<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1996
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.
[X]
POST-EFFECTIVE AMENDMENT NO. 6
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 7
(Check appropriate box or boxes)
----------------
MERRILL LYNCH DRAGON FUND, INC.
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH DRAGON FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
----------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD 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.
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a
new effective date for a previously filed
post-effective amendment.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF 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 21, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH DRAGON FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page................ Cover Page
Item 2. Synopsis.................. Fee Table; Prospectus Summary
Condensed Financial
Item 3. Information............... Financial Highlights
Item 4. General Description of Investment Objective and Policies;
Registrant................ Additional Information
Item 5. Management of the Fund.... Fee Table; 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 Cover Page; Additional Information
Securities................
Item 7. Purchase of Securities Cover Page; Fee Table; Prospectus
Being Offered............. Summary; Merrill Lynch Select
PricingSM System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase.. Fee Table; 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 Not Applicable
History...................
Item 13. Investment Objectives and Investment Objective and Policies
Policies..................
Item 14. Management of the Fund.... Management of the Fund
Item 15. Control Persons and
Principal Holders of Management of the Fund; General
Securities............... Information--Security Ownership of
Certain Beneficial Owners
Item 16. Investment Advisory and Management of the Fund; Purchase of
Other Services............ Shares; General Information
Item 17. Brokerage Allocation and Portfolio Transactions and Brokerage
Other Practices...........
Item 18. Capital Stock and Other General Information--Description of
Securities................ Shares
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of
Being Offered............ 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 Performance Data
Data......................
Item 23. Financial Statements...... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
- ----------
APRIL 26, 1996
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 12, herein. For more information on the Fund's
investment objective and policies, please see "Investment Objective and
Policies" on page 17.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. 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. See "Merrill Lynch Select PricingSM
System" on page 5.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], 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 26, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION EX-
PENSES:
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 None(d) 4.0% during the first 1% for one year None(d)
purchase price year, decreasing 1.0%
or redemption annually thereafter
proceeds, to 0.0% after the
whichever is fourth year
lower).........
Exchange Fee.... None None None None
ANNUAL FUND OPER-
ATING EXPENSES
(AS A PERCENTAGE
OF AVERAGE NET
ASSETS):
Management
Fees(e)........ 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(f):
Account Mainte-
nance 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.. 0.15% 0.15% 0.15% 0.15%
Shareholder Ser-
vicing
Costs(g)....... 0.16% 0.20% 0.21% 0.17%
Other........... 0.06% 0.06% 0.06% 0.06%
----- ----- ----- -----
Total Other Ex- 0.37% 0.41% 0.42% 0.38%
penses........ ----- ----- ----- -----
Total Fund Oper- 1.37% 2.41% 2.42% 1.63%
ating Expenses. ===== ===== ===== =====
</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 36.
(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 39.
(c) Reduced for purchases of $25,000 and over and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A or Class D purchases of $1,000,000 or more
may not be subject to an initial sales charge. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares"--page 36.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
(e) See "Management of the Fund--Management and Advisory Arrangements"--page
33.
(f) See "Purchase of Shares--Distribution Plans"--page 42.
(g) See "Management of the Fund--Transfer Agency Services"--page 34.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a $1,000
investment including the
maximum $52.50 initial sales
charge (Class A and Class D
shares only) and assuming
(1) the Total Fund Operating
Expenses for each class set
forth above, (2) a 5% annual
return throughout the
periods and (3) redemption at
the end of the period:
Class A...................... $66 $ 94 $124 $208
Class B...................... $64 $ 95 $129 $256*
Class C...................... $35 $ 75 $129 $276
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 $208
Class B...................... $24 $ 75 $129 $256*
Class C...................... $25 $ 75 $129 $276
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
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
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
3
<PAGE>
considers developing Asia-Pacific countries to be all countries in Asia and the
Pacific Basin other than Japan, Australia and New Zealand. The objective of the
Fund reflects the belief that the emerging economies and securities markets of
the developing Asia-Pacific countries present attractive investment
opportunities.
The economies of a number of the developing Asia-Pacific countries have been
among the most rapidly growing economies in the world in recent years. In the
1980's, the four original newly industrialized economies ("NIEs") in the region
were Hong Kong, South Korea, Singapore and Taiwan, the so-called four "tigers".
In the late 1980's, the economies of Thailand, Malaysia, and Indonesia began to
emerge, making significant economic progress. More recently, southern China,
particularly the province of Guangdong, experienced rapid economic growth. This
regional growth has resulted from government policies directed towards market-
oriented economic reform and, in particular, seeking to encourage the
development of labor-intensive, export-oriented industries. There also has been
growth resulting from an increase in domestic demand. In addition, the
governments have been introducing deregulatory reforms to encourage development
of their securities markets and, in varying degrees, permit foreign investment.
A number of these securities markets have been undergoing rapid growth. While
investments in the developing Asia-Pacific countries are subject to
considerable risks (see "Risk Factors and Special Considerations"), the Fund
believes that the above developments in the region present attractive
investment opportunities.
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. ("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 its affiliate, Fund Asset Management, L.P. ("FAM"), acts as
4
<PAGE>
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, 1996, the Manager and
FAM had a total of approximately $207.7 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Manager. See "Management of the Fund--Management and Advisory
Arrangements".
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share subject to the sales charges and ongoing fee
arrangements described below. See "Merrill Lynch Select 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 (the
"NYSE") (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 its affiliate, FAM. Funds advised by MLAM or
FAM which utilize the Merrill Lynch Select PricingSM System are referred to
herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
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, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, 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
5
<PAGE>
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% eight years(/4/)
- ---------------------------------------------------------------------------------------
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 are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead 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 was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
6
<PAGE>
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Other eligible investors
include certain retirement plans and participants in certain
investment programs. In addition, Class A shares will be offered at
net asset value 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 the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 5.25%, which is reduced for purchases of
$25,000 and over, and waived for purchases by certain retirement plans
in connection with certain investment programs. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived, such purchases will be subject
to a 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 the conversion and
holding periods for certain retirement plans, is modified as
described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B
Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also
subject to a CDSC 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
7
<PAGE>
distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. Purchases of $1,000,000 or more may not be
subject to an initial sales charge but if the initial sales charge is
waived, such purchases will be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. The schedule of
initial sales charges and reductions for Class D shares is the same
as the schedule for Class A shares, except that there is no waiver
for purchases by retirement plans in connection with certain
investment programs. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B". See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
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. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares together with Class B, Class C and Class D share holdings will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
8
<PAGE>
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".
9
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche llp, independent auditors. Financial statements and the independent
auditors' report thereon for the fiscal year ended December 31, 1995 are
included in the Statement of Additional Information. Further information about
the performance of the Fund is contained in the Fund's most recent annual
report to shareholders which may be obtained, without charge, by calling or by
writing the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------- --------------------------------------------------
FOR THE FOR THE FOR THE
FOR THE PERIOD FOR THE YEAR ENDED TEN MONTHS PERIOD
YEAR ENDED OCT. 21, 1994+ DEC. 31, ENDED MAY 29, 1992+
DEC. 31, TO DEC. 31, --------------------- DEC. 31, TO FEB. 28,
1995## 1994## 1995## 1994## 1993## 1993##
---------- -------------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 15.05 $17.43 $ 15.03 $ 18.74 $ 11.01 $ 10.00
------- ------ --------- --------- -------- --------
Investment income
(loss)--net............ .12 .02 (.03) (.07) (.02) (.02)
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 1.00 (1.91) 1.00 (3.28) 7.86 1.05
------- ------ --------- --------- -------- --------
Total from investment
operations............. 1.12 (1.89) .97 (3.35) 7.84 1.03
------- ------ --------- --------- -------- --------
Less dividends and dis-
tributions:
Investment income--net. -- -- -- -- -- ++ --
In excess of investment
income--net........... (.18) (.13) (.02) -- -- ++ (.02)
Realized gain on
investments--net...... -- (.27) -- (.27) (.11) -- ++
In excess of realized
gain on
investments--net...... -- (.09) -- (.09) -- --
------- ------ --------- --------- -------- --------
Total dividends and dis-
tributions............. (.18) (.49) (.02) (.36) (.11) (.02)
------- ------ --------- --------- -------- --------
Net asset value, end of
period................. $ 15.99 $15.05 $ 15.98 $ 15.03 $ 18.74 $ 11.01
======= ====== ========= ========= ======== ========
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 7.44% (10.82)%# 6.49% (17.86)% 71.27%# 10.32%#
======= ====== ========= ========= ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance and
distribution fees...... 1.37% 1.54%* 1.41% 1.40% 1.35%* 1.49%*
======= ====== ========= ========= ======== ========
Expenses................ 1.37% 1.54%* 2.41% 2.40% 2.35%* 2.49%*
======= ====== ========= ========= ======== ========
Investment income
(loss)--net............ .74% .84%* (.20)% (.42)% (.15)%* (.08)%*
======= ====== ========= ========= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $31,591 $3,383 $ 991,281 $ 917,384 $990,843 $365,430
======= ====== ========= ========= ======== ========
Portfolio turnover...... 24.52% 16.45% 24.52% 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.
10
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS D
-------------------------- ------------------------------------------------
FOR THE FOR THE FOR THE
FOR THE PERIOD FOR THE YEAR ENDED TEN MONTHS PERIOD
YEAR ENDED OCT. 21, 1994+ DEC. 31, ENDED MAY 29, 1992+
DEC. 31, TO DEC. 31, -------------------- DEC. 31, TO FEB. 28,
1995## 1994## 1995## 1994## 1993## 1993##
---------- -------------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 14.92 $17.29 $ 15.08 $ 18.77 $ 11.01 $ 10.00
------- ------ --------- --------- -------- --------
Investment income
(loss)--net............ (.04) (.01) .09 .06 .07 .05
Realized and unrealized
gain (loss) on
investments
and foreign currency
transactions--net...... 1.00 (1.89) 1.02 (3.30) 7.88 1.04
------- ------ --------- --------- -------- --------
Total from investment
operations............. .96 (1.90) 1.11 (3.24) 7.95 1.09
------- ------ --------- --------- -------- --------
Less dividends and
distributions:
Investment income--net. -- -- -- -- (.01) --++
In excess of investment
income--net............ (.09) (.11) (.14) (.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........... (.09) (.47) (.14) (.45) (.19) (.08)
------- ------ --------- --------- -------- --------
Net asset value, end of
period.................. $ 15.79 $14.92 $ 16.05 $ 15.08 $ 18.77 $ 11.01
======= ====== ========= ========= ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 6.46% (10.98)%# 7.35% (17.24)% 72.31%# 10.99%#
======= ====== ========= ========= ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance and
distribution fees...... 1.42% 1.57%* 1.38% 1.38% 1.34%* 1.48%*
======= ====== ========= ========= ======== ========
Expenses................ 2.42% 2.57%* 1.63% 1.63% 1.59%* 1.73%*
======= ====== ========= ========= ======== ========
Investment income
(loss)--net............. (.28)% (.17)%* .59% .34% .61%* .61%*
======= ====== ========= ========= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $29,042 $5,329 $ 285,485 $ 249,903 $311,848 $111,180
======= ====== ========= ========= ======== ========
Portfolio turnover...... 24.52% 16.45% 24.52% 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.
11
<PAGE>
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
Commission, nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign company than about a U.S. company, and such foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which U.S. companies are
subject. As a result, traditional investment measurements, such as
price/earnings ratios, as used in the United States, may not be applicable to
certain smaller capital markets. Foreign companies, and companies in smaller
capital markets in particular, are not generally subject to uniform accounting,
auditing and financial reporting standards or to practices and requirements
comparable to those applicable to domestic companies. Foreign markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have failed to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. There is generally less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
12
<PAGE>
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 laws 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
13
<PAGE>
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. 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
14
<PAGE>
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.
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 of
1940, as amended (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. In addition, under the
Investment Company Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment 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.
15
<PAGE>
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.
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".
16
<PAGE>
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 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 defined 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
17
<PAGE>
years represents (directly or indirectly through subsidiaries) assets or
activities located in such countries. The Fund may acquire developing Asia-
Pacific securities that are denominated in currencies other than a developing
Asia-Pacific currency. The Fund also may consider a debt security that is
denominated in a developing Asia-Pacific currency to be a developing Asia-
Pacific security without reference to its principal trading market or to the
location of its issuer. The Fund may consider investment companies to be
located in the country or countries in which they primarily make their
portfolio investments.
The economies of a number of the developing Asia-Pacific countries have been
among the most rapidly growing economies in the world in recent years. In the
1980's, the four original NIEs were Hong Kong, South Korea, Singapore and
Taiwan, the so-called four "tigers". In the late 1980's, the economies of
Thailand, Malaysia and Indonesia, which, together with Singapore, the
Philippines and Brunei, are members of the Association of Southeast Asian
Nations ("ASEAN"), began to emerge, making significant economic progress. More
recently, southern China, particularly the province of Guangdong, experienced
rapid economic growth. 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".
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The Fund may invest in debt securities ("sovereign debt") issued or
guaranteed by developing Asia-Pacific governments (including developing Asia-
Pacific countries, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), debt securities issued or
guaranteed by international organizations designated or supported by multiple
foreign governmental entities (which are not obligations of foreign
governments) to promote economic reconstruction or development ("supranational
entities"), debt securities issued by corporations or financial institutions or
debt securities issued by the U.S. Government or an agency or instrumentality
thereof.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related governmental
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank") and the Asian Development Bank. The governmental
members or "stockholders" usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
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 certain state laws).
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 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. 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.
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The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield/high risk
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining 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
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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.
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
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necessarily engage in hedging transactions when movements in any particular
equity, debt and currency markets occur.
Set forth below are descriptions of certain hedging strategies in which the
Fund is authorized to engage.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified future
date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the 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
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cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is authorized
to engage in transactions in stock index options and futures and financial
futures, and related options on such futures. The Fund may purchase or write
put and call options on stock indices to hedge against the risks of market-wide
stock price movement in the securities in which the Fund invests. Options on
indices are similar to options on securities except that on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Fund may invest in stock index
options based on a broad market index or based on a narrow index representing
an industry or market segment.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a specified amount of a commodity, such as a type of security, for a
set price on a future date. Unlike most other futures contracts, a stock index
futures contract does not require actual delivery of securities but results in
cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time of its settlement. The Fund may
effect transactions in stock index futures contracts in connection with the
equity securities in which it invests and in financial futures contracts in
connection with the debt securities in which it invests. Transactions by the
Fund in stock index futures and financial futures are subject to limitations as
described below under "Restrictions on the Use of Futures Transactions".
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.
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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" 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.
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
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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 "spread"). 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 "spreads" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade or futures exchanges. The
Fund will not speculate in foreign currency options, futures or related
options. Accordingly, the Fund will not hedge a currency substantially in
excess of the market value of 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
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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 Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 15% (10% to the extent required by certain state
laws) of the total assets of the Fund, taken at market value, together with all
other assets of the Fund which are illiquid or are not otherwise readily
marketable. However, if the OTC option is sold by the Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve Bank of New York
and if the Fund has the unconditional contractual right to repurchase such OTC
option from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying security minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money". This policy as to OTC options is
not a fundamental policy of the Fund and may be amended by the Directors of the
Fund without the approval of the Fund's shareholders. However, the Fund will
not change or modify this policy prior to the change or modification by the
Commission staff of its position.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to predict correctly
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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 for the special tax treatment afforded regulated investment
companies under the Internal Revenue Code of 1986, as amended (the "Code"). 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.
27
<PAGE>
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 Commission. Affiliated persons of the Fund may serve as its
broker in transactions conducted on an exchange and in over-the-counter
transactions conducted on an agency basis. In addition, consistent with the
Rules of Fair Practice of the NASD, the Fund may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund. It is expected that the majority of the
shares of the Fund will be sold by Merrill Lynch. Costs associated with
transactions in foreign securities are generally higher than 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
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.
28
<PAGE>
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 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 repurchase
agreements, allocate interest on the underlying security to the purchaser
during the term of the agreement. In all instances, the Fund takes possession
of the underlying securities when investing in repurchase agreements or
purchase and sale contracts. Nevertheless, if the seller were to default on its
obligation to repurchase a security under a repurchase agreement or purchase
and sale contract and the market value of the underlying security at such time
was less than the Fund had paid to the seller, the Fund would realize a loss.
The Fund may not invest more than 15% (10% to the extent required by
29
<PAGE>
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.
Swap Agreements. The Fund is authorized to enter into equity swap agreements,
which are generally contracts in which one party agrees to make periodic
payments based on the change in market value of a specified equity security,
basket of equity securities or equity index in return for periodic payments
based on a fixed or variable interest rate or the change in market value of a
different equity security, basket of equity securities or equity index. For
example, swap agreements may be used to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impractical. The
swap agreement will be structured to provide for early termination in the
event, for example, that the Fund desires to lock in appreciation.
Swap agreements entail the risk that a party will default on its payment
obligations to the Fund thereunder. The Fund will seek to lessen the risk to
some extent by entering into a transaction only if the counterparty meets the
current credit requirement for OTC option counterparties. Swap agreements also
bear the risk that the Fund will not be able to meet its obligation to the
counterparty. The Fund, however, will deposit in a segregated account with its
custodian high quality liquid fixed income instruments or cash or cash
equivalents or other assets permitted to be so segregated by the Commission in
an amount equal to or greater than the market value of the liabilities under
the swap agreement or the amount it would have cost the Fund initially to make
an equivalent direct investment, plus or minus any amount the Fund is obligated
to pay or is to receive under the swap agreement. The Fund will enter into a
swap transaction only if, immediately following the time the Fund enters into
the transaction, the aggregate notional principal amount of swap transactions
to which the Fund is a party would not exceed 5% of the Fund's net assets.
Indexed and Inverse Securities. The Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an "index"). As an illustration, the Fund may invest in a security that
pays interest and returns principal based on the change in the value of a
securities index or a basket of securities. Interest and principal payable on a
security also may be based on relative changes among particular indices. In
addition, the Fund may invest in securities whose potential investment return
is inversely based on the change in particular indices. For example, the Fund
may invest in securities that pay a higher rate of interest and principal when
a particular index decreases and pay a lower rate of interest and
principal when the value of the index increases. To the extent that the Fund
invests in such types of securities,
30
<PAGE>
it will be subject to the risks associated with changes in the particular
indices, which may include reduced or eliminated interest payments and losses
of invested principal. Examples of such types of securities are indexed or
inverse securities issued with respect to a stock market index in a particular
country.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities generally
will be more volatile than the market values of fixed-rate securities.
Management of the Fund believes that indexed securities, including inverse
securities, represent flexible portfolio management instruments that may allow
the Fund to seek potential investment rewards, hedge other portfolio positions,
or vary the degree of portfolio leverage relatively efficiently under different
market conditions.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental
policies may not be changed without the approval of the holders of a majority
of the Fund's outstanding voting securities (which for this purpose and under
the Investment Company Act means the lesser of (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares). Among its
fundamental policies, the Fund may not invest more than 25% of its 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 without shareholder approval.
As a non-fundamental policy the Fund will not 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.)
As a non-fundamental policy, the Fund will not invest in securities which
cannot readily be resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 15% of its
total assets (or 10% of its total assets as presently required by certain state
laws) taken at market value would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors has otherwise determined to be liquid
pursuant to applicable law. Notwithstanding the foregoing,
31
<PAGE>
the Fund may purchase without regard to this limitation securities that are not
registered under 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.
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 Commission staff of its position regarding OTC options,
as discussed above.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of 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. ("Princeton Services"); Executive Vice President of ML
& Co.; 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.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
32
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the Fund's investment adviser. The Manager is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Manager or its 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, 1996, the Manager and FAM had a
total of approximately $207.7 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio
and constantly reviews the Fund's holdings in light of its own research
analysis and that from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Manager,
subject to review by the Board of Directors.
The Manager provides the portfolio manager for the Fund, who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions, and places transactions
accordingly. The Manager is also obligated to perform certain administrative
and management services for the Fund and is obligated to provide all of the
office space, facilities, equipment and personnel necessary to perform its
duties under the Management Agreement.
The Fund pays the Manager a monthly fee at the annual rate of 1.00% of the
average daily net assets of the Fund. This fee is higher than that of most
mutual funds, including most other mutual funds managed by the Manager and
other investment advisers, but management of the Fund believes this fee is
justified by the additional investment research and analysis required in
connection with investing in developing Asia-Pacific capital markets. For the
fiscal year ended December 31, 1995, the Manager received a fee of $11,840,885
(based on average net assets of approximately $1.2 billion). At March 31, 1996,
the net assets of the Fund aggregated $1.6 billion. At this asset level, the
annual management fee would aggregate approximately $16.5 million.
Kara W. Y. Tan Bhala, Vice President of the Fund, is the Fund's Portfolio
Manager. Ms. Tan Bhala has been a Vice President of the Manager and a Senior
Portfolio Manager of the Manager and FAM since 1992. Ms. Tan Bhala was a
Portfolio manager with Fiduciary Trust Company International from 1990 to 1992;
a 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. Tan 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, 1995, the Fund reimbursed the Manager
$168,696 for accounting services. For the fiscal year ended December 31, 1995,
the ratio of total expenses to average net assets for each class of shares was
as follows: Class A, 1.37%; Class B, 2.41%; Class C, 2.42%; and Class D, 1.63%.
33
<PAGE>
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, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives 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, 1995, the fee paid by
the Fund to the Transfer Agent was $2,244,465. At March 31, 1996, the Fund had
11,059 Class A shareholder accounts, 125,164 Class B shareholder accounts,
8,832 Class C shareholder accounts and 24,981 Class D shareholder accounts. At
this level of accounts, the annual fee payable to the Transfer Agent would
aggregate approximately $2.3 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
34
<PAGE>
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 NYSE
(generally, 4:00 p.m., New York time), which includes orders received after the
close of business on the previous day, the applicable offering price will be
based on the net asset value determined as of 15 minutes after the close of
business on the NYSE on that day, provided the Distributor in turn receives the
orders from the securities dealer prior to 30 minutes after the close of
business on the NYSE on that day. If the purchase orders are not received by
the Distributor prior to 30 minutes after the close of business on the NYSE,
such orders shall be deemed received on the next business day. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee
(presently $4.85) to confirm a sale of shares to such customers. Purchases
directly through the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select PricingSM System is set forth
under "Merrill Lynch Select PricingSM System" on page 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, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid. See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege".
35
<PAGE>
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(!) 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 four 0.25% 0.75% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, decreasing after approximately
1.0% annually to 0.0% eight years(/4/)
- -------------------------------------------------------------------------------------------
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 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 "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but instead will be subject to a
1.0% CDSC for one year. 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 was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
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.
36
<PAGE>
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 and on Class A
purchases by certain retirement plan investors in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases will be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994, might have been subject to a CDSC
if the shares were 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, 1995, the Fund sold 15,316,591 of
its Class A shares for aggregate net proceeds to the Fund of $235,070,334. The
gross sales charges for the sale of its Class A shares for the period were
$2,503, of which $150 and $2,353 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 A shares
purchased subject to front-end sales charge waivers.
During the fiscal year ended December 31, 1995, the Fund sold 25,578,665 of
its Class D shares for aggregate net proceeds to the Fund of $391,676,072. The
gross sales charges for the sale of its Class D shares for the period were
$620,284, of which $43,548 and $576,736 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.
37
<PAGE>
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 ("MFA") 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 in their initial offerings who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met. In
addition, Class A shares of the Fund and certain other MLAM-advised mutual
funds are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. and, if certain conditions set forth in the Statement
of Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of
the Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
employer-sponsored retirement or savings plans and to Employee Access
AccountsSM available through employers which provide such plans.
Class A and Class D shares are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock, pursuant to tender offers conducted by
those funds in shares of the Fund.
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. Class
D shares are offered with reduced sales charges and, in certain circumstances,
at net asset value, to participants in the Merrill Lynch BlueprintSM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
38
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
while Class C shares are subject only to a one-year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans".
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. Approximately eight years after issuance, Class B shares
will convert automatically into Class D shares of the Fund, which are subject
to an account maintenance fee but no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately ten years. If
Class B shares of the Fund are exchanged for Class B shares of another MLAM-
advised mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
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
39
<PAGE>
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------- -----------------
<S> <C>
0-1........................................................... 4.00%
1-2........................................................... 3.00
2-3........................................................... 2.00
3-4........................................................... 1.00
4 and thereafter.............................................. 0.00
</TABLE>
For the fiscal year ended December 31, 1995, the Distributor received CDSCs of
$2,203,281 with respect to the redemption of Class B shares, all of which was
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to 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).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the MFA program, the time
period that such Class A shares are held in the MFA program will be included in
determining the holding period of Class B shares reacquired upon termination of
participation in the MFA program (see "Shareholder Services--Exchange
Privilege").
The Class B CDSC is waived on 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
40
<PAGE>
account at the time of redemption. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. For the fiscal year ended December
31, 1995, the Distributor received CDSCs of $9,778 with respect to the
redemption of Class C shares, all of which was paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
41
<PAGE>
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
The Conversion Period is also modified for retirement plan investors who
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period for the Class B shares originally held for purposes of
calculating the Conversion Period of Class B shares acquired upon termination
of participation in the MFA program.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
42
<PAGE>
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, 1995, the Fund paid the Distributor
$8,958,872 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $898.3
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. During the fiscal year ended December 31, 1995, the Fund paid
the Distributor $133,278 pursuant to the Class C Distribution Plan (based on
average net assets subject to the Class C Distribution Plan of approximately
$13.4 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, 1995, the Fund paid the
Distributor $646,029 pursuant to the Class D Distribution Plan (based on
average net assets subject to the Class D Distribution Plan of approximately
$259.1 million), all of which was paid to Merrill Lynch for providing account
maintenance services in connection with Class D shares. At March 31, 1996, the
net assets of the Fund subject to the Class B Distribution Plan aggregated
approximately $1.2 billion. At this asset level, the annual fee payable
pursuant to the Class B Distribution Plan would aggregate approximately $12.2
million. At March 31, 1996, the net assets of the Fund subject to the Class C
Distribution Plan aggregated approximately $62.5 million. At this asset level,
the annual fee payable pursuant to the Class C Distribution Plan would
aggregate $624,966. At March 31, 1996, the net assets of the Fund subject to
the Class D Distribution Plan aggregated approximately $316.6 million. At this
asset level, the annual fee payable pursuant to the Class D Distribution Plan
would aggregate $791,592.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
As of December 31, 1995, for Class B shares, fully allocated accrual expenses
for the period since May 29, 1992 (commencement of operations) exceeded fully
allocated accrual revenues by $6,429,000 (0.65% of Class B net assets at that
date). At such date, the direct cash revenues incurred by the Distributor and
Merrill Lynch with respect to Class B shares for the period since commencement
of operations exceeded direct cash expenses for such period by approximately
$14,652,026 (1.48% of Class B net assets at that date). Similar fully allocated
accrual data for Class C shares is not presented because such revenues and
expenses for the
43
<PAGE>
period from October 21, 1994 (commencement of operations) to December 31, 1995
are de minimis. As of December 31, 1995, for Class C shares, direct cash
revenues for the period since October 21, 1994 (commencement of operations)
exceeded direct cash expenses by $27,136 (0.09% 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 shares but not
the account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales charge
rule limits the aggregate of distribution fee payments and CDSCs payable by the
Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares,
computed separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fees and the 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.
44
<PAGE>
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. 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 existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing of
a redemption check until such time as good payment has been collected for the
purchase of such shares. Normally this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
NYSE (generally, 4:00 p.m., New York time), on the day received and that such
request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE, in order to obtain
that day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares.
Repurchases directly through the Transfer Agent are not subject to the
processing fee. The Fund reserves the right to reject any order for repurchase,
which right of rejection might affect adversely shareholders seeking redemption
through the repurchase procedure.
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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. Alternatively, the reinstatement privilege
may be exercised through the investor's Merrill Lynch financial consultant
within 30 days after the date the request for redemption was accepted by the
Transfer Agent or the Distributor.
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. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent.
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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
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in his account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in
which the exchange is made or is otherwise eligible to purchase Class A shares
of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of
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the Fund. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for the
previously owned shares of the Fund is "tacked" to the holding period for the
newly acquired shares of the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange by holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one year holding period does not apply to shares acquired
through reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be re-exchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption of
Class B or Class C shares so reacquired, or the Conversion Period for Class B
shares so reacquired, the holding period for the Class A shares will be
"tacked" to the holding period for the Class B or Class C shares originally
held. The Fund's exchange privilege is also modified with respect to purchases
of Class A and Class D shares by non-retirement plan investors under the MFA
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a MLAM-advised mutual fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values of the shares
being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other MLAM-
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
All dividends and capital gains distributions are 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,
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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 Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B
and Class C shares and the maximum sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance fees and distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.
The Fund will include performance data for all classes of shares of the Fund in
any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
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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 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.
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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.
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) all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, 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 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. Securities which are traded both in the OTC market and on a
stock exchange will be valued according to the broadest and most representative
market. When the Fund writes a call option, the amount of the premium received
is recorded
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on the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last bid price. Other investments,
including futures contracts and related options, will be stated at market
value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes.
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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 distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under proposed
regulations the Fund would be able to "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
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company taxable income during a taxable year, the Fund would not be able to
make any ordinary income dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
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. As of the
date of this Prospectus, the Fund has an authorized capital of 500,000,000
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. Class A, Class C
and Class D each consists of 100,000,000 shares and Class B consists of
200,000,000 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
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<PAGE>
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 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 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:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, 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 Merrill Lynch Financial
Data Services, Inc. at 1-800-637-3863.
55
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
56
<PAGE>
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 Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital
Gains
SELECT ONE:
[_] Reinvest SELECT ONE:
[_] Reinvest
[_] Cash [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch 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 Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
- -------------------------------------------------------------------------------
57
<PAGE>
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......
Dear Sir/Madam: Date of Initial Purchase
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.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
- - -
- - -
This form when completed, should
be mailed to:
Merrill Lynch Dragon Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
signature.
.....................................
Dealer Name and Address
By: .................................
Authorized Signature of Dealer
[_][_][_] [_][_][_][_] ................
Branch Code F/C No. F/C Last Name
[_][_][_] [_][_][_][_]
Dealer's Customer A/C No.
58
<PAGE>
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
(Please Print)
Name of Owner...................... Social Security No. or
First Name Initial Last Name Taxpayer Identification
No.
Name of Co-Owner (if any)..........
First Name
Initial
Last Name
Address............................ Account Number ....................
(if existing account)
...................................
(Zip Code)
- -------------------------------------------------------------------------------
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 MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
59
<PAGE>
MERRILL LYNCH DRAGON FUND, INC. -- AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch 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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
You are hereby authorized to draw an DRAWN BY MERRILL LYNCH FINANCIAL
ACH debit each month on my bank DATA SERVICES, INC.
account for investment in Merrill
Lynch Dragon Fund, Inc., as
indicated below:
Amount of each ACH debit $........ To...............................Bank
(Investor's Bank)
Account No. ......................
Bank Address.........................
City...... State...... Zip Code......
Please date and invest ACH debits on
the 20th of each month beginning As a convenience to me, I hereby
............................. or request and authorize you to pay and
as soon thereafter as possible. charge to my account ACH debits
drawn on my account by and payable
(month) to Merrill Lynch Financial Data
Services, Inc. I agree that your
I agree that you are drawing these rights in respect to each such debit
ACH debits voluntarily at my request shall be the same as if it were a
and that you shall not be liable for check drawn on you and signed
any loss arising from any delay in personally by me. This authority is
preparing or failure to prepare any to remain in effect until revoked by
such debit. If I change banks or me in writing. Until you receive
desire to terminate or suspend this such notice, you shall be fully
program, I agree to notify you protected in honoring any such
promptly in writing. I hereby debit. I further agree that if any
authorize you to take any action to such debit be dishonored, whether
correct erroneous ACH debits of my with or without cause and whether
bank account or purchases of Fund intentionally or inadvertently, you
shares including liquidating shares shall be under no liability.
of the Fund and crediting my bank
account. I further agree that if a
debit is not honored upon
presentation, Merrill Lynch Financial ............ .....................
Data Services, Inc. is authorized to Date Signature of
discontinue immediately the Automatic Depositor
Investment Plan and to liquidate
sufficient shares held in my account ............ .....................
to offset the purchase made with the Bank Signature of Depositor
dishonored debit. Account (If joint account,
Number both must sign)
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
60
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
61
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
62
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................................................. 2
Prospectus Summary........................................................ 3
Merrill Lynch Select PricingSM System..................................... 5
Financial Highlights...................................................... 10
Risk Factors and Special Considerations................................... 12
General.................................................................. 12
Investing on an International Basis and in Countries with Smaller Capital
Markets................................................................. 12
Investing in Developing Asia-Pacific Securities Markets and Economies.... 13
Restrictions on Foreign Investments...................................... 14
Limitations on Share Transactions........................................ 16
Fees and Expenses........................................................ 16
Hedging Strategies....................................................... 16
No Rating Criteria for Debt Securities................................... 16
Borrowing................................................................ 17
Non-Diversified Status................................................... 17
Investment Objective and Policies......................................... 17
Certain Risks of Debt Securities......................................... 19
Portfolio Strategies Involving Options and Futures....................... 21
Other Investment Policies and Practices.................................. 27
Management of the Fund.................................................... 32
Board of Directors....................................................... 32
Management and Advisory Arrangements..................................... 33
Code of Ethics........................................................... 34
Transfer Agency Services................................................. 34
Purchase of Shares........................................................ 34
Initial Sales Charge Alternatives--Class A and Class D Shares............ 36
Deferred Sales Charge Alternatives--Class B and Class C Shares........... 39
Distribution Plans....................................................... 42
Limitations on the Payment of Deferred Sales Charges..................... 44
Redemption of Shares...................................................... 44
Redemption............................................................... 45
Repurchase............................................................... 45
Reinstatement Privilege--Class A and Class D Shares...................... 46
Shareholder Services...................................................... 46
Investment Account....................................................... 46
Exchange Privilege....................................................... 47
Automatic Reinvestment of Dividends and Distributions.................... 48
Systematic Withdrawal Plans.............................................. 49
Automatic Investment Plans............................................... 49
Performance Data.......................................................... 49
Additional Information.................................................... 50
Dividends and Distributions.............................................. 50
Determination of Net Asset Value......................................... 51
Taxes.................................................................... 52
Organization of the Fund................................................. 54
Shareholder Inquiries.................................................... 55
Shareholder Reports...................................................... 55
Authorization Form........................................................ 57
</TABLE>
Code # 16261-0496
[LOGO]MERRILL LYNCH
MERRILL LYNCH
DRAGON FUND, INC.
[ART]
PROSPECTUS
April 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
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 26,
1996 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is April 26, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in developing Asia-Pacific equity and debt
securities. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Manager") will effect portfolio transactions without regard to holding period,
if, in its judgment, such transactions are advisable in light of a change in
circumstances of a particular company or within a particular industry or due to
general market, economic or financial conditions. The Fund's portfolio turnover
rates for the fiscal years ended December 31, 1994 and 1995, were 16.45% and
24.52%, 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 Fund
does not believe that these considerations will have any significant effect on
its portfolio strategy, although there can be no assurance in this regard.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The Fund may seek to hedge its portfolio against
movements in the equity, debt and currency markets. The Fund has authority to
write (i.e., sell) covered put and call options on its portfolio securities,
purchase put and call options on securities and engage in transactions in stock
index options, stock index futures and stock futures and financial futures, and
related options on such futures. The Fund may also deal in forward foreign
exchange transactions, foreign currency options and futures and related options
on such futures. Each of such portfolio strategies is described in the
Prospectus. Although certain risks are involved in options and futures
transactions (as discussed in the Prospectus and below), the
2
<PAGE>
Manager believes that, because the Fund will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions. While
the Fund's use of hedging strategies is intended to reduce the volatility of
the net asset value of its shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Suitable hedging instruments may not be available with
respect to developing Asia-Pacific securities on a timely basis and on
acceptable terms. The following is further information relating to portfolio
strategies involving options and futures the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the underlying
security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security
at a price that may be higher than the market value of that security at the
time of the exercise for as long as the option is outstanding. The Fund may
engage in closing transactions in order to terminate put options that it has
written. The Fund will not write a put option if the aggregate value of the
obligations underlying the put shall exceed 50% of the Fund's net assets.
Options referred to herein and in the Fund's Prospectus may be options traded
on foreign securities exchanges. An option position may be closed only on an
exchange which provides a secondary market for an option of the same series. If
a secondary market does not exist, it might not be possible to effect closing
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon
3
<PAGE>
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 Commission has taken the
position that OTC options and the assets used as cover for written OTC options
are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities which it intends to purchase. The Fund
may purchase either exchange-traded options or OTC options. The Fund will not
purchase options on securities (including stock index options discussed below)
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the
Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is typically between 2% and 15% of the value of the
futures
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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 Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a futures contract may
be a "senior security" under the Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of the
Fund will be conducted on a spot, i.e., cash, basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate
in an amount generally less than one tenth of one percent due to the costs of
converting from one currency to another. The Fund has authority, however, to
deal in forward foreign exchange among currencies of the different countries in
which it may invest as a hedge against possible variations in the foreign
exchange rates among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. The Fund will enter
into such transactions only to the extent, if any, deemed appropriate by the
Manager. The Fund will not enter into a forward contract with a term of more
than one year. Investors should be aware that U.S. dollar denominated
securities may not be available in some or all developing Asia-Pacific
countries, that the forward currency market for the purchase of U.S. dollars in
most, if not all, developing Asia-Pacific countries is not highly developed and
that in certain developing Asia-Pacific countries no forward market for foreign
currencies currently exists or such market may be closed to investment by the
Fund.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against
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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 "spread"). 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 "spreads" of the type which may be
utilized by the Fund constitute hedging transactions and are consistent with
the policies described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange
usually are conducted on a principal basis, no fees or commissions are
involved.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures and movements in the prices of the securities
or currencies which are the subject of the hedge. If the price of the options
and futures moves more or less than the prices of the hedged security or
currency, the Fund will experience a gain or loss which will not be completely
offset by movements in the prices of the subject of the hedge. The successful
use of options and futures also depends on the Manager's ability to predict
correctly price movements in the market involved in a particular options or
futures transaction.
Prior to exercise or expiration, an exchange-traded options or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into options or futures
transactions on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only over-the-counter options
for which management believes the Fund can receive on each business day at
least two independent bids or offers (one of which will be from an entity other
than a party to the option), unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the over-the-counter option agreement.
In the case of a futures position or an option on a futures position written by
the Fund in the event of adverse price movements, the Fund would continue to be
required to make daily cash payments of variation margin. In such situations,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation
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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 investment 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 or sell securities which it is entitled to receive on a when-issued
basis, and it may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future to secure what is considered an
advantageous yield and price to the Fund at the time of entering into the
transaction. Although the Fund has not established any limit on the percentage
of its assets that may be committed in connection with such transactions, the
Fund will maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the amount of its commitment in connection with such
purchase transactions.
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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 additional collateral if
the market value of the securities falls below the repurchase price at any time
during
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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. Such collateral is 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
In addition to the investment restrictions set forth in the Prospectus the
Fund has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities (which
for this purpose and under the Investment Company Act means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
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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.
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
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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 and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in this
investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange (the "NYSE") or American Stock Exchange or a major
foreign exchange. For purposes of this restriction, warrants acquired by
the Fund in units or attached to securities may be deemed to be without
value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than one-
half of one percent of the securities of such issuer own in the aggregate
more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 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.)
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The staff of 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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage". Without such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with Merrill Lynch or any of its affiliates
acting as principal and from purchasing securities in public offerings which
are not registered under the Securities Act in which such firms or any of their
affiliates participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund, including
their ages and their principal occupations for at least the last five years is
set forth below. Unless otherwise noted, the address of each executive officer
and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
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Arthur Zeikel (63)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990; Director of the
Distributor.
Donald Cecil (69)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer (69)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (64)--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, 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Partner, Small
Cities Cablevision, Inc.
Richard R. West (58)--Director(2)--Box 604, Genoa, Nevada 89491. Professor of
Finance since 1984, Dean from 1984 to 1993, and currently Dean Emeritus, New
York University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's Inc. (real estate company).
Edward D. Zinbarg (61)--Director(2)--5 Hardwell Road, Short Hills, New
Jersey, 07078-2117, Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; former Director of Prudential Reinsurance
Company and former Trustee of the Prudential Foundation.
Terry K. Glenn (55)--Executive Vice President(1)(2)--Executive Vice President
of the Manager and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of the Distributor since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Norman R. Harvey (62)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
Kara W.Y. Tan Bhala (36)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and Senior Portfolio Manager of the Manager and FAM
since 1992; Portfolio Manager with Fiduciary Trust Company International from
1990 to 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 (35)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from 1982
to 1990.
13
<PAGE>
Gerald M. Richard (46)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981 and
Treasurer since 1984.
James W. Harshaw (37)--Secretary(1)(2)--Attorney associated with the Manager
and FAM since 1994; Associate with Sullivan & Cromwell from 1990 to 1994;
Judicial Law Clerk for the United States Court of Appeals for the Third Circuit
from 1989 to 1990.
- --------
(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, 1996, 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 and officer of the Fund, and the
other officers of the Fund owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Manager each, (a "non-
affiliated Director") a fee of $3,500 per year plus $500 per meeting attended,
together with such Director's actual out-of-pocket expenses relating to
attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all of the non-
affiliated Directors, at a rate of $500 per meeting attended. The Chairman of
the Audit Committee receives an additional fee of $250 per meeting. For the
fiscal year ended December 31, 1995, fees and expenses paid to such non-
affiliated Directors aggregated $38,934.
The following table sets forth for the fiscal year ended December 31, 1995,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1995 the aggregate compensation paid by all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM FUND
RETIREMENT AND OTHER
BENEFITS MLAM/FAM
ACCRUED AS ADVISED FUNDS
COMPENSATION PART OF FUND PAID TO
NAME OF DIRECTOR FROM FUND EXPENSES DIRECTORS(1)
- ---------------- ------------ ------------ -------------
<S> <C> <C> <C>
Donald Cecil............................ $8,500 None $271,850
Edward H. Meyer......................... $7,500 None $239,225
Charles C. Reilly....................... $7,500 None $269,600
Richard R. West......................... $7,500 None $294,600
Edward D. Zinbarg....................... $8,083 None $155,063
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Cecil (35 funds and portfolios);
Mr. Meyer (35 funds and portfolios); Mr. Reilly (54 funds and portfolios);
Mr. West (54 funds and portfolios) and Mr. Zinbarg (17 funds and
portfolios).
14
<PAGE>
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 March 1, 1993 to
December 31, 1993, and for the fiscal years ended December 31, 1994 and 1995,
the fees paid by the Fund to the Manager were $5,988,153, $11,490,030 and
$11,840,885, respectively.
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual expense
limitations require that the Manager reimburse the Fund in any amount necessary
to prevent the aggregate ordinary operating expenses (excluding taxes,
brokerage fees and commissions, distribution fees and extraordinary charges
such as litigation costs) from exceeding in any fiscal year 2.5% of the Fund's
first $30 million of average net assets, 2.0% of the next $70 million of
average net assets and 1.5% of the remaining average net assets. Such
reimbursement, if any, will be subtracted from the monthly management fee. No
fee payment will be made to the Manager during any fiscal year which will cause
such expenses to exceed the expense limitations at the time of such payment.
The Fund has received an order from the State of California partially waiving
the expense limitations described above. Pursuant to the terms of such order,
the expense limitations that would otherwise apply are waived to the extent the
Fund's expense for custodial services, management and auditing fees exceeds the
average of such fees of a group of funds managed by the Manager or FAM 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
15
<PAGE>
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 period March 1, 1993 to December 31,
1993, and for the fiscal years ended December 31, 1994 and 1995, the amount of
such reimbursement was $78,380, $162,198 and $168,696, respectively. The
Distributor will pay certain promotional expenses of the Fund incurred in
connection with the offering of its shares. Certain expenses in connection with
the distribution of Class B, Class C and Class D shares will be financed by the
Fund pursuant to distribution plans in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares--Distribution Plans".
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties
to such contract or interested persons (as defined in the Investment Company
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class 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 which utilize the Merrill Lynch Select PricingSM System are
referred to herein as "MLAM-advised mutual funds".
16
<PAGE>
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 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
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. The gross sales charges for the sale of its
Class A shares for the fiscal year ended December 31, 1995 were $2,503, of
which the Distributor received $150 and Merrill Lynch received $2,353. 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 Class D shares for the
fiscal year ended December 31, 1995, were $620,284, of which the Distributor
received $43,548 and Merrill Lynch received $576,736. 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 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
17
<PAGE>
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 the Manager or its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select PricingSM System commenced operations),
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994, and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to 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. Shareholders
of certain MLAM-advised continuously offered closed-end funds may reinvest at
net asset value the net proceeds from a sale of certain shares of common stock
of such funds in shares of the Fund. Upon exercise of this investment option,
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive
Class A shares of the Fund and shareholders of Merrill Lynch Municipal Strategy
Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive
Class D shares of the Fund, except that shareholders already owning Class A
shares of the Fund will be eligible to purchase additional Class A shares
pursuant to this option, if such additional Class A shares will be held in the
same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the
Fund. This investment option is available only with respect to eligible shares
as to which no Early Withdrawal Charge or CDSC (each as defined in the eligible
fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at the
net asset value of the designated class of the Fund on such day.
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
18
<PAGE>
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 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.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries" when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and employees and
any trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Fund at net asset value, without a sales charge.
19
<PAGE>
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied; first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds
from a redemption of shares of the 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; and second, such purchase of Class D shares must be made
within 90 days after notice of termination.
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
the other mutual fund and such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts SM available through employers that
provide employer-sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500 except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
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
20
<PAGE>
control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of 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.
21
<PAGE>
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. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fees and the CDSCs). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund will
not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fee. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following table sets forth comparative information as of December 31,
1995, indicating the maximum allowable payments that can be made under the
NASD maximum sales charge rule with respect to Class B and Class C shares and
the Distributor's voluntary maximum with respect to Class B shares, for the
periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1995
----------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ----------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES FOR THE
FISCAL PERIOD MAY 29,
1992 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER
31, 1995:
Under NASD Rule as
Adopted................ $926,163 $57,885 $9,065 $66,950 $23,506 $43,444 $7,435
-------- ------- ------ ------- ------- ------- ------
Under Distributor's
Voluntary Waiver....... $926,163 $57,885 $4,631 $62,516 $23,506 $39,010 $7,435
-------- ------- ------ ------- ------- ------- ------
CLASS C SHARES FOR THE
FISCAL PERIOD OCTOBER
21, 1994 (COMMENCEMENT
OF OPERATIONS) TO DE-
CEMBER 31, 1995:
Under NASD Rule as
Adopted................ $ 26,174 $ 1,636 $ 83 $ 1,719 $ 115 $ 1,604 $ 218
-------- ------- ------ ------- ------- ------- ------
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. 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. See "Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
22
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
NYSE is restricted as determined by the Commission or the NYSE 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 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 period
March 1, 1993, to December 31, 1993, and for the fiscal years ended December
31, 1994 and 1995, the Distributor received CDSCs of $807,253, $2,008,623 and
$2,203,281, respectively, 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, and for the fiscal year
ended December 31, 1995, the Distributor received CDSCs of $141 and $9,778,
respectively, with respect to Class C shares, all of which was paid to Merrill
Lynch.
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 is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions the Manager seeks to obtain the
best net results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. Subject to obtaining
the
23
<PAGE>
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. In addition, consistent with the Rules of Fair
Practice of the NASD and policies established by the Directors of the Fund, the
Manager 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
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 compared to the fee or commission received by non-affiliated brokers
in connection with comparable transactions.
For the fiscal year ended December 31, 1995, the Fund paid total brokerage
commissions of $3,503,591 of which $150,732, or 4.3% was paid to Merrill Lynch
for effecting 4.8% of the aggregate dollar amount of transactions on which the
Fund paid brokerage commissions. 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 dollar
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 dollar amount of transactions
on which the Fund paid brokerage commissions.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions.
24
<PAGE>
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 NYSE
(generally, 4:00 p.m., New York time), on each day the NYSE is open for
trading. The NYSE is not open on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. Net asset value
is computed by dividing the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the 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.
25
<PAGE>
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. Securities which are traded both in the OTC market and on a
stock exchange will be valued according to the broadest and most representative
market. When the Fund writes a call option, the amount of the premium received
is recorded on the books of the Fund as an asset and an equivalent liability.
The amount of the liability is subsequently valued to reflect the current
market value of the option written, based upon the last sale price in the case
of exchange-traded options or, in the case of options traded in the over-the-
counter market, the last asked price. Options purchased by the Fund are valued
at their last sale price in the case of exchange-traded options or, in the case
of options traded in the over-the-counter market, the last bid price. Other
investments, including futures contracts and related options, will be 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. Such valuation and procedures will be
reviewed periodically by the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases, reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check
directly to the Fund's transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem
26
<PAGE>
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class
B or Class C shares from Merrill Lynch and who do not wish to have an
Investment Account maintained for such shares at the transfer agent may request
their new brokerage firm to maintain such shares in an account registered in
the name of the brokerage firm for the benefit of the shareholder at the
transfer agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
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) or CBA(R) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of shares of the Fund as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
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
27
<PAGE>
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 NYSE (generally, 4:00 p.m., New
York time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the 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)
or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to
the shareholder's account five business days after the date the shares are
redeemed. Monthly systematic redemptions will be made at net asset value on
the first Monday of each month, bimonthly systematic redemptions will be made
at net asset value on the first Monday of every other month, and quarterly,
semiannual or annual redemptions are made at net asset value on the first
Monday of months selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net asset value on
the next business day. The Systematic Redemption Program is not available if
Fund shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the CMA(R) or CBA(R) Systematic
Redemption Program, eligible shareholders should contact their Merrill Lynch
Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing SM System, Class A shareholders may exchange Class A shares of the
Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the
28
<PAGE>
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 for 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 as follows: Class A shares
may be exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchanges within certain
retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch
U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A or Class D money market funds with a reduced or without a
sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares
29
<PAGE>
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.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that have
been held for at least one year for Class A shares of the same fund on the
basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the conversion period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired
as a result of an exchange for Class B or Class C shares of the Fund may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of that fund will be aggregated with previous holding periods
for purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds
30
<PAGE>
described above, with shares for which certificates have not been issued may
exercise the exchange privilege by wire through their securities dealers. The
Fund reserves the right to require a properly completed exchange application.
This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares at any time and 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. 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. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as described below whether they are
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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures or options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
31
<PAGE>
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
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 Commission rule permitting the issuance and sale of
multiple classes of stock) that is based on the gross income allocable to Class
A, Class B, Class C and Class D shareholders during the taxable year, or such
other method as the Internal Revenue Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's
32
<PAGE>
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 minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield/high risk 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/high risk 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 Fund
would recognize as ordinary income any increase in the value of such shares.
33
<PAGE>
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. Application of these
rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign currency contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
34
<PAGE>
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as
ordinary income or loss under Code Section 988. In certain circumstances, the
Fund may elect capital gain or loss treatment for such transactions. Regulated
futures contracts, as described above, will be taxed under Code Section 1256
unless application of Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary income dividend distributions, and all
or a portion of distributions made before the losses were realized but in the
same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund shares and
resulting in a capital gain for any shareholder who received a distribution
greater than the shareholder's basis in Fund shares (assuming the shares were
held as a capital asset). These rules and the mark-to-market rules described
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of currency fluctuations with respect to its
investments.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain developing Asia-Pacific 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, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
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.
35
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included. Actual
annual or annualized total return data generally will be lower than average
annual total return data since the average rates of return reflect compounding
of return; aggregate total return data generally will be higher than average
annual total return data since the aggregate rates of return reflect
compounding over longer periods of time.
36
<PAGE>
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 Pricing SM 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 VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1995............... 1.80 % $1,018.00 2.49% $1,024.90
Inception (October 21,
1994) to December 31,
1995................... (7.77)% $ 907.90
Inception (May 29, 1992)
to December 31, 1995... 14.82% $1,642.80
<CAPTION>
PERIOD
------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31,
1995................... 7.44% $1,074.40 6.49% $1,064.90
Year Ended December 31,
1994................... (17.86)% $ 821.40
Year Ended December 31,
1993................... 86.15% $1,861.50
Inception (October 21,
1994) to December 31,
1994................... (10.82)% $ 891.80
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,
1995................... (9.21)% $ 907.90
Inception (May 29, 1992)
to December 31, 1995... 64.28% $1,642.80
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS D
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1995............... 5.46 % $1,054.60 1.72 % $1,017.20
Inception (October 21,
1994) to December 31,
1995................... (4.40)% $ 947.70
Inception (May 29, 1992)
to December 31, 1995... 14.18 % $1,609.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31,
1995................... 6.46% $1,064.60 7.35 % $1,073.50
Year Ended December 31,
1994................... (17.24)% $ 827.60
Year Ended December 31,
1993................... 87.46 % $1,874.60
Inception (October 21,
1994) to December 31,
1994................... (10.98)% $ 890.20
Inception (May 29, 1992)
to December 31, 1992... 2.02 % $1,020.20
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to December 31,
1995................... (5.23)% $ 947.70
Inception (May 29, 1992)
to December 31, 1995... 60.99 % $1,609.90
</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. As of the
date of this Statement of Additional Information, the Fund has an authorized
capital of 500,000,000 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. Class A, Class C and Class D each consists of 100,000,000 shares
and Class B consists of 200,000,000 shares. Each share of Class A, Class B,
Class C and Class D Common Stock represents an interest in the same assets of
the Fund and is identical in all respects except that the Class B, Class C and
Class D shares
38
<PAGE>
bear certain expenses related to the account maintenance and/or distribution of
such shares and have exclusive voting rights with respect to matters relating
to such account maintenance and/or distribution expenditures. The Board of
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold annual meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to elect Directors. Also, the by-laws
of the Fund require that a special meeting of stockholders be held upon the
written request of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting, if they comply with applicable Maryland law. Voting
rights for Directors are not cumulative. Shares issued are fully paid and non-
assessable and have no preemptive rights. Redemption and conversion rights are
discussed elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction
of outstanding liabilities, except that expenses related to the account
maintenance and/or distribution of the shares within a class will be borne
solely by such class. Stock certificates are issued by the transfer agent only
on specific request. Certificates for fractional shares are not issued in any
case.
The Manager provided the initial capital for the Fund by purchasing 5,000
Class A shares and 5,000 Class B shares of Common Stock for an aggregate of
$100,000. Such shares were acquired for investment and can only be disposed of
by redemption. The organizational expenses of the Fund will be paid by the Fund
and amortized over a period not exceeding five years. The proceeds realized by
the Manager (or any subsequent holder) upon redemption of any of such shares
will be reduced by the proportionate amount of the unamortized organizational
expenses which the number of shares redeemed bears to the number of shares
initially purchased.
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, 1995, and its shares outstanding on that date is set
forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets................... $31,591,148 $991,280,764 $29,042,117 $285,485,353
=========== ============ =========== ============
Number of Shares Outstanding. 1,975,424 62,051,871 1,839,500 17,789,930
=========== ============ =========== ============
Net Asset Value Per Share
(net assets divided by num-
ber of shares outstanding).. $ 15.99 $ 15.98 $ 15.79 $ 16.05
Sales Charge (for Class A and
Class D shares: 5.25% of of-
fering price (5.54% of net
asset value per share))*.... .89 ** ** .89
----------- ------------ ----------- ------------
Offering Price............... $ 16.88 $ 15.98 $ 15.79 $ 16.94
=========== ============ =========== ============
</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.
39
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Directors of the
Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 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
Merrill Lynch Financial Data Services,, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood, 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 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 April 1, 1996.
40
<PAGE>
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("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.
41
<PAGE>
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.
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
42
<PAGE>
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 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.
43
<PAGE>
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.
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.
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<PAGE>
B Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
CC The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
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
45
<PAGE>
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 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.
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<PAGE>
A commercial paper rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to Standard & Poor's by the issuer or obtained by Standard & Poor's
from other sources it considers reliable. Standard & Poor's does not perform an
audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the debt rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated
"AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for a preferred stock in this category than for
issues in the "A" category.
BB B CCC
Preferred stock rated "BB", "B", and "CCC" are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
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<PAGE>
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.
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<PAGE>
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, 1995, the related statements of operations for the year then ended, and
changes in net assets for each of the years in the two-year period then ended
and the financial highlights for each of the years in the two-year period 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, 1995, 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, 1995, 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 9, 1996
49
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US Dollars)
<CAPTION>
Face Amount/ Value Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Hong Kong Banking 6,702,000 Guoco Group, Ltd. $ 27,334,197 $ 32,331,169 2.4%
3,340,806 HSBC Holdings, Ltd. 34,214,594 50,552,807 3.8
-------------- -------------- ------
61,548,791 82,883,976 6.2
Conglomerates 4,006,000 ++Citic Pacific Ltd. 12,684,076 13,703,919 1.0
19,488,250 First Pacific Company Limited 20,688,888 21,676,015 1.6
20,158,000 Guangdong Investment, Ltd. 9,301,920 12,122,957 0.9
US$ 3,436,000 Guangdong Investment, Ltd.,
4.50% due 10/07/1998(b) 4,364,558 4,191,920 0.3
9,277,000 Hutchison Whampoa, Ltd. 38,377,393 56,511,472 4.2
3,355,000 Swire Pacific Ltd. 'A' 18,818,725 26,034,661 2.0
2,528,000 Swire Pacific Ltd. 'B' 3,124,538 3,155,096 0.3
-------------- -------------- ------
107,360,098 137,396,040 10.3
Electrical 18,211,000 Innovative International Holdings Ltd. 7,882,226 5,358,255 0.4
Equipment
Electronic/ 12,200,000 ASM Pacific Technology 4,026,946 10,571,650 0.8
Semiconductors
Insurance 22,597,000 National Mutual Asia, Ltd. 10,212,562 20,457,708 1.5
Leisure 6,370,000 Hong Kong & Shanghai Hotels 5,697,738 9,227,108 0.7
Packaging 14,000,000 M.C. Packaging (HK), Ltd. 6,547,529 4,979,307 0.4
Publishing & 7,600,000 South China Morning Post Holdings 4,440,430 4,644,335 0.3
Broadcasting 4,401,000 Television Broadcast Ltd. 17,630,137 15,681,266 1.2
-------------- -------------- ------
22,070,567 20,325,601 1.5
Real Estate 7,323,000 Cheung Kong Holdings Ltd. 37,176,042 44,608,549 3.3
4,508,020 New World Development Co., Ltd. 12,941,206 19,648,251 1.5
4,332,100 Sun Hung Kai Properties, Ltd. 24,487,794 35,437,833 2.6
3,048,000 Wharf Holdings Ltd. 11,127,830 10,150,802 0.8
US$ 9,840,000 Wharf Holdings Ltd., 5% due
7/15/2000 (b) 9,335,976 10,553,400 0.8
-------------- -------------- ------
95,068,848 120,398,835 9.0
Telecommuni- 12,220,000 ABC Communications Holdings Ltd. 3,501,176 2,212,623 0.2
cations 23,665,015 Hong Kong Telecommunications, Ltd. 43,852,525 42,237,093 3.1
-------------- -------------- ------
47,353,701 44,449,716 3.3
Utilities-- 4,441,200 China Light & Power Co., Ltd. 20,428,753 20,448,360 1.5
Electric & Gas 8,990,656 Hong Kong & China Gas Co. (The) 11,559,886 14,476,677 1.1
-------------- -------------- ------
31,988,639 34,925,037 2.6
Total Long-Term Investments in
Hong Kong 399,757,645 490,973,233 36.7
India Chemicals 542,800 Mardia Chemicals Ltd. 2,496,386 779,841 0.1
Conglomerates 173,300 ++Reliance Industries (ADR)* 4,662,021 2,382,875 0.2
Consumer--Durables 456,000 ++IFB Industries Ltd. 3,998,087 1,832,432 0.1
Finance 66,210 Housing Development Finance 6,347,114 5,114,087 0.4
Pharmaceuticals 99,200 Ranbaxy Laboratories Limited 2,000,872 1,820,313 0.1
Steel Mills 131,320 Essar Gujarat Limited 376,037 148,506 0.0
</TABLE>
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<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Total Long-Term Investments
in India 19,880,517 12,078,054 0.9
Indonesia Banking 1,731,500 P.T. Bank International Indonesia 7,163,359 5,742,606 0.4
Food 10,364,032 P.T. Mayorah Indah 5,764,781 7,487,151 0.6
Miscellaneous-- 1,711,250 P.T. Modern Photo Film 4,620,559 9,927,348 0.7
Consumer
Pharmaceuticals 2,251,500 P.T. Kalbe Farma 7,362,735 7,639,722 0.6
Telecommuni- 118,490 P.T. Indonesia Satellite Corp.
cations (Indosat) (ADR)* 4,045,632 4,324,885 0.3
178,000 ++P.T. Telekomunikasi Indonesia (ADR)* 3,204,000 4,494,500 0.3
-------------- -------------- ------
7,249,632 8,819,385 0.6
Tobacco 4,839,000 P.T. Hanjaya Mandala Sampoerna 4,415,689 50,423,905 3.8
Total Long-Term Investments in
Indonesia 36,576,755 90,040,117 6.7
Malaysia Banking 4,256,000 Affin Holdings BHD 6,646,052 8,215,245 0.6
1,507,200 ++Arab-Malaysian Merchant Bank BHD 7,134,948 17,218,357 1.3
MYR 1,969,000 Arab-Malaysian Merchant Bank BHD,
7.50% due 11/20/1999 (b) 768,090 1,047,134 0.1
2,667,000 Malayan Banking BHD 6,353,456 22,483,278 1.7
3,499,000 Public Bank BHD 'Foreign' 4,235,687 6,723,475 0.5
-------------- -------------- ------
25,138,233 55,687,489 4.2
Building & 5,200,000 I.J.M. Corp. BHD 6,266,933 8,275,753 0.6
Construction
Conglomerates 4,968,000 Renong BHD 4,822,048 7,358,550 0.5
US$ 9,025,000 Renong BHD, 2.50% due 1/15/2005 (b) 9,994,404 10,062,875 0.8
-------------- -------------- ------
14,816,452 17,421,425 1.3
Finance 938,000 Hong Leong Credit BHD 6,877,505 4,655,820 0.3
Food 1,721,700 Nestle Malaysia BHD 7,333,320 12,615,174 0.9
Leisure 3,300,000 Berjaya Sports TOTO BHD 7,410,648 7,669,884 0.5
1,281,500 Genting BHD 11,837,879 10,702,305 0.8
3,000,000 Pernas International Hotels &
Properties BHD (Warrants) (a) 165,079 892,259 0.1
2,980,000 Resorts World BHD 10,407,072 15,965,334 1.2
-------------- -------------- ------
29,820,678 35,229,782 2.6
Real Estate 4,156,000 Land & General BHD 5,065,849 9,004,530 0.7
Telecommuni- 5,711,000 Leader Universal Cable BHD 8,553,531 13,048,572 1.0
cations 1,631,000 Telekom Malaysia BHD 10,798,393 12,721,607 1.0
US$ 5,450,000 Telekom Malaysia BHD, 4% due
10/03/2004 (b) 4,732,023 5,272,875 0.4
-------------- -------------- ------
24,083,947 31,043,054 2.4
Transportation 2,957,333 Malaysian International Shipping
Co. BHD 6,043,232 7,747,199 0.6
Total Long-Term Investments
in Malaysia 125,446,149 181,680,226 13.6
Pakistan Telecommuni- 41,905 ++Pakistan Telecommunications
cations (GDR)**++++ 7,533,262 3,561,925 0.3
Total Long-Term Investments
in Pakistan 7,533,262 3,561,925 0.3
</TABLE>
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<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
<CAPTION>
Face Amount/ Value Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Philippines Banking 339,900 ++Philippine Commercial International
Bank $ 2,822,740 $ 3,138,336 0.3%
Beverages 6,246,240 San Miguel Corporation 'B' 10,222,586 21,329,206 1.6
Conglomerates 909,183 ++Benpres Holdings Corp. (ADR)*++++ 8,047,236 4,318,619 0.3
International 16,566,770 ++International Container Terminals 8,867,496 8,691,075 0.7
Trade
Real Estate 4,822,500 ++Ayala Land, Inc. 5,508,954 5,887,829 0.4
5,232,600 ++C & P Homes 2,628,722 3,843,096 0.3
-------------- -------------- ------
8,137,676 9,730,925 0.7
Retail 50,408,475 ++SM Prime Holdings 10,093,708 14,424,401 1.1
Telecommunications 78,880 Philippine Long Distance Telephone
Co. (ADR)* 4,027,836 4,269,380 0.3
Utilities-- 1,357,950 ++Manila Electric Co. (MERALCO) 'B' 6,429,540 11,087,421 0.8
Electric
Total Long-Term Investments
in the Philippines 58,648,818 76,989,363 5.8
Singapore Airlines 1,862,000 Singapore Airlines 'Foreign' Ltd. 13,953,626 17,382,178 1.3
Automotive 1,610,000 Cycle & Carriage, Ltd. 7,464,505 16,054,455 1.2
Banking 2,026,000 Development Bank of Singapore Ltd. 18,809,266 25,217,539 1.9
1,366,866 Overseas Chinese Banking Corp.
'Foreign' 8,900,801 17,109,992 1.3
2,690,704 United Overseas Bank 18,536,290 25,879,473 1.9
-------------- -------------- ------
46,246,357 68,207,004 5.1
Beverages 190,000 Fraser & Neave Ltd. (Warrants)(a) 1,139,529 1,202,617 0.1
Conglomerates 3,139,200 ACMA Ltd. 8,074,466 10,434,399 0.8
Electronics 10,066,000 I.P.C. Corp. 7,496,013 6,691,683 0.5
Marine/ 2,807,500 Sembawang Maritime Ltd. 8,560,245 8,934,760 0.6
Offshore Oil SG$ 2,090,000 Sembawang Maritime Ltd., 1.50%
Services due 10/25/1998 (b) 1,325,469 2,276,238 0.2
9,885,714 11,210,998 0.8
-------------- -------------- ------
Publishing & 1,142,400 Singapore Press Holdings Ltd. 11,734,325 20,198,020 1.5
Broadcasting
Real Estate 4,104,000 DBS Land Ltd. 12,091,181 13,873,494 1.0
Total Long-Term Investments
in Singapore 118,085,716 165,254,848 12.3
South Korea Electronics 105,630 ++Samsung Electronics Co.
(Preferred) (GDR)** 6,987,373 6,337,800 0.5
Retail 78,020 ++Shinsegae Department Stores Co. 2,374,876 6,517,592 0.5
23,665 ++Shinsegae Department Stores Co. (New) 1,022,205 2,011,083 0.1
-------------- -------------- ------
3,397,081 8,528,675 0.6
Steel 143,600 Pohang Iron & Steel Co., Ltd. 13,187,601 10,136,601 0.8
Telecommuni- 16,104 Korea Mobile Telecommunications Corp. 8,995,064 17,671,010 1.3
cations
Utilities-- 428,900 Korean Electric & Power Corp. 12,196,137 18,562,628 1.4
Electric
Total Long-Term Investments
in South Korea 44,763,256 61,236,714 4.6
Taiwan Closed-End Funds 343,300 The R.O.C. Taiwan (ADR)* 2,904,850 3,604,650 0.2
Electronic/ 377,000 ++Advanced Semiconductor Engineering,
Semiconductors Inc. (GDR)** 5,892,909 4,985,825 0.4
</TABLE>
52
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Total Long-Term Investments
in Taiwan 8,797,759 8,590,475 0.6
Thailand Banking 2,113,000 Bangkok Bank 11,408,866 25,678,237 1.9
US$ 6,453,000 Bangkok Bank, 3.25% due 3/03/2004 (b) 6,622,488 6,840,180 0.5
3,453,333 Industrial Finance Corp. of Thailand 5,771,637 11,725,972 0.9
1,262,747 Siam Commercial Bank Public Co. 8,699,381 16,649,404 1.2
US$ 5,241,000 Siam Commercial Bank Public Co.,
3.25% due 1/24/2004 (b) 5,259,179 5,647,178 0.4
1,652,300 Thai Farmers Bank, Ltd. 15,531,720 16,667,363 1.3
-------------- -------------- ------
53,293,271 83,208,334 6.2
Financial 1,834,800 Finance One Co., Ltd. 'Foreign' 12,567,383 11,585,909 0.9
Services 1,698,000 Phatra Thanakit Co., Ltd. 15,255,671 14,565,846 1.1
-------------- -------------- ------
27,823,054 26,151,755 2.0
Mutual Funds 15,977,000 Ruam Pattana Fund II 6,993,984 9,676,301 0.7
Oil & Gas 1,331,500 PITT Exploration `Foreign' 12,867,796 13,960,127 1.0
Real Estate 936,000 Land & House Public Co. 7,122,664 15,389,357 1.2
Telecommuni- 510,000 Advanced Information Service 7,561,746 9,033,360 0.7
cations 457,100 International Engineering Co. Ltd. 181,389 2,450,695 0.2
-------------- -------------- ------
7,743,135 11,484,055 0.9
Total Long-Term Investments
in Thailand 115,843,904 159,869,929 12.0
Total Long-Term Investments 935,333,781 1,250,274,884 93.5
Face
Amount Short-Term Securities
United Commercial US$ 2,606,000 General Electric Capital Corp.,
States Paper*** 5.90% due 1/02/1996 2,604,719 2,604,719 0.2
40,000,000 Goldman Sachs Group L.P., 5.90%
due 1/02/1996 39,980,333 39,980,333 3.0
15,000,000 Preferred Receivable Funding Corp.,
5.75% due 1/02/1996 14,992,812 14,992,812 1.1
-------------- -------------- ------
57,577,864 57,577,864 4.3
US Government & 20,000,000 Federal Home Loan Mortgage Corp.,
Agency 5.43%, due 1/22/1996 19,930,617 19,930,617 1.5
Obligations***
Total Investments in
Short-Term Securities 77,508,481 77,508,481 5.8
Total Investments $1,012,842,262 1,327,783,365 99.3
==============
Other Assets Less Liabilities 9,616,017 0.7
-------------- ------
Net Assets $1,337,399,382 100.0%
============== ======
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Commercial Paper and certain US Government & Agency Obligations
are 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) Convertible security.
++ Non-income producing security.
++++ Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $7,881,000,
representing 0.6% of net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Benpres Holdings Corp. (ADR) 10/25/1994-- $ 8,047,236 $ 4,318,619
3/10/1995
Pakistan Telecommunications (GDR) 9/16/1994 7,533,262 3,561,925
Total $15,580,498 $ 7,880,544
=========== ===========
See Notes to Financial Statements.
</TABLE>
53
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,012,842,262)(Note 1a) $1,327,783,365
Cash 10,892
Foreign cash (Note 1c) 3,247,889
Receivables:
Capital shares sold $ 14,333,196
Dividends 1,726,888
Securities sold 878,877
Interest 789,614 17,728,575
--------------
Deferred organization expenses (Note 1f) 24,461
Prepaid registration fees and other assets (Note 1f) 138,772
--------------
Total assets 1,348,933,954
--------------
Liabilities: Payables:
Securities purchased 5,513,534
Capital shares redeemed 3,562,742
Investment adviser (Note 2) 1,016,519
Distributor (Note 2) 837,890 10,930,685
--------------
Accrued expenses and other liabilities 603,887
--------------
Total liabilities 11,534,572
--------------
Net Assets: Net assets $1,337,399,382
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 197,542
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 6,205,187
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 183,950
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,778,993
Paid-in capital in excess of par 1,040,335,362
Accumulated distributions in excess of investment income (9,723,148)
Accumulated realized capital losses on investments and foreign
currency transactions--net (Note 6) (16,371,641)
Unrealized appreciation on investments and foreign currency transactions--net 314,793,137
--------------
Net assets . $1,337,399,382
==============
Net Asset Class A--Based on net assets of $31,591,148 and 1,975,424 shares
Value: outstanding $ 15.99
==============
Class B--Based on net assets of $991,280,764 and 62,051,871 shares
outstanding $ 15.98
==============
Class C--Based on net assets of $29,042,117 and 1,839,500 shares
outstanding $ 15.79
==============
Class D--Based on net assets of $285,485,353 and 17,789,930
shares outstanding $ 16.05
==============
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1995
<S> <S> <C> <C>
Investment Dividends (net of $1,882,078 foreign withholding tax) $ 20,302,648
Income Interest and discount earned (net of $22,263 foreign
(Notes 1d & 1e): withholding tax) 5,947,703
--------------
Total income 26,250,351
--------------
Expenses: Investment advisory fees (Note 2) $ 11,840,885
Account maintenance and distribution fees--Class B (Note 2) 8,958,872
Custodian fees 1,804,783
Transfer agent fees--Class B (Note 2) 1,765,532
Account maintenance fees--Class D (Note 2) 646,029
Transfer agent fees--Class D (Note 2) 425,160
Printing and shareholder reports 328,012
Accounting services (Note 2) 168,696
Account maintenance and distribution fees--Class C (Note 2) 133,278
Professional fees 99,487
Registration fees (Note 1f) 86,055
Directors' fees and expenses 38,934
Transfer agent fees--Class C (Note 2) 27,831
Transfer agent fees--Class A (Note 2) 25,942
Amortization of organization expenses (Note 1f) 17,267
Pricing fees 8,438
Other 27,672
--------------
Total expenses 26,402,873
--------------
Investment loss--net (152,522)
--------------
Realized & Realized loss from:
Unrealized Gain Investments--net (9,089,880)
(Loss) on Foreign currency transactions--net (411,507) (9,501,387)
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 89,594,068
(Notes 1b, 1c, Foreign currency transactions--net (134,348) 89,459,720
1e & 3): --------------
Net realized and unrealized gain on investments and foreign
currency transactions 79,958,333
--------------
Net Increase in Net Assets Resulting from Operations $ 79,805,811
==============
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
December 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment loss--net $ (152,522) $ (2,783,327)
Realized gain (loss) on investments and foreign currency
transactions--net (9,501,387) 6,883,021
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 89,459,720 (242,120,310)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 79,805,811 (238,020,616)
-------------- --------------
Dividends & In excess of investment income--net:
Distributions to Class A (312,371) (26,417)
Shareholders Class B (1,509,738) --
(Note 1g): Class C (151,749) (34,041)
Class D (2,159,398) (1,471,448)
Realized gain on investments--net:
Class A -- (56,223)
Class B -- (16,559,524)
Class C -- (87,816)
Class D -- (4,524,481)
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 (4,133,256) (29,393,986)
-------------- --------------
Beneficial Net increase in net assets derived from capital share
Interest transactions 85,728,447 140,721,806
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets 161,401,002 (126,692,796)
Beginning of year 1,175,998,380 1,302,691,176
-------------- --------------
End of year $1,337,399,382 $1,175,998,380
============== ==============
See Notes to Financial Statements.
</TABLE>
56
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the financial Year Oct. 21, Ten Months May 29,
statements. Ended 1994++ to For the Year Ended 1992++ to
Dec. 31, Dec. 31, Ended Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1995++++ 1994++++ 1995++++ 1994++++ 1993++++ 1993++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.05 $ 17.43 $ 15.03 $ 18.74 $ 11.01 $ 10.00
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .12 .02 (.03) (.07) (.02) (.02)
Realized and unrealized gain
(loss) on investments and
foreign currency transactions
--net 1.00 (1.91) 1.00 (3.28) 7.86 1.05
-------- -------- -------- -------- -------- --------
Total from investment operations 1.12 (1.89) .97 (3.35) 7.84 1.03
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- --+++++ --
In excess of investment income--net (.18) (.13) (.02) -- --+++++ (.02)
Realized gain on investments--net -- (.27) -- (.27) (.11) --+++++
In excess of realized gain on
investments--net -- (.09) -- (.09) -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.18) (.49) (.02) (.36) (.11) (.02)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.99 $ 15.05 $ 15.98 $ 15.03 $ 18.74 $ 11.01
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 7.44% (10.82%)+++ 6.49% (17.86%) 71.27%+++ 10.32%+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding account
Net Assets: maintenance and distribution fees 1.37% 1.54%* 1.41% 1.40% 1.35%* 1.49%*
======== ======== ======== ======== ======== ========
Expenses 1.37% 1.54%* 2.41% 2.40% 2.35%* 2.49%*
======== ======== ======== ======== ======== ========
Investment income (loss)--net .74% .84%* (.20%) (.42%) (.15%)* (.08%)*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period (in
Data: thousands) $ 31,591 $ 3,383 $991,281 $917,384 $990,843 $365,430
======== ======== ======== ======== ======== ========
Portfolio turnover 24.52% 16.45% 24.52% 16.45% 16.62% 4.65%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects 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>
57
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the financial Year Oct. 21, Ten Months May 29,
statements. Ended 1994++ to For the Year Ended 1992++ to
Dec. 31, Dec. 31, Ended Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1995++++ 1994++++ 1995++++ 1994++++ 1993++++ 1993++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.92 $ 17.29 $ 15.08 $ 18.77 $ 11.01 $ 10.00
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.04) (.01) .09 .06 .07 .05
Realized and unrealized gain
(loss) on investments and foreign
currency transactions--net 1.00 (1.89) 1.02 (3.30) 7.88 1.04
-------- -------- -------- -------- -------- --------
Total from investment operations .96 (1.90) 1.11 (3.24) 7.95 1.09
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- (.01) --+++++
In excess of investment income--net (.09) (.11) (.14) (.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 (.09) (.47) (.14) (.45) (.19) (.08)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.79 $ 14.92 $ 16.05 $ 15.08 $ 18.77 $ 11.01
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.46% (10.98%)+++ 7.35% (17.24%) 72.31%+++ 10.99%+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding account main-
Net Assets: tenance and distribution fees 1.42% 1.57%* 1.38% 1.38% 1.34%* 1.48%*
======== ======== ======== ======== ======== ========
Expenses 2.42% 2.57%* 1.63% 1.63% 1.59%* 1.73%*
======== ======== ======== ======== ======== ========
Investment income (loss)--net (.28%) (.17%)* .59% .34% .61%* .61%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 29,042 $ 5,329 $285,485 $249,903 $311,848 $111,180
======== ======== ======== ======== ======== ========
Portfolio turnover 24.52% 16.45% 24.52% 16.45% 16.62% 4.65%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects 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>
58
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Dragon Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The 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 exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities
are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the 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--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(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
59
<PAGE>
(realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or
losses from investments include the effects of foreign exchange rates
on investments.
NOTES TO FINANCIAL STATEMENTS (continued)
(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. Distributions in
excess of realized capital gains are due primarily to differing tax
treatments for futures transactions and post-October losses.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $236,218 and $908,881 have been reclassified from accumulated net
realized capital losses and paid-in capital in excess of par,
respectively, to accumulated net investment loss. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 1.00%, 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 MLAM 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.
60
<PAGE>
For the year ended December 31, 1995, MLFD earned underwriting
discounts and direct commissions 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 $ 150 $ 2,353
Class D $43,548 $576,736
For the year ended December 31, 1995, MLPF&S received contingent
deferred sales charges of $2,203,281 and $9,778 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $150,732 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended December 31, 1995.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1995 were $356,778,723 and
$272,882,645, respectively.
Net realized and unrealized gains (losses) as of December 31, 1995
were as follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $(9,089,174) $314,941,103
Short-term investments (706) --
Foreign currency transactions (411,507) (147,966)
----------- ------------
Total $(9,501,387) $314,793,137
=========== ============
As of December 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $305,270,816, of which $344,283,633
related to appreciated securities and $39,012,817 related to
depreciated securities. At December 31, 1995, the aggregate cost of
investments for Federal income tax purposes was $1,022,512,549.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
for the year ended December 31, 1995 and the period ended December
31, 1994 were $85,728,447 and $140,721,806, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 15,316,591 $ 235,070,334
Shares issued to shareholders
in reinvestment of dividends 18,086 282,321
----------- -------------
Total issued 15,334,677 235,352,655
Shares redeemed (13,584,058) (209,762,961)
----------- -------------
Net increase 1,750,619 $ 25,589,694
=========== =============
Class A Shares for the Period
October 21, 1994++ to Dollar
December 31, 1994 Shares Amount
Shares sold 703,677 $ 11,334,140
Shares issued to shareholders
in reinvestment of dividends &
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, 1995 Shares Amount
Shares sold 25,831,182 $ 397,664,798
Shares issued to shareholders
in reinvestment of dividends 81,436 1,269,593
----------- -------------
Total issued 25,912,618 398,934,391
Shares redeemed (24,541,247) (372,106,945)
Automatic conversion of shares (369,028) (5,593,649)
----------- -------------
Net increase 1,002,343 $ 21,233,797
=========== =============
61
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
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 dividends &
distributions 1,207,843 18,081,410
----------- -------------
Total issued 22,834,056 372,331,920
Shares redeemed (14,613,098) (239,406,135)
Automatic conversion of shares (47,440) (716,815)
----------- -------------
Net increase 8,173,518 $ 132,208,970
=========== =============
Class C Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 4,484,570 $ 68,645,095
Shares issued to shareholders
in reinvestment of dividends 8,702 134,106
----------- -------------
Total issued 4,493,272 68,779,201
Shares redeemed (3,011,017) (46,232,303)
----------- -------------
Net increase 1,482,255 $ 22,546,898
=========== =============
Class C Shares for the Period
October 21, 1994++ to Dollar
December 31, 1994 Shares Amount
Shares sold 381,246 $ 6,281,385
Shares issued to shareholders
in reinvestment of dividends &
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.
Class D Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 25,578,665 $ 391,676,072
Automatic conversion of shares 364,477 5,593,649
Shares issued to shareholders
in reinvestment of dividends 113,447 1,776,581
----------- -------------
Total issued 26,056,589 399,046,302
Shares redeemed (24,834,684) (382,688,244)
----------- -------------
Net increase 1,221,905 $ 16,358,058
=========== =============
Class D Shares for the Year Dollar
Ended December 31, 1994 Shares Amount
Shares sold 5,213,331 $ 85,671,153
Automatic conversion of shares 47,252 716,815
Shares issued to shareholders
in reinvestment of dividends &
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)
=========== =============
5. Commitments:
At December 31, 1995, the Fund had entered into foreign exchange
contracts under which it had agreed to purchase and sell various
foreign currencies with values of approximately $3,427,000 and
$856,000, respectively.
6. Capital Loss Carryforward:
At December 31, 1995, the Fund had a capital loss carryforward of
approximately $16,372,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
62
<PAGE>
[This Page Intentionally Left Blank]
63
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Portfolio Strategies Involving Options and Futures....................... 2
Other Investment Policies and Practices.................................. 7
Investment Restrictions.................................................. 9
Management of the Fund.................................................... 12
Directors and Officers................................................... 12
Compensation of Directors................................................ 14
Management and Advisory Arrangements..................................... 15
Purchase of Shares........................................................ 16
Initial Sales Charge Alternatives--Class A and Class D Shares............ 17
Reduced Initial Sales Charges............................................ 18
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 21
Distribution Plans....................................................... 21
Limitations on the Payment of Deferred Sales Charges..................... 22
Redemption of Shares...................................................... 23
Contingent Deferred Sales Charges--Class B and Class C Shares............ 23
Portfolio Transactions and Brokerage...................................... 23
Determination of Net Asset Value.......................................... 25
Shareholder Services...................................................... 26
Investment Account....................................................... 26
Automatic Investment Plans............................................... 27
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 27
Systematic Withdrawal Plans--Class A and Class D Shares.................. 27
Exchange Privilege....................................................... 28
Dividends, Distributions and Taxes........................................ 31
Dividends and Distributions.............................................. 31
Taxes.................................................................... 31
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 34
Special Rules for Certain Foreign Currency Transactions.................. 34
Performance Data.......................................................... 36
General Information....................................................... 38
Description of Shares.................................................... 38
Computation of Offering Price Per Share.................................. 39
Independent Auditors..................................................... 40
Custodian................................................................ 40
Transfer Agent........................................................... 40
Legal Counsel............................................................ 40
Reports to Shareholders.................................................. 40
Additional Information................................................... 40
Security Ownership of Certain Beneficial Owners.......................... 40
Appendix.................................................................. 41
Independent Auditors' Report.............................................. 49
Financial Statements...................................................... 50
</TABLE>
Code # 16260-0496
[LOGO]MERRILL LYNCH
MERRILL LYNCH
DRAGON FUND, INC.
[ART]
STATEMENT OF ADDITIONAL INFORMATION
April 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for the years ended December 31, 1995 and 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:
Schedule of Investments as of December 31, 1995.
Statement of Assets and Liabilities as of December 31, 1995.
Statement of Operations for the fiscal year ended December 31, 1995.
Statements of Changes in Net Assets for the fiscal years ended
December 31, 1995 and 1994.
Financial Highlights for the years ended December 31, 1995 and 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
-------
<C> <S>
1(a) --Articles of Incorporation of Registrant dated February 13, 1992.(c)
(b) --Articles of Amendment to the Articles of Incorporation of Registrant
dated October 17, 1994.(c)
(c) --Articles Supplementary to the Articles of Incorporation of
Registrant dated October 17, 1994.(c)
(d) --Articles Supplementary to the Articles of Incorporation of the
Registrant dated September 1, 1995.
2 --By-Laws of Registrant.
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 Merrill Lynch
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)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
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.(c)
(b) --Schedule for computation of each performance quotation relating to
Class B shares provided in the Registration Statement in response to
Item 22.(c)
(c) --Schedule for computation of each performance quotation relating to
Class C shares provided in the Registration Statement in response to
Item 22.(c)
(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, 1995.
(b) --Financial Data Schedule for Class B shares for the year ended
December 31, 1995.
(c) --Financial Data Schedule for Class C shares for the year ended
December 31, 1995.
(d) --Financial Data Schedule for Class D shares for the year ended
December 31, 1995.
18 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(d)
</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 Exhibits (1)(c) and
(1)(d) 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 filed
as Exhibit (2) to the Registrant's Registration Statement.
(c) Filed on April 27, 1995, as an Exhibit to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A (File No. 33-46216) under
the Securities Act of 1933.
(d) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust (File No. 2-
99473), filed on January 25, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1996
-------------- --------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per
share................................................... 11,059
Class B Shares of Common Stock, par value $0.10 per
share................................................... 125,164
Class C Shares of Common Stock, par value $0.10 per
share................................................... 8,832
Class D Shares of Common Stock, par value $0.10 per
share................................................... 24,981
</TABLE>
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940 may be concerned, Article VI of the
Registrant's By-Laws provides that such payments will be made only on the
following conditions: (i) the advances must be limited to amounts used, or to
be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only on receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount which it
is ultimately determined he is entitled to receive from the Registrant by
reason of indemnification; and (iii) (a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assumes that any repayments may be obtained by the Registrant without delay or
litigation, which bond, insurance or other form of security must be provided by
the recipient of the advance and (b) a majority of a quorum of the Registrant's
disinterested non-party Directors, or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D 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 THE INVESTMENT ADVISER
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager"), acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic
C-3
<PAGE>
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility
Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc., and for the
following closed-end investment companies: Convertible Holdings, Inc., Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end investment companies: Apex Municipal Fund, Inc., Corporate
High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers
Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide
DollarVest Fund, Inc.
The address of each of these investment companies listed in the first two
paragraphs of this Item 28 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"), and Princeton Administrators,
L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of Merrill Lynch Financial Data Services, Inc. ("MLFDS") is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and 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
January 1, 1994, 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 first two paragraphs of this Item 28,
and Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services...... General Partner General Partner of FAM
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel........... President President of FAM; President and Director
of Princeton Services; Director of
MLFD; Executive Vice President of ML &
Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM;
President Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of FAM
N. John Hewitt.......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel
President, General and Secretary of FAM; Senior Vice
Counsel and President, General Counsel, Director
Secretary and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller of
and Controller FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Richard L. Reller....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies; Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
C-5
<PAGE>
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 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 None
Assistant Treasurer
Mark A. DeSario........... Vice President None
James T. Fatseas.......... 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 Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus was
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO ITS
REGISTRATION STATEMENT PURSUANT TO RULE 485(b) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS 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 25TH DAY OF APRIL 1996.
Merrill Lynch Dragon Fund, Inc.
(Registrant)
/s/ Terry K. Glenn
By: _________________________________
(TERRY K. GLENN, EXECUTIVE VICE
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.
SIGNATURES TITLE DATE(S)
President and
Arthur Zeikel* Director (Principal
- ------------------------------------- Executive Officer)
(ARTHUR ZEIKEL)
Treasurer (Principal
Gerald M. Richard* Financial and
- ------------------------------------- Accounting Officer)
(GERALD M. RICHARD)
Donald Cecil* Director
- -------------------------------------
(DONALD CECIL)
Edward H. Meyer* Director
- -------------------------------------
EDWARD H. MEYER
Charles C. Reilly* Director
- -------------------------------------
(CHARLES C. REILLY)
Richard R. West* Director
- -------------------------------------
(RICHARD R. WEST)
Edward D. Zinbarg* Director
- -------------------------------------
(EDWARD D. ZINBARG)
/s/ Terry K. Glenn April 25, 1996
*By: ___________________________
(TERRY K. GLENN, ATTORNEY-IN-FACT)
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(d) --Articles Supplementary to the Articles of Incorporation of the
Registrant dated September 1, 1995
2 --By-laws of Registrant
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant
17(a) --Financial Data Schedule for Class A shares for the year ended
December 31, 1995
(b) --Financial Data Schedule for Class B shares for the year ended
December 31, 1995
(c) --Financial Data Schedule for Class C shares for the year ended
December 31, 1995
(d) --Financial Data Schedule for Class D shares for the year ended
December 31, 1995
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
refernces this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH DRAGON FUND, INC. - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1012842262
<INVESTMENTS-AT-VALUE> 1327783365
<RECEIVABLES> 17728575
<ASSETS-OTHER> 3422014
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1348933954
<PAYABLE-FOR-SECURITIES> 5513534
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6021038
<TOTAL-LIABILITIES> 11534572
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1048701034
<SHARES-COMMON-STOCK> 1975424
<SHARES-COMMON-PRIOR> 224805
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9723148
<ACCUMULATED-NET-GAINS> (16371641)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 314793137
<NET-ASSETS> 31591148
<DIVIDEND-INCOME> 20302648
<INTEREST-INCOME> 5947703
<OTHER-INCOME> 0
<EXPENSES-NET> 26402873
<NET-INVESTMENT-INCOME> (152522)
<REALIZED-GAINS-CURRENT> (9501387)
<APPREC-INCREASE-CURRENT> 89459720
<NET-CHANGE-FROM-OPS> 79805811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 312371
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15316591
<NUMBER-OF-SHARES-REDEEMED> 13584058
<SHARES-REINVESTED> 18086
<NET-CHANGE-IN-ASSETS> 161401002
<ACCUMULATED-NII-PRIOR> (2783327)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 3799142
<OVERDIST-NET-GAINS-PRIOR> 6634036
<GROSS-ADVISORY-FEES> 11840885
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 26402873
<AVERAGE-NET-ASSETS> 16507050
<PER-SHARE-NAV-BEGIN> 15.05
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> 1.00
<PER-SHARE-DIVIDEND> .18
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.99
<EXPENSE-RATIO> 1.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH DRAGON FUND, INC. - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1012842262
<INVESTMENTS-AT-VALUE> 1327783365
<RECEIVABLES> 17728575
<ASSETS-OTHER> 3422014
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1348933954
<PAYABLE-FOR-SECURITIES> 5513534
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6021038
<TOTAL-LIABILITIES> 11534572
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1048701034
<SHARES-COMMON-STOCK> 62051871
<SHARES-COMMON-PRIOR> 61049528
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9723148
<ACCUMULATED-NET-GAINS> (16371641)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 314793137
<NET-ASSETS> 991280764
<DIVIDEND-INCOME> 20302648
<INTEREST-INCOME> 5947703
<OTHER-INCOME> 0
<EXPENSES-NET> 26402873
<NET-INVESTMENT-INCOME> (152522)
<REALIZED-GAINS-CURRENT> (9501387)
<APPREC-INCREASE-CURRENT> 89459720
<NET-CHANGE-FROM-OPS> 79805811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1509738
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25831182
<NUMBER-OF-SHARES-REDEEMED> 24910275
<SHARES-REINVESTED> 81436
<NET-CHANGE-IN-ASSETS> 161401002
<ACCUMULATED-NII-PRIOR> (2783327)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 3799142
<OVERDIST-NET-GAINS-PRIOR> 6634036
<GROSS-ADVISORY-FEES> 11840885
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 26402873
<AVERAGE-NET-ASSETS> 898348424
<PER-SHARE-NAV-BEGIN> 15.03
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> 1.00
<PER-SHARE-DIVIDEND> .02
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.98
<EXPENSE-RATIO> 2.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH DRAGON FUND, INC. - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1012842262
<INVESTMENTS-AT-VALUE> 1327783365
<RECEIVABLES> 17728575
<ASSETS-OTHER> 3422014
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1348933954
<PAYABLE-FOR-SECURITIES> 5513534
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6021038
<TOTAL-LIABILITIES> 11534572
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1048701034
<SHARES-COMMON-STOCK> 1839500
<SHARES-COMMON-PRIOR> 357245
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9723148
<ACCUMULATED-NET-GAINS> (16371641)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 314793137
<NET-ASSETS> 29042117
<DIVIDEND-INCOME> 20302648
<INTEREST-INCOME> 5947703
<OTHER-INCOME> 0
<EXPENSES-NET> 26402873
<NET-INVESTMENT-INCOME> (152522)
<REALIZED-GAINS-CURRENT> (9501387)
<APPREC-INCREASE-CURRENT> 89459720
<NET-CHANGE-FROM-OPS> 79805811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 151749
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4484570
<NUMBER-OF-SHARES-REDEEMED> 3011017
<SHARES-REINVESTED> 8702
<NET-CHANGE-IN-ASSETS> 161401002
<ACCUMULATED-NII-PRIOR> (2783327)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 3799142
<OVERDIST-NET-GAINS-PRIOR> 6634036
<GROSS-ADVISORY-FEES> 11840885
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 26402873
<AVERAGE-NET-ASSETS> 13364405
<PER-SHARE-NAV-BEGIN> 14.92
<PER-SHARE-NII> (.04)
<PER-SHARE-GAIN-APPREC> 1.00
<PER-SHARE-DIVIDEND> .09
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.79
<EXPENSE-RATIO> 2.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH DRAGON FUND, INC. - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1012842262
<INVESTMENTS-AT-VALUE> 1327783365
<RECEIVABLES> 17728575
<ASSETS-OTHER> 3422014
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1348933954
<PAYABLE-FOR-SECURITIES> 5513534
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6021038
<TOTAL-LIABILITIES> 11534572
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1048701034
<SHARES-COMMON-STOCK> 17789930
<SHARES-COMMON-PRIOR> 16568025
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9723148
<ACCUMULATED-NET-GAINS> (16371641)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 314793137
<NET-ASSETS> 285485353
<DIVIDEND-INCOME> 20302648
<INTEREST-INCOME> 5947703
<OTHER-INCOME> 0
<EXPENSES-NET> 26402873
<NET-INVESTMENT-INCOME> (152522)
<REALIZED-GAINS-CURRENT> (9501387)
<APPREC-INCREASE-CURRENT> 89459720
<NET-CHANGE-FROM-OPS> 79805811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2159398
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25943142
<NUMBER-OF-SHARES-REDEEMED> 24834684
<SHARES-REINVESTED> 113447
<NET-CHANGE-IN-ASSETS> 161401002
<ACCUMULATED-NII-PRIOR> (2783327)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 3799142
<OVERDIST-NET-GAINS-PRIOR> 6634036
<GROSS-ADVISORY-FEES> 11840885
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 26402873
<AVERAGE-NET-ASSETS> 259121601
<PER-SHARE-NAV-BEGIN> 15.08
<PER-SHARE-NII> .09
<PER-SHARE-GAIN-APPREC> 1.02
<PER-SHARE-DIVIDEND> .14
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.05
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.1(d)
MERRILL LYNCH DRAGON FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION
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 FOUR HUNDRED
MILLION (400,000,000) shares of capital stock. The Corporation has four classes
of capital stock consisting of ONE HUNDRED MILLION (100,000,000) shares of Class
A Common Stock, ONE HUNDRED MILLION (100,000,000) shares of Class B Common
Stock, ONE HUNDRED MILLION (100,000,000) shares of Class C Common Stock and ONE
HUNDRED MILLION (100,000,000) shares of Class D 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 FORTY MILLION Dollars
($40,000,000).
SECOND: The Board of Directors of the Corporation, acting in accordance
with Section 2-105(c) of the Maryland Corporations and Associations Code, hereby
increases the total number of authorized shares of Class B Common Stock of the
Corporation by ONE HUNDRED MILLION (100,000,000) shares.
THIRD: After this increase in the number of authorized shares of capital
stock of the Corporation, the Corporation will have authority to issue FIVE
HUNDRED MILLION (500,000,000) shares of capital stock and the capital stock will
consist of ONE HUNDRED MILLION (100,000,000) shares of Class A Common Stock, TWO
HUNDRED MILLION (200,000,000) shares of Class B Common Stock, ONE HUNDRED
MILLION (100,000,000) shares of Class C Common Stock and ONE HUNDRED MILLION
(100,000,000) shares of Class D Common Stock.
FOURTH: After this increase in the number of authorized shares of capital
stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of FIFTY MILLION Dollars ($50,000,000).
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH DRAGON FUND, INC. has caused these
Articles Supplementary to be signed in its name and on its behalf by a duly
authorized officer and attested by its Secretary on September 1, 1995.
MERRILL LYNCH DRAGON FUND, INC.
By /s/ Terry K. Glenn
----------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
Attest:
/s/ Michael J. Hennewinkel
- ---------------------------------
Michael J. Hennewinkel, Secretary
THE UNDERSIGNED officer 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/ Terry K. Glenn
-------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
2
<PAGE>
EXHIBIT 99.2
Adopted October 14, 1994
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
<PAGE>
Company Act of 1940, as amended, such meeting shall be held no later than 120
days after the occurrence 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
- 2 -
<PAGE>
at his address as it appears on the records of the Corporation, with postage
thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is for more than
one hundred and twenty days after the original 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
- 3 -
<PAGE>
vote may adjourn the meeting from time to time, without notice other than
announcement thereat except as otherwise required by these By-Laws, until the
holders of the requisite amount of shares of stock shall be so present. At any
such adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally called.
The absence from any meeting, in person or by proxy, of holders of the number of
shares of stock of the Corporation 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 stockholders, 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
- 4 -
<PAGE>
meeting, shall act as secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings of
-----------------
the stockholders shall be as determined by the chairman of the meeting.
Section 8. 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
- 5 -
<PAGE>
to be taken by vote of the stockholders (other than the election of directors,
which shall be by plurality vote) 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
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act, the chairman of the meeting may appoint inspectors. Each 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 power 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
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notice and without a vote, if the following are filed with the records of
stockholders' meetings: (i) a unanimous written consent which sets forth the
action and is signed by each stockholder entitled to vote on the matter and (ii)
a written waiver of any right to dissent signed by each stockholder entitled to
notice of the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the Articles
--------------
of Incorporation, the business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. All powers of the Corporation
may be exercised by or under authority of the Board of Directors except as
conferred on or reserved to the stockholders by law or by the Articles of
Incorporation or these By-Laws.
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
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to the expiration of his term unless such director is specifically removed
pursuant to Section 5 of this Article III at the time of such decrease.
Directors need not be stockholders.
Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually 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 until the
election of directors next succeeding his election and until his successor shall
have been elected and shall have qualified, or until his death, or 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.
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Section 5. Removal of Directors. Any director of the Corporation may be
--------------------
removed by the stockholders by a vote of a majority of the votes entitled to be
cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether arising from
---------
death, resignation, removal, an increase in the number of directors or any other
cause, 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 Meetings. Regular meetings of the Board may be held
----------------
without notice at such time and place as may be determined by the Board of
Directors.
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Section 9. Special Meetings. Special meetings of the Board may be called
----------------
by two or more directors of the Corporation or by the Chairman of the Board or
the President.
Section 10. Telephone Meetings. Members of the Board of Directors or of
------------------
any committee thereof may participate in a meeting by means of a conference
telephone or similar communications 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 residence 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
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shall attend such meeting. Except as otherwise specifically required by these
By-Laws, a notice or waiver or notice of any meeting need not state the purposes
of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, of the
-----------------
members of the entire Board shall be present in person at any meeting of the
Board in order to constitute a quorum for the transaction of business at such
meeting, and except as otherwise expressly required by statute, the Articles of
Incorporation, these By-Laws, the Investment Company Act of 1940, as amended, or
other applicable statute, the act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board. In the
absence 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 directors. 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
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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 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 writing or
writings 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 consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the
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<PAGE>
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 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 accordance
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:
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<PAGE>
(a) the submission to stockholders of any action requiring authorization of
stockholders pursuant to statute or the Articles of Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving on the Board or
on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment adviser
or principal underwriter, as such terms are defined in the Investment Company
Act of 1940, as amended, or the taking of any other action required to be taken
by the Board of Directors by the Investment Company Act of 1940, as amended;
(e) the amendment or repeal of these By-Laws or the adoption of new By-
Laws;
(f) the amendment or repeal of any resolution of the Board which by its
terms may be amended or repealed only by the Board;
(g) the declaration of dividends and the issuance of capital stock of the
Corporation; and
(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 prejudiced by such revision or alteration.
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<PAGE>
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 committees of the Board, each such committee to consist of two
or more directors and to have such powers and duties as the Board of Directors
may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of the members of
-------
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of
any committee, the member or members thereof present at any meeting and not
disqualified 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
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<PAGE>
of persons who are not directors of the Corporation; provided, however, that no
such committee shall have or may exercise any authority or power of the Board in
the management of the business or affairs of the Corporation.
ARTICLE V
Officers, Agents and Employees
------------------------------
Section 1. Number and 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 Presidents 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
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
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<PAGE>
for the business of the Corporation. The President shall also have the power to
appoint such assistant officers (including one or more Assistant Vice
Presidents, one or more Assistant Treasurers and one or more Assistant
Secretaries) as may be necessary or appropriate to facilitate the management of
the Corporation's affairs. Such officers and agents shall have such duties and
shall hold their offices for such terms as may be prescribed by the Board or by
the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of resignation to the Board, the Chairman of the
Board, President or the Secretary. Any such resignation shall take effect at
the time specified therein or, if the time when it shall become effective shall
not be specified therein, immediately upon its receipt; and, unless otherwise
specified therein, the acceptance of such resignation shall not 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.
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<PAGE>
Section 4. Vacancies. A vacancy in any office, whether arising from
---------
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive officer
---------
of the Corporation. In the absence of the Chairman of the Board (or if there be
none), he shall preside at all meetings of the stockholders and of the Board of
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.
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<PAGE>
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) 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 valuables 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
---------
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<PAGE>
(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
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.
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<PAGE>
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 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
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<PAGE>
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 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 Corporation 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
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<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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 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
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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 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.
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<PAGE>
Section 7. Information to Stockholders and Others. Any stockholder
--------------------------------------
of the Corporation or his agent may inspect and copy during usual business hours
the Corporation's By-Laws, minutes of the proceedings of its stockholders,
annual statements of its affairs, and voting trust agreements on file at its
principal office.
ARTICLE VIII
Seal
----
The seal of the Corporation shall be circular in form and shall bear,
in addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its 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 31st day of December.
ARTICLE X
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be
------------
deposited with such banks or other depositories as the
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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 safekeeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine. Every arrangement
entered into with any bank or other company for the safekeeping 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
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<PAGE>
Corporation or sold, transferred or otherwise disposed of, may be transferred
from the name of the Corporation by the signature of the President or a Vice
President or the Treasurer or pursuant to any procedure approved by the Board of
Directors, subject to applicable law.
ARTICLE XII
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange Commission shall be selected annually by the Board of Directors
and, if required by the provisions of the Investment Company Act of 1940, as
amended, ratified by the stockholders.
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
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<PAGE>
statement shall also be available at the annual meeting of stockholders, if any,
and, within 20 days after the meeting (or, in the absence of an annual meeting,
within 20 days after the end of the month of October following the end of the
fiscal year), be placed on file at the Corporation's principal office. Each
such report shall show the assets and liabilities of the Corporation as of the
close of the annual or quarterly period covered by the report and the securities
in which the funds of the Corporation were then invested. Such report shall
also show the Corporation's income and expenses for the period from the end of
the Corporation's preceding fiscal year to the close of the annual or quarterly
period covered by the report and any other information required by the
Investment Company Act of 1940, as amended, and shall set forth such other
matters as the Board or such firm of independent public accountants shall
determine.
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>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Dragon Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 6 to Registration
Statement No. 33-46216 of our report dated February 9, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
April 26, 1996
