------------------
Address:
-------------------------------------------
---------------------------------------------------
Date:
----------------------------------------------
<PAGE> 21
EXHIBIT B
MERRILL LYNCH DRAGON FUND, INC.
CLASS B 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 B shares of common stock, par
value $0.10 per share (herein referred to as the "Class B
shares"), of the Fund, and as such has the right to distribute
Class B 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 B shares being offered to the
public are registered under the Securities Act of 1933, as
amended. You have received a copy of the Class B 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 "Prospec-
tus" 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. As princi-
pal, we offer to sell to you, as a member of the Selected Dealers
Group, Class B shares of the Fund upon the following terms and
conditions:
1. In all sales of these Class B 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.
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-
tial and subsequent purchase requirements are as set forth in the
current Prospectus and Statement of Additional Information of the
Fund.
1
<PAGE> 22
3. You shall not place orders for any of the Class B shares
unless you have already received purchase orders for such Class B
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 B 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 B 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 Addi-
tional Information (as then amended or supplemented) and will not
furnish to any person any information relating to the Class B
shares of the Fund, which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Addi-
tional 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 B 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 B shares directly to the Fund or its agent for redemption
subject to the applicable terms and conditions set forth in Sec-
tion 4 of the Distribution Agreement.
5. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. No person is authorized to make any representations
concerning Class B 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 B
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Informa-
tion and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospec-
tus, Statement of Additional Information, periodic reports and
proxy solicitation material are 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.
7. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
2
<PAGE> 23
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 re-
quest.
8. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class B shares
entirely. Each party hereto has the right to cancel this Agree-
ment 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 B 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 B
shares in any jurisdiction. we will file with the Department of
State in New York a Further State Notice with respect to the
Class B 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 tele-
graphed to you at the address specified by you below.
3
<PAGE> 24
13. Your first order placed pursuant to this Agreement for
the purchase of Class B 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:
------------------------------------------
By:
-------------------------------------------------
Address:
--------------------------------------------
----------------------------------------------------
Date:
-----------------------------------------------
4
<PAGE> 1
EXHIBIT 6D
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 in-
terest 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 direct-
ly 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 "Class C shares") to
the public and hereby agrees during the term of this Agreement to
<PAGE> 2
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 prin-
cipal 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 conso-
lidation 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 Dis-
tributor 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 imprac-
ticable 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 sus-
pended 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 in-
clude, 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 addi-
tional 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 exclu-
sive and nothing herein contained shall prevent the Distributor
from entering into like arrangements with other investment com-
panies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distri-
butor 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 se-
lected 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 neces-
sary 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 con-
sultants. 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 Dis-
tributor 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 here-
under may be paid from amounts recovered by it from the Fund
under such Plan.
(c) The Fund shall bear the cost and expenses of qualifi-
cation 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 Distri-
butor 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, in-
formation 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 commence-
ment 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 indem-
nity 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 Distri-
butor, 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 October 21, 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 specifi-
cally approved by (i) the Directors or by the vote of a majority
of outstanding voting securities of the Fund and (ii) by the vote
of a majority of those Directors of the Fund who are not parties
to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such
approval.
Section 13. Governing Law. The provisions of this Agree-
ment shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
15
<PAGE> 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 "Prospec-
tus" 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 Addi-
tional 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 Addi-
tional 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 Sec-
tion 4 of the Distribution Agreement.
5. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. No person is authorized to make any representations
concerning Class C shares of the Fund except those contained in
the current Prospectus and Statement of Additional Information of
the Fund and in such printed information subsequently issued by
us or the Fund as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Informa-
tion and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospec-
tus, 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 re-
quest.
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 tele-
graphed 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: October 21, 1994
-----------------------------------------------
4
<PAGE> 1
EXHIBIT 6E
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 distri-
butor of the Fund to sell Class D shares of common stock in the
Fund (sometimes herein referred to as "Class D shares") to the
public and hereby agrees during the term of this Agreement to
<PAGE> 2
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 prin-
cipal underwriter and distributor, except that:
(a) The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors 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 pur-
chase 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 sub-
stantially 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 Sec-
tion 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 deter-
mined 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 Distri-
butor 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 repur-
chase within seven business days after the date of the confirma-
tion 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 Dis-
tributor may reasonably request for use in connection with the
distribution of Class D shares of the Fund, and this shall in-
clude, 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 addi-
tional 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 Securi-
ties 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 in-
vestment 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 Distri-
butor 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 mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required regis-
tration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to Class 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 con-
sultants. 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 qualifi-
cation of the Class D shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
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
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 Distri-
butor 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 com-
mon 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 per-
formance 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 reim-
burse the Distributor or such controlling person or persons, de-
fendant 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 October 21, 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 Dis-
tributor, 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 specifi-
cally 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 $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.
** 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
$25,000 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: October 21, 1994
-----------------------------------------------------
6
<PAGE> 1
EXHIBIT 8
CUSTODIAN AGREEMENT
AGREEMENT made this day of 1992,
between MERRILL LYNCH DRAGON FUND, INC. (the "Fund") and
Brown Brothers Harriman & Co. (the "Custodian").
WITNESSETH: That in consideration of the mutual covenants
and agreements herein contained, the parties hereto agree as
follows:
1. The Fund hereby employs and appoints the Custodian as a
Custodian for the term and subject to the provisions of this
Agreement. The Custodian shall not be under any duty or
obligation to require the Fund to deliver to it any securities or
funds owned by the Fund and shall have no responsibility or
liability for or on account of securities or funds not so
delivered. The Fund will deposit with the Custodian copies of
the Certificate of Incorporation and By-Laws (or comparable
documents) of the Fund and all amendments thereto, and copies of
such votes and other proceedings of the Fund as may be necessary
for or convenient to the Custodian in the performance of its
duties.
2. Except for securities and funds held by subcustodians
appointed pursuant to the provisions of Section 3 hereof, the
Custodian shall have and perform the following powers and duties:
A. Safekeeping - To keep safely the securities of the Fund
that have been delivered to the Custodian and from time to time
to receive delivery of securities for safekeeping.
- 1 -
<PAGE> 2
B. Manner of Holding Securities - To hold securities of the
Fund (1) by physical possession of the share certificates or
other instruments representing such securities in registered or
bearer form, or (2) in book-entry form by a Securities System (as
said term is defined in Section 2S).
C. Registered Name; Nominee - To hold registered securities
of the Fund (1) in the name or any nominee name of the Custodian
or the Fund, or in the name or any nominee name of any agent
appointed pursuant to Section 6E, or (2) in street certificate
form, so-called, and in any case with or without any indication
of fiduciary capacity.
D. Purchases - Upon receipt of Proper Instructions, as
defined in Section V on Page 14, insofar as funds are available
for the purpose, to pay for and receive securities purchased for
the account of the Fund, payment being made only upon receipt of
the securities (1) by the Custodian, or (2) by a clearing
corporation of a national securities exchange of which the
Custodian is a member, or (3) by a Securities System. However,
(i) in the case of repurchase agreements entered into by the
Fund, the Custodian may release funds to a Securities System or
to a Subcustodian prior to the receipt of advice from the
Securities System or Subcustodian that the securities underlying
such repurchase agreement have been transferred by book entry
into the Account (as defined in Section 2S) of the Custodian
maintained with such Securities System or Subcustodian, so long
- 2 -
<PAGE> 3
as such payment instructions to Securities System or Subcustodian
include a requirement that delivery is only against payment of
securities, and (ii) in the case of time deposits, call account
deposits, currency deposits, and other deposits, contracts or
options pursuant to Sections 2K, 2L and 2M, the Custodian may
make payment therefor without receiving an instrument evidencing
said deposit so long as such payment instructions detail specific
securities to be acquired.
E. Exchanges - Upon receipt of proper instructions, to
exchange securities held by it for the account of the Fund for
other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value,
conversion or other event, and to deposit any such securities in
accordance with the terms of any reorganization or protective
plan. Without such instructions, the Custodian may surrender
securities in temporary form for definitive securities, may
surrender securities for transfer into a name or nominee name as
permitted in Section 2C, and may surrender securities for a
different number of certificates or instruments representing the
same number of shares or same principal amount of indebtedness,
provided the securities to be issued are to be delivered to the
Custodian and further provided custodian shall at the time of
surrendering securities or instruments receive a receipt or other
evidence of ownership thereof.
F. Sales of Securities - Upon receipt of proper
- 3 -
<PAGE> 4
instructions, to make delivery of securities which have been sold
for the account of the Fund, but only against payment therefor
(1) in cash, by a certified check, bank cashier's check, bank
credit, or bank wire transfer, or (2) by credit to the account of
the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member, or (3) by
credit to the account of the Custodian or an Agent of the
Custodian with a Securities System.
G. Depositary Receipt - Upon receipt of proper
instructions, to instruct a subcustodian appointed pursuant to
Section 3 hereof (a "Subcustodian") or an agent of the Custodian
appointed pursuant to Section 6E hereof (an "Agent") to surrender
securities to the depositary used by an issuer of American
Depositary Receipts or International Depositary Receipts
(hereinafter collectively referred to as "ADRs") for such
securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to
the Subcustodian or Agent that the depositary has acknowledged
receipt of instructions to issue with respect to such securities
ADRs in the name of the Custodian, or a nominee of the Custodian,
for delivery to the Custodian in Boston, Massachusetts, or at
such other place as the Custodian may from time to time
designate.
Upon receipt of proper instructions, to surrender
ADRs to the issuer thereof against a written receipt therefor
- 4 -
<PAGE> 5
adequately describing the ADRs surrendered and written evidence
satisfactory to the Custodian that the issuer of the ADRs has
acknowledged receipt of instructions to cause its depositary to
deliver the securities underlying such ADRs to a Subcustodian or
an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt
of proper instructions, to deliver to the issuer or trustee
thereof, or to the agent of either, warrants, puts, calls, rights
or similar securities for the purpose of being exercised or sold,
provided that the new securities and cash, if any, acquired by
such action are to be delivered to the Custodian, and, upon
receipt of proper instructions, to deposit securities upon
invitations for tenders of securities, provided that the
consideration is to be paid or delivered or the tendered
securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect
all stock dividends, rights and other items of like nature; and
to deal with the same pursuant to proper instructions relative
thereto.
J. Borrowings - Upon receipt of proper instructions, to
deliver securities of the Fund to lenders or their agents as
collateral for borrowings effected by the Fund, provided that
such borrowed money is payable to or upon the Custodian's order
as Custodian for the Fund.
K. Demand Deposit Bank Accounts - To open and operate an
- 5 -
<PAGE> 6
account or accounts in the name of the Fund on the Custodian's
books subject only to draft or order by the Custodian. All funds
received by the Custodian from or for the account of the Fund
shall be deposited in said account(s). The responsibilities of
the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U. S. bank for a similar
deposit.
If and when authorized by proper instructions, the Custodian
may open and operate an additional account(s) in such other banks
or trust companies as may be designated by the Fund in such
instructions (any such bank or trust company so designated by the
Fund being referred to hereafter as a "Banking Institution"),
provided that such account(s) shall be in the name of the
Custodian for account of the Fund and subject only to the
Custodian's draft or order. Such accounts may be opened with
Banking Institutions in the United States and in other countries
and may be denominated in either U. S. Dollars or other
currencies as the Fund may determine. All such deposits shall be
deemed to be portfolio securities of the Fund and accordingly the
responsibility of the Custodian therefore shall be the same as
and neither lesser nor greater than the Custodian's
responsibility in respect of other portfolio securities of the
Fund.
L. Interest Bearing Call or Time Deposits - To place
interest bearing fixed term and call deposits with such banks and
- 6 -
<PAGE> 7
in such amounts as the Fund may authorize pursuant to proper
instructions. Such deposits may be placed with the Custodian or
with Subcustodians or other Banking Institutions as the Fund may
determine. Deposits may be denominated in U. S. Dollars or other
currencies and need not be evidenced by the issuance or delivery
of a certificate to the Custodian, provided that the Custodian
shall include in its records with respect to the assets of the
Fund, appropriate notation as to the amount and currency of each
such deposit, the accepting Banking Institution, and other
appropriate details. Such deposits, other than those placed with
the Custodian, shall be deemed portfolio securities of the Fund
and the responsibilities of the Custodian therefor shall be the
same as those for demand deposit bank accounts placed with other
banks, as described in Section K of this agreement. The
responsibility of the Custodian for such deposits accepted on the
Custodian's books shall be that of a U. S. bank for a similar
deposit.
M. Foreign Exchange Transactions and Futures Contracts -
Pursuant to proper instructions, to enter into foreign exchange
contracts or options to purchase and sell foreign currencies for
spot and future delivery on behalf and for the account of the
Fund. Such transactions may be undertaken by the Custodian with
such Banking Institutions, including the Custodian and
Subcustodian(s) as principals, as approved and authorized by the
Fund. Foreign exchange contracts and options other than those
- 7 -
<PAGE> 8
executed with the Custodian, shall be deemed to be portfolio
securities of the Fund and the responsibilities of the Custodian
therefor shall be the same as those for demand deposit bank
accounts placed with other banks as described in Section 2-K of
this agreement. Upon receipt of proper instructions, to receive
and retain confirmations evidencing the purchase or sale of a
futures contract or an option on a futures contract by the Fund;
to deposit and maintain in a segregated account, for the benefit
of any futures commission merchant or to pay to such futures
commission merchant, assets designated by the fund as initial,
maintenance or variation "margin" deposits intended to secure the
Fund's performance of its obligations under any futures contracts
purchased or sold or any options on futures contracts written by
the Fund, in accordance with the provisions of any agreement or
agreements among any of the Fund, the Custodian and such futures
commission merchant, designated to comply with the rules of the
Commodity Futures Trading Commission and/or any contract market,
or any similar organization or organizations, regarding such
margin deposits; and to release and/or transfer assets in such
margin accounts only in accordance with any such agreements or
rules.
N. Stock Loans - Upon receipt of proper instructions, to
deliver securities of the Fund, in connection with loans of
securities by the Fund, to the borrower thereof upon the receipt
of the cash collateral, if any, for such borrowing. In the event
- 8 -
<PAGE> 9
U.S. Government securities are to be used as collateral, the
Custodian will not release the securities to be loaned until it
has received confirmation that such collateral has been delivered
to the Custodian. The Custodian and Fund understand that the
timing of receipt of such confirmation will normally require that
the delivery of securities to be loaned will be made one day
after receipt of the U. S. Government collateral.
O. Collections - To collect, receive and deposit in said
account or accounts all income and other payments with respect to
the securities held hereunder, and to execute ownership and other
certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments
with respect to securities of the Fund or in connection with
transfer of securities, and pursuant to proper instructions to
take such other actions with respect to collection or receipt of
funds or transfer of securities which involve an investment
decision.
P. Dividends, Distributions and Redemptions - Upon receipt
of proper instructions from the Fund, or upon receipt of
instructions from the Fund's shareholder servicing agent or agent
with comparable duties (the "Shareholder Servicing Agent") (given
by such person or persons and in such manner on behalf of the
Shareholder Servicing Agent as the Fund shall have authorized),
the custodian shall release funds or securities to the
Shareholder Servicing Agent or otherwise apply funds or
- 9 -
<PAGE> 10
securities, insofar as available, for the payment of dividends or
other distributions to Fund shareholders. Upon receipt of proper
instructions from the Fund, or upon receipt of instructions from
the Shareholder Servicing Agent (given by such person or persons
and in such manner on behalf of the Shareholder Servicing Agent
as the Fund shall have authorized), the Custodian shall release
funds or securities, insofar as available, to the Shareholder
Servicing Agent or as such Agent shall otherwise instruct for
payment to Fund shareholders who have delivered to such Agent a
request for repurchase or redemption of their shares of capital
stock of the Fund.
Q. Proxies, Notices, Etc. - Promptly to deliver or mail to
the Fund all forms of proxies and all notices of meetings and any
other notices or announcements affecting or relating to
securities owned by the Fund that are received by the Custodian,
and upon receipt of proper instructions, to execute and deliver
or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its
nominee shall vote upon any of such securities or execute any
proxy to vote thereon or give any consent or take any other
action with respect thereto (except as otherwise herein provided)
unless ordered to do so by proper instructions.
R. Bills - Upon receipt of proper instructions, to pay or
cause to be paid, insofar as funds are available for the purpose,,
bills, statements, or other obligations of the Fund.
- 10 -
<PAGE> 11
S. Deposit of Fund Assets in Securities Systems - The
Custodian may deposit and/or maintain securities owned by the
Fund in (i) The Depository Trust Company, (ii) any book-entry
system as provided in Subpart 0 of Treasury Circular No. 300, 31
CFR 306, Subpart B of 31 CFR Part 350, or the book-entry
regulations of federal agencies substantially in the form of
Subpart 0, or (iii) any other domestic clearing agency registered
with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934 which acts as a securities
depository and whose use the Fund has previously approved in
writing (each of the foregoing being referred to in this
Agreement as a "Securities System"). Utilization of a Securities
System shall be in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may deposit and/or maintain Fund
securities, either directly or through one or more Agents
appointed by the Custodian (provided that any such agent shall be
qualified to act as a custodian of the Fund pursuant to the
Investment Company Act of 1940 and the rules and regulations
thereunder), in a Securities System provided that such securities
are represented in an account ("Account") of the Custodian or
such Agent in the Securities System which shall not include any
assets of the Custodian or Agent other than assets held as a
fiduciary, custodian, or otherwise for customers;
- 11 -
<PAGE> 12
2) The records of the Custodian with respect to securities
of the Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred to
the Account, and (ii) the making of an entry on the records of
the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall Transfer securities
sold for the account of the Fund upon (i) receipt of advice from
the Securities System that payment for such securities has been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such transfer and payment
for the account of the Fund. Copies of all advices from the
Securities System of transfers of securities for the account of
the Fund shall identify the Fund, be maintained for the Fund by
the Custodian or an Agent as referred to above, and be provided
to the Fund at its request. The Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund
in the form of a written advice or notice and shall furnish to
the Fund copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the Fund
on the next business day;
4) The Custodian shall provide the Fund with any report
obtained by the Custodian or any Agent as referred to above on
- 12 -
<PAGE> 13
the Securities System's accounting system, internal accounting
control and procedures for safeguarding securities deposited in
the Securities System; and the Custodian and such Agents shall
send to the Fund such reports on their own systems of internal
accounting control as the Fund may reasonably request from time
to time.
5) At the written request of the Fund, the Custodian will
terminate the use of any such Securities System on behalf of the
Fund as promptly as practicable.
T. Other Transfers - Upon receipt of Proper Instructions,
to deliver securities, funds and other property of the Fund to a
Subcustodian or another custodian of the Fund; and, upon receipt
of proper instructions, to make such other disposition of
securities, funds or other property of the Fund in a manner other
than or for purposes other than as enumerated elsewhere in this
Agreement, provided that the instructions relating to such
disposition shall include a statement of the purpose for which
the delivery is to be made, the amount of securities to be
delivered and the name of the person or persons to whom delivery
is to be made.
U. Investment Limitations - In performing its duties
generally, and more particularly in connection with the purchase,
sale and exchange of securities made by or for the Fund, the
Custodian may assume unless and until notified in writing to the
contrary that proper instructions received by it are not in
- 13 -
<PAGE> 14
conflict with or in any way contrary to any provisions of the
Fund's Certificate of Incorporation or By-Laws (or comparable
documents) or votes or proceedings of the shareholders or
Directors of the Fund. The Custodian shall in no event be liable
to the Fund and shall be indemnified by the Fund for any
violation which occurs in the course of carrying out instructions
given by the Fund of any investment limitations to which the Fund
is subject or other limitations with respect to the Fund's powers
to make expenditures, encumber securities, borrow or take similar
actions affecting its portfolio.
V. Proper Instructions - Proper instructions shall mean a
tested telex from the Fund or a written request, direction,
instruction or certification signed or initialled on behalf of
the Fund by two or more persons as the Board of Directors of the
Fund shall have from time to time authorized, provided, however,
that no such instructions directing the delivery of securities or
the payment of funds to an authorized signatory of the Fund shall
be signed by such person. Those persons authorized to give
proper instructions may be identified by the Board of Directors
by name, title or position and will include at least one officer
empowered by the Board to name other individuals who are
authorized to give proper instructions on behalf of the Fund.
Telephonic or other oral instructions given by any one of the
above persons will be considered proper instructions if the
Custodian reasonably believes them to have been given by a person
- 14 -
<PAGE> 15
authorized to give such instructions with respect to the
transaction involved. Oral instructions will be confirmed by
tested telex or in writing in the manner set forth above but the
lack of such confirmation shall in no way affect any action taken
by the Custodian in reliance upon such oral instructions. The
Fund authorizes the Custodian to tape record any and all
telephonic or other oral instructions given to the Custodian by
or on behalf of the Fund (including any of its officers,
Directors, employees or agents) and will deliver to the Custodian
a similar authorization from any investment manager or adviser or
person or entity with similar reponsibilities which is authorized
to give proper instructions on behalf of the Fund to the
Custodian. Proper instructions may relate to specific
transactions or to types or classes of transactions, and may be
in the form of standing instructions.
Proper instructions may include communications effected
directly between electromechanical or electronic devices or
systems, in addition to tested telex, provided that the Fund and
the Custodian agree to the use of such device or system.
3. Securities, funds and other property of the Fund may be
held by subcustodians appointed pursuant to the provisions of
this Section 3 (a "Subcustodian"). The Custodian may, at any
time and from time to time, appoint any bank or trust company
(meeting the requirements of a custodian or a foreign custodian
under the Investment Company Act of 1940 and the rules and
- 15 -
<PAGE> 16
regulations thereunder) to act as a Subcustodian for the Fund,
provided that the Fund shall have approved in writing (1) any
such bank or trust company and the subcustodian agreement to be
entered into between such bank or trust company and the
Custodian, and (2) if the subcustodian is a bank organized under
the laws of a country other than the United States, the holding
of securities, cash and other property of the Fund in the country
in which it is proposed to utilize the services of such
subcustodian. Upon such approval by the Fund, the Custodian is
authorized on behalf of the Fund to notify each Subcustodian of
its appointment as such. The Custodian may, at any time in its
discretion, remove any bank or trust company that has been
appointed as a Subcustodian but will promptly notify the Fund of
any such action.
Those Subcustodians, their offices or branches which the
Fund has approved to date are set forth on Appendix A hereto.
Such Appendix shall be amended from time to time as
Subcustodians, branches or offices are changed, added or deleted.
The Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be
held at a location not listed on Appendix A, in order that there
shall be sufficient time for the Fund to give the approval
required by the preceding paragraph and for the Custodian to put
the appropriate arrangements in place with such Subcustodian
pursuant to such subcustodian agreement.
- 16 -
<PAGE> 17
Although the Fund does not intend to invest in a country
before the foregoing procedures have been completed, in the event
that an investment is made prior to approval, if practical, such
security shall be removed to an approved location or if not
practical such security shall be held by such agent as the
Custodian may appoint. In such event, the Custodian shall be
liable to the Fund for the actions of such agent if and only to
the extent the Custodian shall have recovered from such agent for
any damages caused the Fund by such agent and provided that the
Custodian shall pursue its rights against such agent.
With respect to the securities and funds held by a
Subcustodian, either directly or indirectly, including demand and
interest bearing deposits, currencies or other deposits and
foreign exchange contracts as referred to in Sections 2K, 2L or
2M, the Custodian shall be liable to the Fund if and only to the
extent that such Subcustodian is liable to the Custodian and the
Custodian recovers under the applicable subcustodian agreement.
The Custodian shall nevertheless be liable to the Fund for its
own negligence in transmitting any instructions received by it
from the Fund and for its own negligence in connection with the
delivery of any securities or funds held by it to any such
Subcustodian.
In the event that any Subcustodian appointed pursuant to the
provisions of this Section 3 fails to perform any of its
obligations under the terms and conditions of the applicable
- 17 -
<PAGE> 18
subcustodian agreement, the Custodian shall use its best efforts
to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to
perform fully its obligations thereunder, the Custodian shall
forthwith upon the Fund's request terminate such Subcustodian
and, if necessary or desirable, appoint another subcustodian in
accordance with the provisions of this Section 3. At the
election of the Fund, it shall have the right to enforce, to the
extent permitted by the subcustodian agreement and applicable
law, the Custodian's rights against any such Subcustodian for
loss or damage caused the Fund by such Subcustodian.
At the written request of the Fund, the Custodian will
terminate any subcustodian appointed pursuant to the provisions
of this Section 3 in accordance with the termination provisions
under the applicable subcustodian agreement. The Custodian will
not amend any subcustodian agreement or agree to change or permit
any changes thereunder except upon the prior written approval of
the Fund.
In the event the Custodian receives a claim from a
Subcustodian under the indemnification provisions of any
subcustodian agreement, the Custodian shall promptly give written
notice to the Fund of such claim. No more than thirty days after
written notice to the Fund of the Custodian's intention to make
such payment, the Fund will reimburse the Custodian the amount of
such payment except in respect of any negligence or misconduct of
the Custodian.
- 18 -
<PAGE> 19
4. The Custodian may assist generally in the preparation of
reports to Fund shareholders and others, audits of accounts, and
other ministerial matters of like nature.
5. The Fund hereby also appoints the Custodian as its
financial agent. With respect to the appointment as financial
agent, the Custodian shall have and perform the following powers
and duties:
A. Records - To create, maintain and retain such records
relating to its activities and obligations under this Agreement
as are required under the Investment Company Act of 1940 and the
rules and regulations thereunder (including Section 31 thereof
and Rules 31a-1 and 31a-2 thereunder) and under applicable
Federal and State tax laws. All such records will be the
property of the Fund and in the event of termination of this
Agreement shall be delivered to the successor custodian, and the
Custodian agrees to cooperate with the Fund in execution of
documents and other action necessary or desirable in order to
substitute the successor custodian for the Custodian under this
Agreement.
B. Accounts - To keep books of account and render
statements, including interim monthly and complete quarterly
financial statements, or copies thereof, from time to time as
reasonably requested by proper instructions.
C. Access to Records - Subject to security requirements of
the custodian applicable to its own employees having access to
- 19 -
<PAGE> 20
similar records within the Custodian and such regulations as may
be reasonably imposed by the Custodian, the books and records
maintained by the Custodian pursuant to Sections 5A and 5B shall
be open to inspection and audit at reasonable times by officers
of, attorneys for, and auditors employed by, the Fund.
D. Disbursements - Upon receipt of proper instructions, to
pay or cause to be paid, insofar as funds are available for the
purpose, bills, statements and other obligations of the Fund
(including but not limited to interest charges, taxes, management
fees, compensation to Fund officers and employees, and other
operating expenses of the Fund).
6. A. The Custodian shall not be liable for any action
taken or omitted in reliance upon proper instructions believed by
it to be genuine or upon any other written notice, request,
direction, instruction, certificate or other instrument believed
by it to be genuine and signed by the proper party or parties.
The Secretary or Assistant Secretary of the Fund shall
certify to the Custodian the names, signatures and scope of
authority of all persons authorized to give proper instructions
or any other such notice, request, direction, instruction,
certificate or instrument on behalf of the Fund, the names and
signatures of the officers of the Fund, the name and address of
the Shareholder Servicing Agent, and any resolutions, votes,
instructions or directions of the Fund's Board of Directors or
shareholders. Such certificate may be accepted and relied upon
- 20 -
<PAGE> 21
by the Custodian as conclusive evidence of the facts set forth
therein and may be considered in full force and effect until
receipt of a similar certificate to the contrary.
So long as and to the extent that it is in the exercise of
reasonable care, the Custodian shall not be responsible for the
title, validity or genuineness of any property or evidence of
title thereto received by it or delivered by it pursuant to this
Agreement.
The Custodian shall be entitled, at the expense of the Fund,
(but only to the extent such expenses are reasonable) to receive
and act upon advice of counsel (who may be counsel for the Fund)
on all matters, and the Custodian shall be without liability for
any action reasonably taken or omitted pursuant to such advice.
B. With respect to the portfolio securities, cash and other
property of the Fund held by a Securities System, the Custodian
shall be liable to the Fund only for any loss or damage to the
Fund resulting from use of the Securities System if caused by any
negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from any
failure of the Custodian or any such agent to enforce effectively
such rights as it may have against the Securities System.
C. Except as may otherwise be set forth in this Agreement
with respect to particular matters, the Custodian shall be held
only to the exercise of reasonable care and diligence in carrying
out the provisions of this Agreement, provided that the Custodian
- 21 -
<PAGE> 22
shall not thereby be required to take any action which is in
contravention of any applicable law. However, nothing herein
shall exempt the Custodian from liability due to its own
negligence or willful misconduct. The Fund agrees to indemnify
and hold harmless the Custodian and its nominees from all claims
and liabilities (including reasonable counsel fees) incurred or
assessed against it or its nominees in connection with the
performance of this Agreement, except such as may arise from its
or its nominee's breach of the relevant standard of conduct set
forth in this Agreement. Without limiting the foregoing
indemnification obligation of the Fund, the Fund agrees to
indemnify the Custodian and its nominees against any liability
the Custodian or such nominee may incur by reason of taxes
assessed to the Custodian or such nominee or other costs,
liability or expense incurred by the Custodian or such nominee
resulting directly or indirectly from the fact that portfolio
securities or other property of the Fund is registered in the
name of the Custodian or such nominee.
In order that the indemnification provisions contained in
this Paragrapgh 6-C shall apply, however, it is understood that
if in any case the Fund may be asked to indemnify or hold the
custodian harmless, the Fund shall be fully and promptly advised
of all pertinent facts concerning the situation in question, and
it is further understood that the Custodian will use all
reasonable care to identify and notify the Fund promptly
- 22 -
<PAGE> 23
concerning any situation which presents or appears likely to
present the probability of such a claim for indemnification
against the Fund. The Fund shall have the option to defend the
Custodian against any claim which may be the subject of this
indemnification, and in the event that the Fund so elects it will
so notify the Custodian, and thereupon the Fund shall take over
complete defense of the claim, and the Custodian shall in such
situation initiate no further legal or other expenses for which
it shall seek indemnification under thie Paragraph 6-C. The
Custodian shall in no case confess any claim or make any
compromise in any case in which the Fund will be asked to
indemnify the Custodian except with the Fund's prior written
consent.
It is also understood that the Custodian shall not be liable
for any loss involving any securities, currencies, deposits or
other property of the Fund, whether maintained by it, a
Subcustodian, an agent of the Custodian or a Subcustodian, a
Securities System, or a Banking Institution, or a loss arising
from a foreign currency transaction or contract, resulting from a
Sovereign Risk. A "Sovereign Risk" shall mean nationalizaton,
expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental
authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of
currency restrictions, exchange controls, taxes, levies or other
- 23 -
<PAGE> 24
charges affecting the Fund's property; or acts of war, terrorism,
insurrection or revolution; or any other similar act or event
beyond the Custodian's control.
D. The Custodian shall be entitled to receive reimbursement
from the Fund on demand, in the manner provided in Section 7, for
its cash disbursements, expenses and charges (including the fees
and expenses of any Subcustodian or any Agent) in connection with
this Agreement, but excluding salaries and usual overhead
expenses.
E. The Custodian may at any time or times in its discretion
appoint (and may at any time remove) any other bank or trust
company as its agent (an "Agent") to carry out such of the
provisions of this Agreement as the Custodian may from time to
time direct, provided, however, that the appointment of such
Agent (other than an Agent appointed pursuant to the third
paragraph of Section 3) shall not relieve the Custodian of any of
its responsibilities under this agreement.
F. Upon request, the Fund shall deliver to the Custodian
such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their
respective obligations under this Agreement or any applicable
subcustodian agreement.
7. The Fund shall pay the Custodian a custody fee based on
such fee schedule as may from time to time be agreed upon in
- 24 -
<PAGE> 25
writing by the Custodian and the Fund. Such fee, together with
all amounts for which the Custodian is to be reimbursed in
accordance with Section 6D, shall be billed to the Fund in such a
manner as to permit payment by a direct cash payment to the
Custodian.
8. This Agreement shall continue in full force and effect
until terminated by either party by an instrument in writing
delivered or mailed, postage prepaid, to the other party, such
termination to take effect not sooner than seventy five (75) days
after the date of such delivery or mailing. In the event of
termination the Custodian shall be entitled to receive prior to
delivery of the securities, funds and other property held by it
all accrued fees and unreimbursed expenses the payment of which
is contemplated by Sections 6D and 7, upon receipt by the Fund of
a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it
is agreed that the funds and securities owned by the Fund and
held by the Custodian or any Subcustodian shall be delivered to
the successor custodian, and the Custodian agrees to cooperate
with the Fund in execution of documents and performance of other
actions necessary or desirable in order to substitute the
successor custodian for the Custodian under this Agreement.
9. This Agreement constitutes the entire understanding and
agreement of the parties hereto with respect to the subject
matter hereof. No provision of this Agreement may be amended or
- 25 -
<PAGE> 26
terminated except by a statement in writing signed by the party
against which enforcement of the amendment or termination is
sought.
In connection with the operation of this Agreement, the
Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the
provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. No
interpretative or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this
Agreement.
10. This instrument is executed and delivered in The
Commonwealth of Massachusetts and shall be governed by and
construed according to the laws of said Commonwealth.
11. Notices and other writings delivered or mailed postage
prepaid to the Fund addressed to the Fund at Merrill Lynch Asset
Management, Inc., 800 Scudders Mill Road, Plainsboro, New Jersey
08536, Mailing address: Post Office Box 9011, Princeton, New
Jersey 08543, Attention: Mr. Gerald M. Richard, Senior Vice
President/Treasurer, or to such other address as the Fund may
have designated to the Custodian in writing, or to the Custodian
at 40 Water Street, Boston, Massachusetts 02109, Attention:
Manager, Securities Department, or to such other address as the
Custodian may have designated to the Fund in writing, shall be
deemed to have been properly delivered or given hereunder to the
respective addressee.
- 26 -
<PAGE> 27
12. This Agreement shall be binding on and shall inure to
the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that neither party hereto may
assign this Agreement or any of its rights or obligations
hereunder without the prior written consent of the other party.
13. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This
Agreement shall become effective when one or more counterparts
have been signed and delivered by each of the parties.
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed in its name and behalf on the day and
year first above written.
MERRILL LYNCH DRAGON
FUND, INC. BROWN BROTHERS HARRIMAN & CO.
By per pro
------------------------------- -----------------------
- 27 -
<PAGE> 28
BROWN BROTHERS HARRIMAN & CO - GLOBAL CUSTODY NETWORK
MERRILL LYNCH DRAGON FUND, INC.
APPENDIX A
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN CENTRAL
DEPOSITORY
<S> <C> <C>
CHINA STANDARD CHARTERED BANK, SHANGHAI NONE
REGIONAL AGHT 2/18/92
STANDARD CHARTERED BANK, SHENZHEN NONE
REGIONAL AGMT 2/18/92
HONG KONG CHASE MANHATTAN BANK, HONG KONG AGMT 6/4/79 NONE
CMB HONG KONG AGMT AMENDMENT 9/17/90
INDIA CITIBANK N A, BOMBAY AGMT 7/16/81- NONE
INDONESIA CITIBANK N A, JAKARTA AGMT 7/16/81- NONE
CITIBANK N A, SEOUL AGMT DTD 7/16/81- KSSC
KOREA
MALAYSIA HONGKONG & SHANGHAI BKG CORP, KUALA LUMPUR NONE
HSBC REGIONAL AGMT DTD 4/19/91
PAKISTAN STANDARD CHARTERED BANK, KARACHI NONE
REGIONAL AGMT 2/18/92
PHILIPPINES CITIBANK N A, MANILA AGMT 7/16/81* NONE
SINGAPORE CHASE MANHATTAN BANK SINGAPORE AGMT 6/9/80 CDP
SRI LANKA HONGKONG & SHANGHAI BKG CORP, COLOMBO NONE
HSBC REGIONAL AGMT DTD 4/19/91
TAIWAN CITIBANK N A, TAIPEI AGMT 7/16/81- TSCD
THAILAND HONG KONG & SHANGHAI BKG CORP, SINGAPORE FOR NONE
BANGKOK - HSBC REGIONAL AGMT 4/19/91
TRANSNATIONAL BROWN BROTHERS HARRIMAN & CO EUROCLEAR
CEDEL
TURKEY CITIBANK N A, ISTANBUL AGMT 7/16/81- NONE
</TABLE>
* CITIBANK N A AGREEMENT AMENDMENT DATED 8/31/90
I HEREBY CERTIFY THAT AT ITS MEETING ON 19 THE BOARD
APPROVED THE COUNTRIES, SUBCUSTODIANS, AGREEMENTS, AND CENTRAL DEPOSITORIES
LISTED ON THIS APPENDIX.
------------------------------------------------- -----------------------
(SIGNATURE) (DATE)
-------------------------------------------------
(TITLE)
<PAGE> 29
MERRILL LYNCH DRAGON FUND, INC.
CERTIFICATE AS TO RESOLUTION
OF
BOARD OF DIRECTORS
THE UNDERSIGNED CERTIFIES THAT HE IS THE SECRETARY OF MERRILL LYNCH
DRAGON FUND, INC. (THE -COMPANY-) A CORPORATION AND THAT, AS
SuCH, HE IS AUTHORIZED TO EXECUTE THIS CERTIFI ATE ON BEHALF OF THE COMPANY,
AND
FURTHER CERTIFIES THAT THE FOLLOWING IS A COMPLETE AND CORRECT COPY OF A
RESOLUTION ADOPTED BY THE BOARD OF DIRECTORS OF THE COMPANY AT THE MEETING HELD
ON AT WHICH A QUORUM WAS PRESENT AND THAT SUCH RESOLUTION
HAS NOT BEEN AMENDED AND IS IN FULL FORCE AND EFFECT.
RESOLVED, THAT ANY OF THE FOLLOWING PERSONS IN THEIR CAPACITIES AS
OFFICERS OF MERRILL LYNCH DRAGON FUND, INC. ARE HEREBY AUTHORIZED TO
GIVE INSTRUCTIONS TO BROWN BROTHERS HARRIMAN & CO, THE CORPORATION'S
CUSTODIAN, IN ACCORDANCE WITH THE CUSTODIAN AGREEMENT UNDER THE HEADING
OF "PROPER INSTRUCTIONS":
TITLE INDICATE SINGLY, JOINTLY OR
ANY OTHER SPECIFIC REQUIREMENTS
--------------------------- -------------------------------
--------------------------- -------------------------------
--------------------------- -------------------------------
--------------------------- -------------------------------
THE SECRETARY OF THE COMPANY FURTHER CERTIFIES THAT THE SIGNATURES
APPEARING OPPOSITE OF THE FOLLOWING NAMES RESPECTIVELY ARE SPECIMENS OF THE
GENUINE SIGNATURES OF THE INDIVIDUALS.
TYPED NAME AND TITLE SIGNATURE
--------------------------- -------------------------------
--------------------------- -------------------------------
--------------------------- -------------------------------
--------------------------- -------------------------------
--------------------------- -------------------------------
WHEREOF, I HEREUNTO SET MY HAND AND SEAL OF SAID CORPORATION THIS
DAY OF 199-
-------------------------------
SECRETARY
<PAGE> 1
EXHIBIT 9A
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the 14th day of April, 1992
by and between Merrill Lynch Dragon Fund, Inc., a Maryland
corporation (the "Fund") and Financial Data Services, Inc.
("FDS"), a New Jersey corporation.
WITNESSETH:
WHEREAS, the Fund wishes to appoint FDS to be the
Transfer Agent, Dividend Disbursing Agent and shareholder
Servicing Agent upon, and subject to, the terms and provisions of
this Agreement, and FDS is desirous of accepting such appointment
upon, and subject to, such terms and provisions:
NOW THEREFORE, in consideration of mutual covenants
contained in this Agreement, the Fund and FDS agree as follows:
1. Appointment of FDS as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent.
(a) The Fund hereby appoints FDS to act as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund upon, and subject to, the terms and provisions of this
Agreement.
(b) FDS hereby accepts the appointment as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund, and agrees to act as such upon, and subject to, the terms
and provisions of this Agreement.
2. Definitions.
(a) In this Agreement:
(i) The term "Act" means the Investment Company Act of
1940 as amended from time to time and any rule or regulation
thereunder;
(ii) The term "Account" means any account of a
Shareholder, or, if the shares are held in an account in the name
of MLPF&S for benefit of an identified customer, such account,
including a Plan Account, any account under a plan (by whatever
name referred to in the Prospectus) pursuant to the Self-Employed
Individuals Retirement Act of 1962 ("Keogh Act Plan") and any
plan (by whatever name referred to in the Prospectus) in
conjunction with Section 401 of the Internal Revenue Code
("Corporation Master Plan");
<PAGE> 2
(iii) The term "application" means an application made
by a Shareholder or prospective Shareholder respecting the
opening of an Account;
(iv) The term "MLFD" means Merrill Lynch Funds
Distributor, Inc., a Delaware corporation;
(v) The term "MLPF&S" means Merrill Lynch, Pierce,
Fenner & Smith Incorporated, a Delaware corporation;
(vi) The term "Officer's Instruction" means an
instruction in writing given on behalf of the Fund to FDS, and
signed on behalf of the Fund by the President, any vice
President, the Secretary or the Treasurer of the Fund;
(vii) The term "Prospectus" means the Prospectus and
the Statement of Additional Information of the Fund as from time
to time in effect;
(viii) The term "Shares" means shares of stock or
beneficial interest,as the case may be, of the Fund,
irrespective of class or series;
(ix) The term "Shareholder" means the holder of record
of Shares;
(x) The term "Plan Account" means an account opened by
a Shareholder or prospective Shareholder in respect to an open
account, monthly payment or withdrawal plan (in each case by
whatever name referred to in the Prospectus), and may also
include an account relating to any other plan if and when
provision is made for such plan in the Prospectus.
3. Duties of FDS as Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing Agent.
(a) Subject to the succeeding provisions of the Agreement,
FDS hereby agrees to perform the following functions as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund;
(i) Issuing, transferring and redeeming shares;
(ii) opening, maintaining, servicing and closing
Accounts;
(iii) Acting as agent for the Fund Shareholders and/or
customers of MLPF&S in connection with Plan Accounts, upon the
terms and subject to the conditions contained in the Prospectus
and application relating to the specific Plan Account;
2
<PAGE> 3
(iv) Acting as agent of the Fund and/or MLPF&S,
maintaining such records as may permit the imposition of such
contingent deferred sales charges as may be described in the
Prospectus, including such reports as may be reasonably requested
by the Fund with respect to such Shares as may be subject to a
contingent deferred sales charge;
(v) Upon the redemption of Shares subject to such a
contingent deferred sales charge, calculating and deducting from
the redemption proceeds thereof the amount of such charge in the
manner set forth in the Prospectus. FDS shall pay, on behalf of
MLFD, to MLPF&S such deducted contingent deferred sales charges
imposed upon all Shares maintained in the name of MLPF&S, or
maintained in the name of an account identified as a customer
account of MLPF&S. Sales charges imposed upon any other Shares
shall be paid by FDS to MLFD.
(vi) Exchanging the investment of an investor into, or
from the shares of other open-end investment companies or other
series portfolios of the Fund, if any, if and to the extent
permitted by the Prospectus at the direction of such investor.
(vii) Processing redemptions;
(viii) Examining and approving legal transfers;
(ix) Replacing lost, stolen or destroyed certificates
representing Shares, in accordance with, and subject to,
procedures and conditions adopted by the Fund;
(x) Furnishing such confirmations of transactions
relating to their Shares as required by applicable law;
(xi) Acting as agent for the Fund and/or MLPF&S,
furnishing such appropriate periodic statements relating to
Accounts, together with additional enclosures, including
appropriate income tax information and income tax forms duly
completed, as required by applicable law;
(xii) Acting as agent for the Fund and/or MLPF&S,
mailing annual, semi-annual and quarterly reports prepared by or
on behalf of the Fund, and mailing new Prospectuses upon their
issue to Shareholders as required by applicable law;
(xiii) Furnishing such periodic statements of
transactions effected by FDS, reconciliations, balances and
summaries as the Fund may reasonably request;
(xiv) Maintaining such books and records relating to
transactions effected by FDS as are required by the Act, or by
any other applicable provision of law, rule or regulation, to be
maintained by the Fund or its transfer agent with respect to such
3
<PAGE> 4
transactions, and preserving, or causing to be preserved any such
books and records for such periods as may be required by any such
law, rule or regulation and as may be agreed upon from time to
time between FDS and the Fund. In addition, FDS agrees to
maintain and preserve master files and historical computer tapes
on a daily basis in multiple separate locations a sufficient
distance apart to insure preservation of at least one copy of
such information;
(xv) Withholding taxes on non-resident alien Accounts,
preparing and filing U.S. Treasury Department Form 1099 and other
appropriate forms as required by applicable law with respect to
dividends and distributions; and
(xvi) Reinvesting dividends for full and fractional
shares and disbursing cash dividends, as applicable.
(b) FDS agrees to act as proxy agent in connection with the
holding of annual, if any, and special meetings of Shareholders,
mailing such notices, proxies and proxy statements in connection
with the holding of such meetings as may be required by
applicable law, receiving and tabulating votes cast by proxy and
communicating to the Fund the results of such tabulation
accompanied by appropriate certifications, and preparing and
furnishing to the Fund certified lists of Shareholders as of such
date, in such form and containing such information as may be
required by the Fund.
(c) FDS agrees to deal with, and answer in a timely manner,
all correspondence and inquiries relating to the functions of FDS
under this Agreement with respect to Accounts.
(d) FDS agrees to furnish to the Fund such information and
at such intervals as is necessary for the Fund to comply with the
registration and/or the reporting requirements (including
applicable escheat laws) of the Securities and Exchange
Commission, Blue Sky authorities or other governmental
authorities.
. (e) FDS agrees to provide to the Fund such information as
may reasonably be required to enable the Fund to reconcile the
number of outstanding Shares between FDS's records and the
account books of the Fund.
(f) Notwithstanding anything in the foregoing provisions of
this paragraph, FDS agrees to perform its functions thereunder
subject to such modification (whether in respect of particular
cases or in any particular class of cases) as may from time to
time be contained in an Officer's Instruction.
4
<PAGE> 5
4. compensation.
The charges for services described in this Agreement,
including "out-of-pocket" expenses, will be set forth in the
Schedule of Fees attached hereto.
5. Right of Inspection.
FDS agrees that it will in a timely manner make
available to, and permit, any officer, accountant, attorney or
authorized agent of the Fund to examine and make transcripts and
copies (including photocopies and computer or other electronical
information storage media and print-outs) of any and all of its
books and records which relate to any transaction or function
performed by FDS under or pursuant to this Agreement.
6. Confidential Relationship.
FDS agrees that it will, on behalf of itself and its
officers and employees, treat all transactions contemplated by
this Agreement, and all information germane thereto, as
confidential and not to be disclosed to any person (other than
the Shareholder concerned, or the Fund, or as may be disclosed in
the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the
Fund by way of an Officer's Instruction.
7. Indemnification.
The Fund shall indemnify and hold FDS harmless from any
loss, costs, damage and reasonable expenses, including reasonable
attorney's fees (provided that such attorney is appointed with
the Fund's consent, which consent shall not be unreasonably
withheld), incurred by it resulting from any claim, demand,
action, or suit in connection with the performance of its duties
hereunder, provided that this indemnification shall not apply to
actions or omissions of FDS in cases of willful misconduct,
failure to act in good faith or negligence by FDS, its officers,
employees or agents, and further provided, that prior to
confessing any claim against it which may be subject to this
indemnification, FDS shall give the Fund reasonable opportunity
to defend against said claim in its own name or in the name of
FDS. An action taken by FDS upon any Officer's Instruction
reasonably believed by it to have been properly executed shall
not constitute willful misconduct, failure to act in good faith
or negligence under this Agreement.
5
<PAGE> 6
8. Regarding FDS.
(a) FDS hereby agrees to hire, purchase, develop and
maintain such dedicated personnel, facilities, equipment,
software, resources and capabilities as may be reasonably
determined by the Fund to be necessary for the satisfactory
performance of the duties and responsibilities of FDS. FDS
warrants and represents that its officers and supervisory
personnel charged with carrying out its functions as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund possess the special skill and technical knowledge
appropriate for that purpose. FDS shall at all times exercise
due care and diligence in the performance of its functions as
Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent for the Fund. FDS agrees that, in determining
whether it has exercised due care and diligence, its conduct
shall be measured by the standard applicable to persons
possessing such special skill and technical knowledge.
(b) FDS warrants and represents that is duly authorized and
permitted to act as Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent under all applicable laws and that it.
will immediately notify the Fund of any revocation of such
authority or permission or of the commencement of any proceeding
or other action which may lead to such revocation.
9. Termination.
(a) This Agreement shall become effective as of the date
first above written and shall thereafter continue from year to
year. This Agreement may be terminated by the Fund or FDS
(without penalty to the Fund or FDS) provided that the
terminating party gives the other party written notice of such
termination at least sixty (60) days in advance, except that the
Fund may terminate this Agreement immediately upon written notice
to FDS if the authority or permission of FDS to act as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
has been revoked or if any proceeding or other action which the
Fund reasonably believes will lead to such revocation has been
commenced.
(b) Upon termination of this Agreement, FDS shall deliver
all unissued and cancelled stock certificates representing Shares
remaining in its possession, and all Shareholder records, books,
stock ledgers, instruments and other documents (including
computerized or other electronically stored information) made or
accumulated in the performance of its duties as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund along with a certified locator document clearly indicating
the complete contents therein, to such successor as may be
specified in a notice of termination or Officer's Instruction;
6
<PAGE> 7
and the Fund assumes all responsibility for failure thereafter to
produce any paper, record or documents so delivered and
identified in the locator document, if and when required to be
produced.
10. Amendment.
Except to the extent that the performance by FDS or its
functions under this Agreement may from time to time be modified
by an Officer's Instruction, this Agreement may be amended or
modified only by further written Agreement between the parties.
11. Governing Law.
This Agreement shall be governed by the laws of the
State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective duly authorized
officers and their respective corporate seals hereunto duly
affixed and attested, as of the day and year above written.
MERRILL LYNCH DRAGON FUND, INC.
By:/s/ Arthur Zeikel
-----------------------------
Title: President
--------------------------
FINANCIAL DATA SERVICES, INC.
By: /s/ Richard J. Heple
----------------------------
Title: Vice President
--------------------------
7
<PAGE> 8
Schedule of Fees
The Fund will pay to FDS an annual fee of $9.00 per Class A
Shareholder Account and $10.00 per Class B Shareholder Account in
addition to reimbursement for the out-of-pocket expenses incurred
by FDS pursuant to this Agreement.
8
<PAGE> 1
EXHIBIT 9B
LICENSE AGREEMENT RELATING TO USE 0F NAME
AGREEMENT made as of the 14th day of April, 1992, by,
between MERRILL LYNCH & CO., INC., a Delaware corporation
("ML&Co."), and MERRILL LYNCH DRAGON FUND, INC., a Maryland
corporation (the "Fund");
W I T N E S S E T H
WHEREAS, ML&CO. was incorporated under the laws of the State
of Delaware on March 27, 1973 under the corporate name "Merrill
Lynch & Co., Inc." and has used such name at all times there-
after;
WHEREAS, ML&CO. was duly qualified as a foreign corporation
under the laws of the State of New York on April 25, 1973 and has
remained so qualified at all times thereafter;
WHEREAS, the Fund was incorporated under the laws of the
State of Maryland on February 13, 1992; and
WHEREAS, the Fund desires to qualify as a foreign
corporation under the laws of the State of New York and has
requested ML&CO. to give its consent to the use of the name
"Merrill Lynch" in the Fund's corporate name.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and of the
covenants hereinafter contained, ML&CO. and the Fund hereby agree
as follows:
1. ML&CO. hereby grants the Fund a non-exclusive license to
use the words "Merrill Lynch" in its corporate name.
2. ML&CO. hereby consents to the qualification of the Fund
as a foreign corporation under the laws of the State of New York
with the words "Merrill Lynch" in its corporate name and agrees
to execute such formal consents as may be necessary in connection
with such filing.
3. The non-exclusive license hereinabove referred to has
been given and is given by ML&CO. on the condition that it may at
any time, in its sole and absolute discretion, withdraw the
non-exclusive license to the use of the words "Merrill Lynch" in
the name of the Fund; and, as soon as practicable after receipt
by the Fund of written notice of the withdrawal of such
non-exclusive license, and in no event later than ninety days
thereafter, the Fund will change its name so that such name will
not thereafter include the words "Merrill Lynch" or any variation
thereof.
4. ML&CO. reserves and shall have the right to grant to any
other company, including without limitation, any other investment
company, the right to use the words "Merrill Lynch" or variations
thereof in its name and no consent or permission of the Fund
shall be necessary; but, if required by an applicable law of any
state, the Fund will forthwith grant all requisite consents.
2
<PAGE> 3
5. The Fund will not grant to any other company the right to
use a name similar to that of the Fund or ML&CO. without the
written consent of ML&CO.
6. Regardless of whether the Fund should hereafter change
its name and eliminate the words "Merrill Lynch" or any variation
thereof from such name, the Fund hereby grants to ML&CO. the
right to cause the incorporation of other corporations or the
organization of voluntary associations which may have names
similar to that of the Fund or to that to which the Fund may
change its name and to own all or any portion of the shares of
such other corporations or associations and to enter into
contractual relationships with such other corporations or asso-
ciations, subject to any requisite approval of a majority of the
Fund's shareholders and the Securities and Exchange Commission
and subject to the payment of a reasonable amount to be deter-
mined at the time of use, and the Fund agrees to give and execute
any such formal consents or agreements as may be necessary in
connection therewith.
7. This Agreement may be amended at any time by a writing
signed by the parties hereto.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH & CO., INC.
By:
---------------------------------------
Vice President
MERRILL LYNCH DRAGON FUND, INC.
By:
---------------------------------------
President
4
<PAGE> 1
13
CERTIFICATE OF SOLE SHAREHOLDER
Merrill Lynch Investment Management, Inc. (doing business as
Merrill Lynch Asset Management ("MIAMI')), the holder of 5,000
Class A shares of common stock, par value $0.10 per share, and
5,000 Class B shares of common stock, par value $0.10 per share,
of Merrill Lynch Dragon Fund, Inc. (the "Fund"), a Maryland
corporation, does hereby confirm to the Fund its representation
that it purchased such shares for investment purposes, with no
present intention of redeeming or reselling any portion thereof,
and does further agree that if it redeems any portion of such
shares prior to the amortization of the Fund's organizational
expenses, the proceeds thereof will be reduced by the
proportionate amount of unamortized organizational expenses which
the number of shares being redeemed bears to the number of shares
initially purchased and outstanding at the time of redemption.
MLAM further agrees that in the event such shares are sold or
otherwise transferred to any other party, that prior to such sale
or transfer MLAM will obtain on behalf of the Fund an agreement
from such other party to comply with the foregoing as to the
reduction of redemption proceeds and to obtain a similar
agreement from any transferee of such party.
MERRILL LYNCH ASSET MANAGEMENT
By:
----------------------------------
President
Dated: April 14, 1992
<PAGE> 1
EXHIBIT 15A
AMENDED AND RESTATED
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH DRAGON FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 14th day of April 1992, and
amended and restated as of June 28, 1993, 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 intends to engage in business as an
open-end investment company registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act");
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;
WHEREAS, the Fund proposes to enter into a Class B 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 B shares (the "Class B shares") of
the Fund to the public;
WHEREAS, the Fund has entered into a Class B Distribution
Plan (the "Prior Plan") pursuant to Rule 12b-1 under the
Investment Company Act; and
WHEREAS, the Fund desires to adopt this Amended and Restated
Class B 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 B 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:
<PAGE> 2
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 B shares
to compensate MLFD and securities firms with which MLFD enters
into related agreements pursuant to Paragraph 3 hereof ("Sub-
Agreements") for account maintenance activities with respect to
Class B shareholders of the Fund.
2. The Fund shall pay MLFD a distribution fee under the
Plan at the end of each month at the annual rate of 0.75% of
average daily net assets of the Fund relating to Class B 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 B shares
of the Fund. Such expenditures may consist of sales commissions
to financial consultants for selling Class B 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 require-
ments set forth in Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of
Directors, and the Directors shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee and the
distribution fee during such period.
5. The Prior Plan has been approved by a vote of at least a
majority, as defined in the Investment Company Act, of the
outstanding Class B voting securities of the Fund. The Plan has
2
<PAGE> 3
not been submitted to the Class B shareholders because the
amendments do not materially increase the rate of payments by the
Fund provided for in the Prior Plan.
6. The 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 B 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 B 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 nomina-
tion 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
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 B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 28th day of June 1993, by and
between Merrill Lynch Funds Distributor, Inc., a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation (the "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 B shares (the "Class B shares"), of the Fund;
WHEREAS, MLFD and the Fund have entered into an Amended and
Restated Class B 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 B shares for account
maintenance activities related to Class B shares of the Fund and
a distribution fee from the Fund at the annual rate of 0.75% of
average daily net assets of the Fund relating to Class B shares
for providing sales and promotional activities and services
related to the distribution of Class B 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 B 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 with respect to the Class B shares of the Fund 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 B
shares of the Fund, and incur distribution expenditures, of the
types referred to in Paragraph 2 of the Plan.
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.
<PAGE> 6
4. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
12b-1 regarding the disbursement of the account maintenance fee
and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Directors of the
Fund and (b) those Directors of the Fund who are not "interested
persons" of the Fund, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
<PAGE> 1
EXHIBIT 15B
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
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
<PAGE> 2
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 0.75% 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 require-
ments set forth in Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of
Directors, and the Directors shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee and the
distribution fee during such period.
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 securi-
ties of the Fund.
6. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
2
<PAGE> 3
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 nomina-
tion 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.
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:
<PAGE> 4
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 corpo-
ration ("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 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 0.75% 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.
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.
<PAGE> 5
4. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
12b-1 regarding the disbursement of the account maintenance fee
and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Directors of the
Fund and (b) those Directors of the Fund who are not "interested
persons" of the Fund, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
<PAGE> 1
EXHIBIT 15C
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH DRAGON FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st 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 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 main-
tenance fee to MLFD with respect to the Fund's Class D shares;
and
WHEREAS, the Directors of the Fund have determined that
there is a reasonable likelihood that adoption of the Plan will
benefit the Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
under the Investment Company Act on the following terms and
conditions:
1. The Fund shall pay MLFD an account maintenance fee under
the Plan at the end of each month at the annual rate of 0.25% of
average daily net assets of the Fund relating to Class D shares
to compensate MLFD and securities firms with which MLFD enters
into related agreements ("Sub-Agreements") pursuant to Paragraph
2 hereof for providing account maintenance activities with
respect to Class D shareholders of the Fund. Expenditures under
<PAGE> 2
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 securi-
ties 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.
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
2
<PAGE> 3
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 nomina-
tion of Directors who are not interested persons, as defined in
the Investment Company Act, of the Fund shall be committed to the
discretion of the Directors who are not interested persons.
10. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 3
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH 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 corpo-
ration ("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
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
<PAGE> 5
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
<PAGE> 1
Dragon EXHIBIT 16(b)
Class B
<TABLE>
<CAPTION>
Period from
05-29-92 Annual
(inception) Total
to 2-28-93 Return*
-------- ------------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by
Maximum Offering Price 10.00
----------
Divided by Net Asset Value 10.00
----------
Equals Shares Purchased 100.00 100.00
Plus Shares Acquired through
Dividend Reinvestment 0.20 0.00
---------- ----------
Equals Shares Held
at 2/28/93 100.20 100.20
Multiplied by Net Asset
Value at 2/28/93 11.01 11.01
---------- ----------
1,103.20 1,103.23
Less deferred sales charge 40.00 0.00
Less 2% Redemption Fee 22.00 0.00
Equals Ending Redeemable Value at ---------- ----------
$1,000 Investment (ERV) at 2/28/93 $1,041.20 $1,103.23
Divided by $1,000 (P) 1.0412 1.1032
Subtract 1 0.0412 0.1032
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 4.12%
Expressed as a percentage
equals the Aggregate Total
Return for the Period 10.32%
ERV divided by P 1.0412
Raise to the power of 1.325
Equals 1.0551
Subtract 1 0.0551
Expressed as a percentage
equals the Average
Annualized Total Return 5.51%
</TABLE>
* Does not include sales charge or redemption fee.
<PAGE> 1
Dragon EXHIBIT 16(d)
Class A
<TABLE>
<CAPTION>
Period from
05/29/92 Annual
(inception) Total
to 2/28/93 Return*
-------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by
Maximum Offering Price 10.42
Divided by Net Asset Value 10.00
Equals Shares Purchased 96.05 100.00
plus Shares Acquired through
Dividend Reinvestment 0.81 0.81
--------- -------
Equals Shares Held
at 2/28/93 96.86 100.81
multiplied by Net Asset
Value at 2/28/93 11.01 11.01
--------- -------
1,066.44 1,109.92
Less 2% Redemption Fee 22.04 0.00
Equals Ending Redeemable Value at --------- -------
$1,000 Investment (ERV) at 2/28/93 $1,044.40 $1,109.90
Divided by $1,000 (P) 1.0444 1.1099
Subtract 1 0.0444 0.1099
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 4.44%
Expressed as a percentage
equals the Aggregate Total
Return for the Period 10.99%
ERV divided by P 1.0444
Raise to the power of 1.325
Equals 1.0593
Subtract 1 0.0593
Expressed as a percentage
equals the Average
Annualized Total Return 5.93%
</TABLE>
* Does not include sales charge or redemption fee.
