<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
SECURITIES ACT FILE NO. 33-46216
INVESTMENT COMPANY ACT FILE NO. 811-6581
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 8 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH DRAGON FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH DRAGON FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(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 24, 1997.
================================================================================
<PAGE> 2
MERRILL LYNCH DRAGON FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
- ----------- ----------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................................. Cover Page
Item 2. Synopsis.................................... Fee Table; Prospectus Summary
Item 3. Condensed Financial Information............. Financial Highlights
Item 4. General Description of Registrant........... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund...................... Fee Table; Prospectus Summary;
Management of the Fund; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund
Performance............................... Not Applicable
Item 6. Capital Stock and Other Securities.......... Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered........ Cover Page; Fee Table; Prospectus
Summary; Merrill Lynch Select
PricingSM System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase.................... Fee Table; Prospectus Summary; Merrill
Lynch Select PricingSM System;
Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal Proceedings................... Not Applicable
PART B
Item 10. Cover Page.................................. Cover Page
Item 11. Table of Contents........................... Back Cover Page
Item 12. General Information and History............. Not Applicable
Item 13. Investment Objective and Policies........... Investment Objective and Policies
Item 14. Management of the Fund...................... Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities................................ Management of the Fund; General
Information -- Security Ownership of
Certain Beneficial Owners
Item 16. Investment Advisory and Other Services...... Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other Practices.... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.......... General Information -- Description of
Shares
Item 19. Purchase, Redemption and Pricing of
Securities
Being Offered............................. Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services;
Additional Information
Item 20. Tax Status.................................. Additional Information -- Dividends and
Distributions; Additional
Information -- Taxes
Item 21. Underwriters................................ Purchase of Shares
Item 22. Calculation of Performance Data............. Performance Data
Item 23. Financial Statements........................ Financial Statements
</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> 3
PROSPECTUS
APRIL 28, 1997
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 that seeks 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 that 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, but as of May
1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated April 28, 1997 (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> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------------ ---------------- --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price).................. 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend Reinvestments... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower)............................ None(d) 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% annually year(f)
thereafter to 0.0% after the
fourth year(e)
Exchange Fee..................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees(g)............................... 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(h):
Account Maintenance Fees....................... None 0.25% 0.25% 0.25%
Distribution Fees.............................. None 0.75% 0.75% None
(Class B shares convert to
Class D shares automatically
after approximately eight
years and cease being subject
to distribution fees)
OTHER EXPENSES:
Custodial Fees................................... .13% .13% .13% .13%
Shareholder Servicing Costs(i)................... .16% .19% .20% .16%
Other............................................ .04% .04% .04% .04%
------ ----- ----- ------
Total Other Expenses........................... .33% .36% .37% .33%
------ ----- ----- ------
Total Fund Operating Expenses...................... 1.33% 2.36% 2.37% 1.58%
====== ===== ===== ======
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 36 and "Shareholder
Services -- Fee-Based Programs" -- page 48.
(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 fee-based
programs. Class A or Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares" -- page 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. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" on page 48.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 48.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 48.
(g) See "Management of the Fund -- Management and Advisory
Arrangements" -- page 32.
(h) See "Purchase of Shares -- Distribution Plans" -- page 42.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 34.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-----------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including the maximum $52.50
initial sales charge (Class A and Class D shares
only) and assuming (1) the Total Fund Operating
Expenses for each class set forth on page 2, (2) a 5%
annual return throughout the periods and (3)
redemption at the end of the period (including any
applicable CDSC for Class B and Class C shares):
Class A........................................... $65 $ 92 $122 $ 204
Class B........................................... $64 $ 94 $126 $ 251*
Class C........................................... $34 $ 74 $127 $ 271
Class D........................................... $68 $100 $134 $ 230
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at the
end of the period:
Class A........................................... $65 $ 92 $122 $ 204
Class B........................................... $24 $ 74 $126 $ 251*
Class C........................................... $24 $ 74 $127 $ 271
Class D........................................... $68 $100 $134 $ 230
</TABLE>
- ---------------
*Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. The example should not be considered a representation of
past or future expenses or annual rates of return, and actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
Example. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD").
Merrill Lynch may charge its customers a processing fee (presently $4.85, but as
of May 1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through the Fund's transfer agent are not subject to
the processing fee. See "Purchase of Shares" and "Redemption of Shares."
3
<PAGE> 6
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 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
4
<PAGE> 7
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 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, 1997, the Manager and FAM had a
total of approximately $247.2 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Manager. See "Management of the Fund -- Management and Advisory Arrangements."
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share subject to the sales charges and ongoing fee
arrangements described below. See "Merrill Lynch Select Pricing(SM) System" and
"Purchase of Shares."
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income.
Dividends from such net investment income are paid at least annually. All net
realized long-term and short-term capital gains, if any, will be distributed to
the Fund's shareholders at least annually. See "Additional
Information -- Dividends and Distributions."
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily as
of 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 PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by MLAM or its affiliate, FAM. Funds
advised by MLAM or FAM which utilize the Merrill Lynch Select Pricing(SM) System
are referred to herein as "MLAM-advised mutual funds."
5
<PAGE> 8
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
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Account
Maintenance Distribution
CLASS SALES CHARGE(1) Fee Fee Conversion Feature
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales charge(2)(3) No No No
------------------------------------------------------------------------------------------------------------------
B CDSC for a period of four years, at a rate of 0.25% 0.75% B shares convert to D shares
4.0% during the first year, decreasing 1.0% automatically after
annually to 0.0%(4) approximately eight years(5)
------------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
------------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales charge(3) 0.25% No No
------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1 million will apply. See "Class A" and "Class D"
below.
(Footnotes continued on following page)
6
<PAGE> 9
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class
A shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Other eligible investors
include certain retirement plans and participants in certain
fee-based programs. In addition, Class A shares will be offered at
net asset value to 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 of 5.25%, is reduced for purchases of
$25,000 and over, and waived for purchases by certain retirement
plans and participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. Sales charges also are
reduced under a right of accumulation that 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 Class B shares and a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately eight
years after issuance, Class B shares will convert automatically into
Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made
convert 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
7
<PAGE> 10
described under "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also
subject to a CDSC of 1.0% if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain
fee-based programs. Although Class C shares are subject to a CDSC
for only one year (as compared to four years for Class B), Class C
shares have no conversion feature and, accordingly, an investor who
purchases Class C shares will be subject to distribution fees that
will be imposed on Class C shares for an indefinite period subject
to annual approval by the Fund's Board of Directors and regulatory
limitations.
Class D: Class D shares incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance fee of
0.25% of the Fund's average net assets attributable to Class D
shares. Class D shares are not subject to an ongoing distribution
fee or any CDSC when they are redeemed. The maximum initial sales
charge of 5.25% is reduced for purchases of $25,000 and over.
Purchases of $1,000,000 or more may not be subject to an initial
sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. The schedule of initial
sales charges and reductions for Class D shares is the same as the
schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D
shares also will be issued upon conversion of Class B shares as
described above under "Class B." See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B 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
8
<PAGE> 11
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges."
9
<PAGE> 12
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, 1996
are included in the Statement of Additional Information. Further information
about the performance of the Fund is contained in the Fund's most recent annual
report to shareholders which may be obtained, without charge, by calling or by
writing the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS B++
CLASS A++ -----------------------------------------------------------
---------------------------------------- FOR THE
FOR THE FOR THE PERIOD
FOR THE YEAR ENDED PERIOD FOR THE YEAR ENDED TEN MONTHS MAY 29,
DEC. 31, OCT. 21. 1994+ DEC. 31, ENDED 1992+
---------------------- TO DEC. 31, -------------------------------- DEC. 31, TO FEB. 28,
1996 1995 1994 1996 1995 1994 1993 1993
---------- ---------- ---------------- ---------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 15.99 $ 15.05 $17.43 $ 15.98 $ 15.03 $ 18.74 $ 11.01 $ 10.00
------- ------- ------ ---------- -------- -------- -------- --------
Investment income
(loss) -- net............ .14 .12 .02 (.04) (.03) (.07) (.02) (.02)
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net...... 2.03 1.00 (1.91) 2.02 1.00 (3.28) 7.86 1.05
------- ------- ------ ---------- -------- -------- -------- --------
Total from investment
operations............... 2.17 1.12 (1.89) 1.98 .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..... (.07) -- (.27) (.07) -- (.27) (.11) --+++
In excess of realized
gain on
investments -- net..... -- -- (.09) -- -- (.09) -- --
------- ------- ------ ---------- -------- -------- -------- --------
Total dividends and
distributions............ (.07) (.18) (.49) (.07) (.02) (.36) (.11) (.02)
------- ------- ------ ---------- -------- -------- -------- --------
Net asset value, end of
period................... $ 18.09 $ 15.99 $15.05 $ 17.89 $ 15.98 $ 15.03 $ 18.74 $ 11.01
======= ======= ====== ========== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................ 13.59% 7.44% (10.82)%# 12.41% 6.49% (17.86)% 71.27%# 10.32%#
======= ======= ====== ========== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses.................. 1.33% 1.37% 1.54%* 2.36% 2.41% 2.40% 2.35%* 2.49%*
======= ======= ====== ========== ======== ======== ======== ========
Investment income
(loss) -- net............ .78% 74% .84%* (.24)% (.20)% (.42)% (.15)%* (.08)%*
======= ======= ====== ========== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $ 49,943 $ 31,591 $3,383 $1,157,944 $991,281 $917,384 $990,843 $365,430
======= ======= ====== ========== ======== ======== ======== ========
Portfolio turnover........ 30.63% 24.52% 16.45% 30.63% 24.52% 16.45% 16.62% 4.65%
======= ======= ====== ========== ======== ======== ======== ========
Average commission rate
paid##................... $ .0130 -- -- $ .0130 -- -- -- --
======= ======= ====== ========== ======== ======== ======== ========
</TABLE>
- ------------------------
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ Amount was less than $.01 per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average commission rate paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
10
<PAGE> 13
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS D++
CLASS C++ -----------------------------------------------------------
---------------------------------------- FOR THE
FOR THE FOR THE PERIOD
FOR THE YEAR ENDED PERIOD FOR THE YEAR ENDED TEN MONTHS MAY 29,
DEC. 31, OCT. 31. 1994+ DEC. 31, ENDED 1992+
---------------------- TO DEC. 31, -------------------------------- DEC. 31, TO FEB. 28,
1996 1995 1994 1996 1995 1994 1993 1993
---------- ---------- ---------------- ---------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 15.79 $ 14.92 $17.29 $ 16.05 $ 15.08 $ 18.77 $ 11.01 $ 10.00
------- ------- ------ ---------- -------- -------- -------- --------
Investment income
(loss) -- net............ (.04) (.04) (.01) .09 .09 .06 .07 .05
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions --
net...................... 2.00 1.00 (1.89) 2.04 1.02 (3.30) 7.88 1.04
------- ------- ------ ---------- -------- -------- -------- --------
Total from investment
operations............... 1.96 .96 (1.90) 2.13 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..... (.07) -- (.27) (.07) -- (.27) (.11) --
In excess of realized
gain on investments --
net.................... -- -- (.09) -- -- (.09) -- --
------- ------- ------ ---------- -------- -------- -------- --------
Total dividends and
distributions............ (.07) (.09) (.47) (.07) (.14) (.45) (.19) (.08)
======= ======= ====== ========== ======== ======== ======== ========
Net asset value, end of
period................... $ 17.68 $ 15.79 $14.92 $ 18.11 $ 16.05 $ 15.08 $ 18.77 $ 11.01
======= ======= ====== ========== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................ 12.43% 6.46% (10.98)%# 13.29% 7.35% (17.24)% 72.31%# 10.99%#
======= ======= ====== ========== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses.................. 2.37% 2.42% 2.57%* 1.58% 1.63% 1.63% 1.59%* 1.73%*
======= ======= ====== ========== ======== ======== ======== ========
Investment income
(loss) -- net............ (.23)% (.28)% (.17)%* .53% .59% .34% .61%* .61%*
======= ======= ====== ========== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $ 62,113 $ 29,042 $5,329 $ 297,179 $285,485 $249,903 $311,848 $111,180
======= ======= ====== ========== ======== ======== ======== ========
Portfolio turnover........ 30.63% 24.52% 16.45% 30.63% 24.52% 16.45% 16.62% 4.65%
======= ======= ====== ========== ======== ======== ======== ========
Average commission rate
paid##................... $ .0130 -- -- $ .0130 -- -- -- --
======= ======= ====== ========== ======== ======== ======== ========
</TABLE>
- ------------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ Amount was less than $.01 per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average commission rate paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
11
<PAGE> 14
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
12
<PAGE> 15
in the United States. There is generally less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities since the
expenses of the Fund, such as management and advisory fees and custodial costs,
are higher.
INVESTING IN DEVELOPING ASIA-PACIFIC SECURITIES MARKETS AND ECONOMIES
The securities markets of developing Asia-Pacific countries are not as
large as the U.S. securities markets and have substantially less trading volume,
resulting in a lack of liquidity and high price volatility. Certain markets,
such as those of China, are in only the earliest stages of development. There is
also a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region, such as in Japan. Developing Asia-Pacific brokers typically are
fewer in number and less capitalized than brokers in the United States. These
factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investments discussed below, result in
potentially fewer investment opportunities for the Fund and may have an adverse
impact on the investment performance of the Fund. The Fund's investment
restrictions permit it to invest up to 15% of its total assets in securities
which are determined by the Manager to be illiquid securities.
The investment objective of the Fund reflects the belief that the economies
of the developing Asia-Pacific countries will continue to grow in such a fashion
as to provide attractive investment opportunities. At the same time, emerging
economies present certain risks that do not exist in more established economies,
especially significant is that political and social uncertainties exist for many
of the developing Asia-Pacific countries. In addition, the governments of many
of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy. Another risk common to most such countries is that the
economy is heavily export oriented and, accordingly, is dependent upon
international trade. The existence of overburdened infrastructure and obsolete
financial systems also presents risks in certain countries, as do environmental
problems. Certain economies also depend to a significant degree upon exports of
primary commodities and, therefore, are vulnerable to changes in commodity
prices which, in turn, may be affected by a variety of factors.
Legal standards applicable in certain developing Asia-Pacific countries
also may have an adverse impact on the Fund. For example, while the potential
liability of a shareholder in a U.S. corporation with respect to acts of the
corporation is generally limited to the amount of the shareholder's investment,
the notion of limited liability is not fully established in certain developing
Asia-Pacific countries. Similarly, the rights of investors in developing
Asia-Pacific companies may be more limited than those of shareholders of U.S.
corporations.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in
developing Asia-Pacific countries. For example, some of the currencies of
developing Asia-Pacific countries have experienced devaluations relative to the
U.S. dollar, and major adjustments have been made periodically in certain of
such currencies. Certain countries, such as India, face serious exchange
constraints. In addition, as mentioned above, governments of many developing
Asia-Pacific countries have exercised and continue to exercise substantial
influence over many aspects of the private sector. In certain cases, the
government owns or controls many companies, including the largest in the
country.
13
<PAGE> 16
Accordingly, government actions in the future could have a significant effect on
economic conditions in developing Asia-Pacific countries, which could affect
private sector companies and the Fund, as well as the value of securities in the
Fund's portfolio.
In addition to the relative lack of publicly available information about
developing Asia-Pacific issuers and the possibility that such issuers may not be
subject to the same accounting, auditing and financial reporting standards as
are applicable to U.S. companies, inflation accounting rules in some developing
Asia-Pacific countries require, for companies that keep accounting records in
the local currency, for both tax and accounting purposes, that certain assets
and liabilities be restated on the company's balance sheet in order to express
items in terms of currency of constant purchasing power. Inflation accounting
may indirectly generate losses or profits for certain developing Asia-Pacific
companies.
Satisfactory custodial services for investment securities may not be
available in some developing Asia-Pacific countries, which may result in the
Fund incurring additional costs and delays in providing transportation and
custody services for such securities outside such countries.
Certain developing Asia-Pacific countries, such as the Philippines, India
and Turkey, are especially large debtors to commercial banks and foreign
governments. Trading in debt obligations ("sovereign debt") issued or guaranteed
by developing Asia-Pacific governments or their agencies and instrumentalities
("governmental entities") involves a high degree of risk. The governmental
entity that controls the repayment of sovereign debt may not be willing or able
to repay the principal and/or interest when due in accordance with the terms of
such obligations. A governmental entity's willingness or ability to repay
principal and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the relative size of the debt service burden
to the economy as a whole, the governmental entity's dependence on expected
disbursements from third parties, the governmental entity's policy toward the
International Monetary Fund and the political constraints to which a
governmental entity may be subject. As a result, governmental entities may
default on their sovereign debt. Holders of sovereign debt (including the Fund)
may be requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. The Fund's ability to pursue the
collection of such debts by means of legal process following a default may be
limited by sovereign immunity or other legal concepts.
As a result, management of the Fund may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or
appropriate to invest in a particular developing Asia-Pacific country. The Fund
may invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience.
RESTRICTIONS ON FOREIGN INVESTMENTS
Some developing Asia-Pacific countries prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As illustrations, certain
countries may require governmental approval prior to investments by foreign
persons or limit the amount of investment by foreign persons in a particular
company or limit the investment by foreign persons to only a specific class of
securities of a company which may have less advantageous terms (including price)
than securities of the company available for purchase by nationals. Certain
countries may restrict investment opportunities in issuers or industries deemed
important to national interests.
14
<PAGE> 17
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% 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. 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> 18
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 predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. 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> 19
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 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-
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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."
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
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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.
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 Services ("S&P") and Moody's Investors Service,
Inc. ("Moody's") and unrated securities of comparable quality (referred to
herein as "high yield/high risk securities") are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
the terms of the security and generally involve a greater volatility of price
than securities in higher rating categories. See "Statement of Additional
Information -- Appendix." These securities are commonly referred to as "junk"
bonds. In purchasing such securities, the Fund will rely on the Manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. The Manager will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund is not authorized to purchase debt securities that
are in default, except for sovereign debt (discussed below) in which the Fund
may invest no more than 5% of its total assets while such sovereign debt
securities are in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, such
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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 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.
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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 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
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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 (i.e., sell) put options which give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a put option which
increases the Fund's return. The Fund writes only covered put options, which
means that so long as the Fund is obligated as the writer of the option it will,
through its custodian, have deposited and maintained cash, cash equivalents,
U.S. Government securities or other liquid securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written. The
Fund will not write put options if the aggregate value of the obligations
underlying the put options shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the stated exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of any offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if as a result of such purchase,
the aggregate cost (premiums paid) of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
Stock or Other Financial Index Futures and Options. The Fund is authorized
to engage in transactions in stock or other financial index options and futures
(including futures on government bonds), and related options on such futures.
The Fund may purchase or write put and call options on stock or other financial
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 settlement, the parties to the contract pay or
receive an amount of cash equal to the difference between the closing value of
the index on the relevant valuation date and the exercise price of the option
times a specified multiple. The Fund may invest in stock or other financial
index options based on a broad market index, e.g., the S&P 500 Index, or based
on a narrow index representing an industry or market segment, e.g., the AMEX Oil
& Gas Index.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties that obligates the
purchaser of the
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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 is also authorized to sell futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
invested or fully invested in any particular 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 has authority to purchase and write call and put options on
futures contracts (including financial futures) and stock indices in connection
with its hedging activities. Generally, these strategies are utilized under the
same market and market sector conditions (i.e., conditions relating to specific
types of investments) in which the Fund enters into futures transactions. The
Fund may purchase put options or write call options on futures contracts and
stock indices rather than selling the underlying futures contract in
anticipation of a decrease in the market value of its securities. Similarly, the
Fund may purchase call options, or write put options on futures contracts and
stock indices, as a substitute for the purchase of such futures to hedge against
the increased cost resulting from an increase in the market value of securities
which the Fund intends to purchase.
The Fund also has authority to 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
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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 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
("OTC") foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a 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
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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 liquid securities
having a market value substantially representing any subsequent net decrease in
the market value of such hedged positions, including net positions with respect
to cross-currency hedges. The Fund may not incur potential net liabilities of
more than 20% of its total assets from foreign currency options, futures or
related options.
In connection with its trading in forward foreign currency contracts, the
Fund will contract with a foreign or domestic bank, or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks
and dealers have refused to quote prices for such forward contracts or have
quoted prices with an unusually wide spread between the price at which the bank
or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward contract
trading. With respect to its trading of forward contracts, if any, the Fund will
be subject to the risk of bank or dealer failure and the inability of, or
refusal by, a bank or dealer to perform with respect to such contracts. Any such
default would deprive the Fund of any profit potential or force the Fund to
cover its commitments for resale, if any, at the then market price and could
result in a loss to the Fund.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission ("CTFC") 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
OTC stock index options, OTC foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million or any other bank
or dealer having capital of at least $150 million or whose obligations are
guaranteed by an entity having capital of at least $150 million.
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The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transaction, the sum of the market value of
OTC options currently outstanding which are held by the Fund, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on futures contracts exceeds 15% of the total assets of the Fund, taken
at market value, together with all other assets of the Fund which are illiquid
or are not otherwise readily marketable. However, if the OTC option is sold by
the Fund to a primary U.S. Government securities dealer recognized by the
Federal Reserve Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
security minus the option's strike price). The repurchase price with the primary
dealers is typically a formula price which is generally based on a multiple of
the premium received for the option, plus the amount by which the option is
"in-the-money". This policy as to OTC options is not a fundamental policy of the
Fund and may be amended by the Directors of the Fund without the approval of the
Fund's shareholders. However, the Fund will not change or modify this policy
prior to the change or modification by the Commission staff of its position.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge. If
the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction. In addition, options and futures
transactions in foreign markets are subject to the risk factors associated with
foreign investments generally. See "Risk Factors and Special Considerations."
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. There can be
no assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures position. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
the bankruptcy of a broker with whom the Fund has an open position in an option,
a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the
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<PAGE> 29
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 ("RICs") under the Internal Revenue Code of 1986, as amended (the
"Code"). See "Additional Information -- Taxes." To qualify, the Fund must comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (i) not more than 25% of the market
value of the Fund's total assets will be invested in the securities of a single
issuer and (ii) with respect to 50% of the market value of its total assets, not
more than 5% of the market value of its total assets will be invested in the
securities of a single issuer, and the Fund will not own more than 10% of the
outstanding voting securities of a single issuer. Foreign government securities
(unlike U.S. Government securities) are not exempt from the diversification
requirements of the Code and are considered obligations of a single issuer. A
fund that elects to be classified as "diversified" under the Investment Company
Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of
its total assets. To the extent that the Fund assumes large positions in the
securities of a small number of issuers, the Fund's net asset value may
fluctuate to a greater extent than that of a diversified company as a result of
changes in the financial condition or in the market's assessment of the issuers,
and the Fund may be more susceptible to any single economic, political or
regulatory occurrence than a diversified company.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain of
such exchanges. See "Risk Factors and Special Considerations." In executing the
Fund's portfolio transactions, the Manager seeks to obtain the best net results
for the Fund, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. The Fund may invest in certain securities
traded in the over-the-counter market and, where possible, will deal directly
with the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. Securities firms may receive brokerage
commissions on certain portfolio transactions, including options, futures and
options on futures transactions and the purchase and sale of underlying
securities upon exercise of options. The Fund has no obligation to deal with any
broker in the execution of transactions in portfolio securities. Under the
Investment Company Act, persons affiliated with the Fund, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Affiliated persons of the Fund may serve as its
broker in transactions conducted on an exchange and in OTC transactions
conducted on an agency basis. In addition, consistent with the Conduct Rules of
the NASD, the Fund may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch. Costs associated with transactions in foreign securities are
generally higher than those
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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 liquid securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the amount of its commitments in connection with such
purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security that 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% 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 liquid securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
to the purchase price of the securities underlying 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.
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<PAGE> 31
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 financial institutions that
(i) have, in the opinion of the Manager, substantial capital relative to the
Fund's exposure, or (ii) have provided the Fund with a third-party guaranty or
other credit enhancement. A purchase and sale contract is similar to a
repurchase agreement, but purchase and sale contracts, unlike repurchase
agreements, allocate interest on the underlying security to the purchaser during
the term of the agreement. In all instances, the Fund takes possession of the
underlying securities when investing in repurchase agreements or purchase and
sale contracts. Nevertheless, if the seller were to default on its obligation to
repurchase a security under a repurchase agreement or purchase and sale contract
and the market value of the underlying security at such time was less than the
Fund had paid to the seller, the Fund would realize a loss. The Fund may not
invest more than 15% of its total assets in repurchase agreements or purchase
and sale contracts maturing in more than seven days, together with all other
illiquid securities.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. 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 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.
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<PAGE> 32
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 liquid securities 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 the
potential return of which 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 the potential investment
return of which 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, 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 that 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
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<PAGE> 33
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 that
cannot readily be resold because of legal or contractual restrictions or that
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
including repurchase agreements and purchase and sale contracts maturing in more
than seven days, if, regarding all such securities, more than 15% of its total
assets taken at market value would be invested in such securities. 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, 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 non-fundamental restriction regarding
investment in restricted securities. 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.
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<PAGE> 34
The Directors of the Fund are:
ARTHUR ZEIKEL* -- President of the Manager and its affiliate, FAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of the Distributor.
DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).
EDWARD H. MEYER -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the Fund's investment adviser. The Manager is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Manager or its affiliate, FAM, acts as the investment adviser
to more than 130 registered investment companies. The Manager or FAM also offers
portfolio management and portfolio analysis services to individuals and
institutions. As of March 31, 1997, the Manager and FAM had a total of
approximately $247.2 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The management agreement between the Fund and 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 1.0% 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, 1996, the Manager received a fee of $15,984,061 (based on average
net assets of approximately $1.6 billion).
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Also, the Manager has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly owned subsidiary of ML & Co. and an affiliate
of the Manager, pursuant to which the Manager pays MLAM U.K. a fee for providing
investment advisory services to the Manager with respect to the Fund in an
amount to be determined from time to time by the Manager and MLAM U.K. but in no
event in excess of the amount the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement. MLAM U.K. has offices
at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
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 day-to-day management of the Fund's investment
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, 1996, the Fund
reimbursed the Manager $124,707 for accounting services. For the fiscal year
ended December 31, 1996, the ratio of total expenses to average net assets for
each class of shares was as follows: Class A, 1.33%; Class B, 2.36%; Class C,
2.37%; and Class D, 1.58%.
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 that 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 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
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<PAGE> 36
opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class A
or Class D account and up to $14.00 per Class B or Class C account and is
entitled to reimbursement for out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. The term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing a beneficial interest of a person in the relevant share
class or a record-keeping system, provided the record-keeping system is
maintained by a subsidiary of ML & Co. For the fiscal year ended December 31,
1996, the Fund paid $2,859,698 to the Transfer Agent pursuant to the Transfer
Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and of Merrill Lynch,
acts as the distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except for retirement plans, the minimum initial purchase is
$100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined after
receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the 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 on that
day, such orders shall be deemed received on the next business day. The Fund or
the Distributor may suspend the continuous offering of the Fund's shares 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, but as of May 1, 1997, $5.35) to confirm a sale of shares to such
customers. Purchases made directly through the Transfer Agent are not subject to
the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that
34
<PAGE> 37
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
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). See "Distribution Plans"
below. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees 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 Pricing(SM) System.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Account Distribution Conversion
CLASS SALES CHARGE(1) Maintenance Fee Fee Feature
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales charge(2)(3) No No No
- -----------------------------------------------------------------------------------------------------------
B CDSC for a period of four years, at 0.25% 0.75% B shares convert to D shares
a rate of 4.0% during the first automatically after
year, decreasing 1.0% annually to approximately eight years(5)
0.0%(4)
- -----------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -----------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes continued on next page)
35
<PAGE> 38
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1 million will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS 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 fee-based
programs. If the sales charge is waived in connection with a purchase of
$1,000,000 or more, such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be waived
in connection with certain fee-based programs. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may
36
<PAGE> 39
be deemed to be underwriters under the Securities Act. The proceeds from the
account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
As noted above, as a result of the implementation of the Merrill Lynch
Select Pricing(SM) System, Class A shares of the Fund outstanding prior to
October 21, 1994, 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, 1996, the Fund sold 12,899,901 of
its Class A shares for aggregate net proceeds to the Fund of $220,044,411. The
gross sales charges for the sale of its Class A shares for the year were $4,396,
of which $322 and $4,074 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 a front-end sales charge waiver.
During the fiscal year ended December 31, 1996, the Fund sold 25,641,811 of
its Class D shares for aggregate net proceeds to the Fund of $438,051,376. The
gross sales charges for the sale of its Class D shares for the year were
$940,810, of which $64,519 and $876,291 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 purchased subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors who currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) 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
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net asset
value to ML&Co. and its subsidiaries and their directors and employees and to
members of the Boards of MLAM-advised investment companies, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other MLAM-advised
mutual funds.
37
<PAGE> 40
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Class A shares are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and,
subject to certain conditions Class A and Class D shares are offered at net
asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies. Class D
shares are offered with reduced sales charges and, in certain circumstances, at
net asset value, to participants in the Merrill Lynch Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and a distribution fee of 0.75% of net assets as discussed below under
"Distribution Plans." The proceeds from the account maintenance fees are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing
38
<PAGE> 41
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 that
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
----------------------------------- ------------------
<S> <C>
0-1................................ 4.00%
1-2................................ 3.00
2-3................................ 2.00
3-4................................ 1.00
4 and thereafter................... 0.00
</TABLE>
For the fiscal year ended December 31, 1996, the Distributor received CDSCs of
$2,098,967 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares
39
<PAGE> 42
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased after
October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans. The CDSC also is waived for any Class B shares that
are purchased by eligible 401(k) or eligible 401(a) plans that are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in
such account at the time of redemption. Effective on or about May 12, 1997, the
Class B CDSC also will be waived for any Class B shares purchased within
eligible Employee Access(SM) Accounts. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information. The terms of the CDSC may be modified in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
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. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs." For the fiscal year ended December 31, 1996,
the Distributor received CDSCs of $71,125 with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
40
<PAGE> 43
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all 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 certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
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
41
<PAGE> 44
Class B and Class C Distribution Plans provide for the payment of account
maintenance fees and distribution fees, and the Class D Distribution Plan
provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended December 31, 1996, the Fund paid the Distributor
$11,795,965 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $1.2 billion),
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, 1996, the Fund paid the Distributor
$606,862 pursuant to the Class C Distribution Plan (based on average net assets
subject to such Class C Distribution Plan of approximately $60.4 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, 1996, the Fund paid the Distributor
$780,000 pursuant to the Class D Distribution Plan (based on average net assets
subject to such Class D Distribution Plan of approximately $310.3 million), all
of which was paid to Merrill Lynch for providing account maintenance activities
in connection with Class D shares.
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.
42
<PAGE> 45
As of December 31, 1996, for Class B shares, fully allocated accrual
expenses for the period since May 29, 1992 (commencement of operations) incurred
by the Distributor and Merrill Lynch exceeded fully allocated accrual revenues
by $2,339,000 (.20% of Class B net assets at that date). As of December 31,
1996, for Class B shares, direct cash revenues for the period since commencement
of operations exceeded direct cash expenses for such period by approximately
$24,778,099 (2.14% of Class B net assets at that date). As of December 31, 1996,
for Class C shares, fully allocated accrual expenses for the period since
October 21, 1994 (commencement of operations) exceeded fully allocated accrued
revenues by $311,000 (.50% of Class C net assets at that date). As of December
31, 1996, for Class C shares, direct cash revenues for the period since October
21, 1994 (commencement of operations) exceeded direct cash expenses by $515,014
(.83% 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 Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges), plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fees
and the 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.
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REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, 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 in either event 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.
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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, but as of May 1, 1997, $5.35) to
confirm a repurchase of shares. Repurchases made directly through the Transfer
Agent are not subject to the processing fee. The Fund reserves the right to
reject any order for repurchase, which right of rejection might affect adversely
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem shares
as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various 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
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Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder. If the new brokerage firm
is willing to accommodate the shareholder in this manner, the shareholder must
request that he or she be issued certificates for such shares and then must turn
the certificates over to a new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred account
such as an IRA from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account is
to be transferred will not take delivery of shares of the Fund, a shareholder
must either redeem the shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm, or such shareholder
must continue to maintain a retirement account at Merrill Lynch for those
shares.
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 or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
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Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share next determined after the close of business on the NYSE on
the ex-dividend date of such dividend or distribution. A shareholder may at any
time, by written notification to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or telephone call
(1-800-MER-FUND) to the Transfer Agent if the shareholder's account is
maintained with the Transfer Agent, elect to have subsequent dividend or capital
gains distributions, or both, paid in cash, rather than reinvested, in which
event payment will be mailed on or about the payment date. Cash payments can
also be directly deposited to the shareholder's bank account. No CDSC will be
imposed on redemption of shares issued as a result of the automatic reinvestment
of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on either
a monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain
conditions.
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AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his or her regular bank account. Investors who maintain CMA(R) 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) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND or (800) 637-3863.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified 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
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<PAGE> 51
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return, and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over longer periods of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B and Class C shares (such as investors in
certain retirement plans) or to reduced sales charges in the case of Class A and
Class D shares, performance data may take into account the reduced, and not the
maximum, sales charges or may not take into account the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or waiver
of the CDSC, a lower amount of expenses may be deducted. See "Purchase of
Shares." The Fund's total return may be expressed either as a percentage or as a
dollar amount in order to illustrate the effect of such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 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
will be reinvested automatically in shares of the Fund, at net asset value
without a sales charge. However, a shareholder whose account is maintained at
the Transfer Agent or whose account is maintained through Merrill Lynch may
elect in writing to receive any such dividends or
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<PAGE> 52
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 Federal tax requirements that certain percentages of its ordinary income
and capital gains be distributed during the calendar year.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Determination of Net Asset Value" below.
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, thereby reducing each shareholder's tax basis in
Fund shares for Federal income tax purposes and resulting in a capital gain for
any shareholder who received a distribution greater than the shareholders' tax
basis in Fund shares (assuming that the shares were held as a capital asset).
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 NYSE (generally, 4:00
p.m., New York time), on each day during which the NYSE is open for trading or
on such other day that there is sufficient trading in portfolio securities that
the net asset value of the Fund's shares may be materially affected. 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 sum of the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time to the nearest cent. Expenses, including the
management fees payable to the Manager and any account maintenance and/or
distribution fees payable to the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; in addition, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and 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.
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Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Securities
which are traded both in the OTC market and on a stock exchange will be valued
according to the broadest and most representative market. When the Fund writes
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Any assets or liabilities expressed in terms of foreign
currencies are translated into U.S. dollars at the prevailing market rates as
obtained from one or more dealers. Other investments, including futures
contracts and related options, 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"). As long as 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.
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Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of 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
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to recognize income in excess of the distributions it received from PFICs and
its proceeds from dispositions of PFIC stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's basis in Fund shares
(assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
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.
53
<PAGE> 56
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 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.
54
<PAGE> 57
MERRILL LYNCH DRAGON FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
<TABLE>
<S> <C> <C> <C>
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares
</TABLE>
of Merrill Lynch Dragon Fund, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to 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)
<TABLE>
<CAPTION>
<S> <C>
Occupation ......................................... Name and Address of Employer.................................................
.............................................................................
.............................................................................
..................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
[ ] Check or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Dragon Fund, Inc. Authorization Form.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ........................ Account Number.............................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to 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.
55
<PAGE> 58
MERRILL LYNCH DRAGON FUND, INC. -- AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information -- Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH-SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................, 19 . . . .
Dear Sir/Madam: Date of Initial Purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Dragon Fund, Inc. or any other investment company with an initial sales
charge or deferred sales charge for which Merrill Lynch Funds Distributor, Inc.
acts as distributor over the next 13 month period which will equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Dragon Fund, Inc.
Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Dragon Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form when completed should be mailed to:
Merrill Lynch Dragon Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
56
<PAGE> 59
MERRILL LYNCH DRAGON FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(Please Print) ------------------------------------
Name of Owner.......................................................................
First Name Initial Last Name ------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address............................................................................. Account Number...........................
(if existing account)
....................................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Dragon Fund,
Inc. at cost or current offering price. Withdrawals to be made either (check
one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly on the 24th day
of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawals on ________________or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [ ]
$________ or [ ] ____% of the current value of [ ] Class A or [ ] Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner................................Date..........................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO 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.
57
<PAGE> 60
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.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Dragon Fund, Inc., as indicated below:
Amount of each ACH debit $...................................................
Account No. .................................................................
Please date and invest ACH debits on the 20th of each month beginning ..........
(month)
or as soon as possible thereafter.
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
............... ....................................
Date Signature of Depositor
..............................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip Code.......................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
............... ...................................
Date Signature of Depositor
.................... ..............................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
58
<PAGE> 61
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 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 LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 62
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION 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........................... 4
Merrill Lynch Select Pricing(SM) System...... 5
Financial Highlights......................... 10
Risks 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....................... 31
Board of Directors......................... 31
Management and Advisory Arrangements....... 32
Code of Ethics............................. 33
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................................. 44
Repurchase................................. 45
Reinstatement Privilege --
Class A and Class D Shares............... 45
Shareholder Services......................... 46
Investment Account......................... 46
Exchange Privilege......................... 47
Automatic Reinvestment of Dividends and
Distributions............................ 48
Systematic Withdrawal Plans................ 48
Automatic Investment Plans................. 48
Fee-Based Programs......................... 48
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
Code # 16261-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
DRAGON FUND, INC.
PROSPECTUS [MLYNCH COMPASS]
April 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 63
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH DRAGON FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------------
Merrill Lynch Dragon Fund, Inc. (the "Fund") is a non-diversified, open-end
management investment company that seeks 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
28, 1997 (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 28, 1997.
<PAGE> 64
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in developing Asia-Pacific equity and debt
securities. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. ("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, 1995 and 1996, were 24.52% and 30.63%,
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 Manager believes
that, because the Fund will engage in options and futures transactions only for
hedging purposes, the
2
<PAGE> 65
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 on or before a
specified future date and at a specified 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 or she may
be required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her obligation as
a writer. If an option expires unexercised, the writer realizes a gain in the
amount of the premium. Such a gain, of course, may be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer realizes a gain or loss from the sale of the
underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other liquid securities denominated in U.S. dollars or non-U.S.
currencies with a securities depository with a value equal to or greater than
the exercise price of the underlying securities. By writing a put, the Fund will
be obligated to purchase the underlying security at a price that may be higher
than the market value of that security at the time of 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 exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be
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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 is authorized to 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 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 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 (premium paid) of all
outstanding options on securities held by the Fund would exceed 5% of the market
value of the Fund's total assets.
Stock or Other Financial Index Futures and Options. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock or other
financial index futures and options (including futures on government bonds), and
related options on such futures. Set forth below is further information
concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is typically between 2% and 15% of the value of the
futures contract, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit
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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 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
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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 OTC option agreement. In the case of a futures
position or an option on a futures position written by the Fund in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery of the 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 its portfolio effectively.
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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 liquid securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
amount of its commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and
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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% of its total assets taken at the time of acquisition of such
commitment or security. The Fund will at all times maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other liquid securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the 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 and purchase and sale contracts may be entered into only
with financial institutions which (i) have, in the opinion of the Manager,
substantial capital relative to the Fund's exposure, or (ii) have provided the
Fund with a third-party guaranty or other credit enhancement. Under such
agreements, the seller agrees, upon entering into the contract with the Fund, to
repurchase the security at a mutually-agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect the accrued interest on the underlying obligations; whereas, in the case
of purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, often less than one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement; the Fund does not have the right to seek additional collateral in the
case of purchase and sale contracts. In the event of default by the seller under
a repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only 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
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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 value of such securities
and the accrued interest on the securities. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
resulting from market fluctuations following the failure of the seller to
perform. The Fund may not invest more than 15% 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).
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.
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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 not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
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has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
and determined to be liquid by the Board of Directors are not subject to
the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 33 1/3% of its total assets taken at market
value (including the amount borrowed) and then only from a bank as a
temporary measure for extraordinary or emergency purposes including to meet
redemptions or to settle securities transactions. Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however,
the Fund will not borrow to increase income but only as a temporary measure
for extraordinary or emergency purposes, including to meet redemptions or
to settle securities transactions which may otherwise require untimely
dispositions of Fund securities. The Fund will not purchase securities
while borrowings exceed 5% of total assets except (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained, exclusively for settlements of other
securities transactions. (For the purpose of this restriction, collateral
arrangements with respect to the writing of options, and, if applicable,
futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to
be a pledge of assets and neither such arrangements nor the purchase or
sale of futures or related options are deemed to be the issuance of a
senior security.)
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
that are held by the Fund, the market value of the underlying securities covered
by OTC call options currently outstanding that were sold by the Fund and margin
deposits on the Fund's existing OTC options on futures contracts exceeds 15% of
the net assets of the Fund, taken at market value, together with all other
assets of the Fund that 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.
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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.
ARTHUR ZEIKEL (64) -- President and Director(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990; and Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
DONALD CECIL (70) -- 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 (70) -- Director(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (65) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, 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 from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to 1990;
Partner, Small Cities Cable Television since 1986.
RICHARD R. WEST (59) -- 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).
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<PAGE> 75
EDWARD D. ZINBARG (62) -- Director(2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117, Executive Vice President of The Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
TERRY K. GLENN (56) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
NORMAN R. HARVEY (63) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
KARA W.Y. TAN BHALA (37) -- 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 (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Manager since 1990.
GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993; Vice President of the Distributor since 1981
and Treasurer thereof since 1984.
JAMES W. HARSHAW (38) -- 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, 1997, 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 Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended December 31, 1996, fees and expenses
paid to such non-affiliated Directors aggregated $37,698.
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<PAGE> 76
The following table sets forth for the fiscal year ended December 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996 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 AND
RETIREMENT OTHER MLAM/FAM
BENEFITS ADVISED FUNDS
ACCRUED AS PAID
COMPENSATION PART OF FUND TO
NAME OF DIRECTOR FROM FUND EXPENSES DIRECTORS(1)
--------------------------------- ------------ ------------ --------------
<S> <C> <C> <C>
Donald Cecil..................... $8,500 None $268,933
Edward H. Meyer.................. $6,500 None $227,933
Charles C. Reilly................ $7,500 None $293,833
Richard R. West.................. $7,500 None $269,833
Edward D. Zinbarg................ $7,500 None $127,333
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios); Mr.
West (41 registered investment companies consisting of 54 portfolios); and
Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling 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
1.0% of the average daily net assets of the Fund. For the fiscal years ended
December 31, 1994, 1995 and 1996, the fees paid by the Fund to the Manager were
$11,490,030, $11,840,885 and $15,984,061, respectively.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of the Manager. The Fund
pays all other expenses incurred in its operation, including, among other
things, taxes; expenses for legal and auditing services; costs of printing
14
<PAGE> 77
proxies, stock certificates, shareholder reports and prospectuses and statements
of additional information (except to the extent paid by the Distributor);
charges of the custodian, any sub-custodian and transfer agent; expenses of
redemption of shares; Commission fees; expenses of registering the shares under
Federal, state or foreign laws; fees and expenses of unaffiliated Directors;
accounting and pricing costs (including the daily calculation of net asset
value); insurance; interest; brokerage costs; litigation and other extraordinary
or non-recurring expenses; and other expenses properly payable by the Fund.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal years ended December 31, 1994, 1995 and 1996,
the amount of such reimbursement was $162,198, $168,696 and $124,707,
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."
As described in the Prospectus, the Manager has also entered into a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") pursuant to which MLAM U.K. provides investment advisory services to the
Manager with respect to the Fund.
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
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests in
the investment portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses
15
<PAGE> 78
charged under the Class D Distribution Plan). Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM which utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous 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 Pricing(SM)
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 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 A shares for the fiscal year ended December
31, 1996, were $4,396, of which the Distributor received $322 and Merrill Lynch
received $4,074. 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. The gross
sales charges for the sale of its Class D shares for the fiscal year ended
December 31, 1996, were $940,810, of which the Distributor received $64,519 and
Merrill Lynch received $876,291. 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
a front-end sales charge waiver.
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 or her spouse and their children under
the age of 21 years purchasing shares for his, her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Internal Revenue Code of 1986, as amended (the
16
<PAGE> 79
"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 that
has not been in existence for at least six months or that has no purpose other
than the purchase of shares of the Fund or shares of other registered investment
companies at a discount. The term "purchase" shall not include purchases by any
group of individuals whose sole organizational nexus is that the participants
therein are credit cardholders of a company, policyholders of an insurance
company, customers of either a bank or broker-dealer or clients of an investment
adviser. The term "purchase" also includes purchases by employee benefit plans
not qualified under Section 401 of the Code, including purchases of shares of
the Fund by employees or by employers on behalf of employees, by means of a
payroll deduction plan or otherwise. Purchases by such a company or
non-qualified employee benefit plan will qualify for the 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 Pricing(SM) 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
17
<PAGE> 80
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 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
18
<PAGE> 81
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.
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 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 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.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. 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.
19
<PAGE> 82
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 that
might result from an acquisition of assets having net unrealized appreciation
that 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 that (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, that
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
20
<PAGE> 83
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that such Distribution Plan will
benefit the Fund and its related class of shareholders. Each Distribution Plan
can be terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholder, and all material
amendments are required to be approved by the vote of the Directors, including a
majority of the Independent Directors who have no direct or indirect financial
interest in such Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules 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,
1996, 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.
21
<PAGE> 84
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1996
-----------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
MAY 29, 1992 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31,
1996:
Under NASD Rule as Adopted..... $1,121,245 $70,078 $ 13,664 $83,742 $ 34,452 $49,290 $8,685
Under Distributor's Voluntary
Waiver....................... $1,121,245 $70,078 $ 5,606 $75,684 $ 34,452 $41,232 $8,685
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996:
Under NASD Rule as Adopted..... $ 75,950 $ 4,747 $ 439 $5,186 $ 642 $ 4,544 $ 466
</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 July
7, 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.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange (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.
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 certain
instances, including 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
22
<PAGE> 85
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 years ended
December 31, 1994, 1995 and 1996, the Distributor received CDSCs of $2,007,892,
$2,203,281 and $2,098,967, respectively, with respect to Class B shares, all of
which were paid to Merrill Lynch. Similarly, for the fiscal period October 21,
1994 (commencement of operations) to December 31, 1994, and for the fiscal years
ended December 31, 1995 and 1996, the Distributor received CDSCs of $141,
$9,778, and $71,125, respectively, with respect to Class C shares, all of which
were paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices -- 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 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 Conduct Rules 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
23
<PAGE> 86
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, 1996, the Fund paid total brokerage
commissions of $4,116,501 of which $307,021, or 7.46%, was paid to Merrill Lynch
for effecting 7.41% of the aggregate dollar amount of transactions on which the
Fund paid brokerage commissions. 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.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts that 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 possibility of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the advisory fee paid by the Fund. After considering all
factors deemed relevant, the Directors made a determination not to seek such
recapture. The Directors will reconsider this matter from time to time.
24
<PAGE> 87
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 Class B, Class C and Class D shares generally will be lower
than the per share net asset value of Class A shares reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; moreover, the per share net asset value of Class B and Class C
shares generally will be lower than the per share net asset value of Class D
shares reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C shares of
the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that 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 ("OTC") market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Securities which are traded both in the OTC market and on a stock
exchange will be valued according to the broadest and most representative
market. When the Fund writes an option, the amount of the premium received is
recorded on the books of the Fund as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last bid price. Other investments, including futures
contracts and related options, 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.
25
<PAGE> 88
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
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 or she be issued certificates for his or
her shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an IRA from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by
26
<PAGE> 89
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 NYSE on the ex-dividend date of such 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 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 on the NYSE (generally, 4:00 p.m., New
York time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the 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
27
<PAGE> 90
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
U.S. 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 or her account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares 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.
28
<PAGE> 91
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 certain money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares is
"tacked" to the holding period 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 Special Value Fund Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds 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 that were acquired as
a result of an exchange for Class B or Class C shares of the Fund may, in turn,
be exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of the newly-acquired 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
29
<PAGE> 92
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 that 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, a shareholder should contact his or her
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised mutual
funds, 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 Class B and Class C shares; similarly, the per
share dividends and distributions on Class D shares will be lower than the per
share dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to Class D shares. See "Determination
of Net Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as 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.
30
<PAGE> 93
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).
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
31
<PAGE> 94
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 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 and distribute 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.
32
<PAGE> 95
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. Unrealized losses, however, would not be
recognized. By making the mark-to-market election, the Fund could avoid
imposition of the interest charge with respect to its distributions from PFICs,
but in any particular year might be required to recognize income in excess of
the distributions it received from PFICs and its proceeds from dispositions of
PFIC stock.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may 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.
33
<PAGE> 96
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign currency contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from certain debt instruments, from certain
forward contracts, from futures contracts that are not "regulated futures
contracts" and from unlisted options will be treated as 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. To date, 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.
34
<PAGE> 97
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the 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.
35
<PAGE> 98
Set forth in the tables below is total return information for 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."
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------------------------- ---------------------------- ---------------------------- ----------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
VALUE VALUE VALUE VALUE
EXPRESSED OF A EXPRESSED OF A EXPRESSED OF A EXPRESSED OF A
AS A HYPOTHETICAL AS A HYPOTHETICAL AS A HYPOTHETICAL AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE $1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ---------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year
Ended
December
31,
1996..... 7.63% $1,076.30 8.41% $1,084.10 11.43% $1,114.30 7.34% $1,073.40
Inception
(October
21,
1994) to
December
31,
1996.... 1.41% $1,031.30 -- -- 2.93% $1,065.50 -- --
Inception
(May 29,
1992) to
December
31,
1996.... -- -- 14.44% $1,858.00 -- -- 13.98% $1,823.90
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
PERIOD (EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December
31,
1996..... 13.59% $1,135.90 12.41% $1,124.10 12.43% $1,124.30 13.29% $1,132.90
Year Ended
December
31,
1995.... 7.44% $1,074.40 6.49% $1,064.90 6.46% $1,064.60 7.35% $1,073.50
Year Ended
December
31,
1994.... -- -- (17.86)% $ 821.40 -- -- (17.24)% $ 827.60
Inception
(October
21,
1994) to
December
31,
1994.... (10.82)% $ 891.80 -- -- (10.98)% $ 890.20 -- --
Year Ended
December
31,
1993.... -- -- 86.15% $1,861.50 -- -- 87.46% $1,874.60
Inception
(May 29,
1992) to
December
31,
1992.... -- -- 1.50% $1,015.00 -- -- 2.02% $1,020.20
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
PERIOD (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October
21, 1994)
to
December
31,
1996..... 3.13% $1,031.30 -- -- 6.55% $1,065.50 -- --
Inception
(May 29,
1992) to
December
31,
1996.... -- -- 85.80% $1,858.00 -- -- 82.39% $1,823.90
</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 CDSCs, a lower amount of expenses may be deducted.
36
<PAGE> 99
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 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.
37
<PAGE> 100
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, 1996, 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.................................. $49,942,833 $1,157,944,111 $62,112,801 $297,179,437
=========== ============== =========== ============
Number of Shares Outstanding................ 2,760,504 64,719,334 3,512,195 16,405,188
=========== ============== =========== ============
Net Asset Value Per Share (net assets
divided by number of shares
outstanding).............................. $ 18.09 $ 17.89 $ 17.68 $ 18.11
Sales Charge (for Class A and Class D
shares: 5.25% of offering price (5.54% of
net asset value per share))*.............. 1.00 ** ** 1.00
----------- -------------- ----------- ------------
Offering Price.............................. $ 19.09 $ 17.89 $ 17.68 $ 19.11
=========== ============== =========== ============
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Contingent Deferred Sales
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to 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.
38
<PAGE> 101
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on 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, ML & Co. 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, 1997.
39
<PAGE> 102
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.
40
<PAGE> 103
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 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.
41
<PAGE> 104
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.
42
<PAGE> 105
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("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.
Speculative
Grade 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.
43
<PAGE> 106
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 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
44
<PAGE> 107
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.
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.
45
<PAGE> 108
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.
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.
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<PAGE> 109
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.
47
<PAGE> 110
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, 1996, 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 periods presented. 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, 1996, by correspondence with the custodian. 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, 1996, 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 10, 1997
48
<PAGE> 111
<TABLE>
<CAPTION>
MERRILL LYNCH DRAGON FUND, INC., DECEMBER 31, 1996
SCHEDULE OF INVESTMENTS (IN US DOLLARS)
FACE AMOUNT/ VALUE PERCENT OF
COUNTRIES INDUSTRIES SHARES HELD LONG-TERM INVESTMENTS COST (NOTE 1a) NET ASSETS
<S> <S> <C> <S> <C> <C> <C>
China Building & 2,606,800 +New World Infrastructure, Ltd. $ 7,558,272 $ 7,617,492 0.5%
Construction
Conglomerates 32,504,104 Guangdong Investments, Ltd. 17,911,060 31,310,522 2.0
Manufacturing 1,675,205 +Guangdong Tannery Ltd. 225,419 422,375 0.0
Real Estate 5,346,000 China Resources Enterprise Ltd. 7,838,543 12,027,463 0.8
US$ 15,900,000 Henderson Capital International,
5% due 3/28/1997 (b) 17,032,175 13,674,000 0.9
-------------- -------------- ------
24,870,718 25,701,463 1.7
TOTAL LONG-TERM INVESTMENTS
IN CHINA 50,565,469 65,051,852 4.2
Hong Kong Banking 905,500 Dao Heng Bank Group Ltd. 4,162,560 4,343,684 0.3
7,504,000 Guoco Group, Ltd. 33,753,379 42,012,309 2.7
4,241,106 HSBC Holdings, Ltd. 51,026,855 90,755,501 5.7
-------------- -------------- ------
88,942,794 137,111,494 8.7
Conglomerates 7,765,000 Citic Pacific Ltd. 28,620,635 45,079,972 2.9
23,328,159 First Pacific Company Ltd. 26,159,850 30,313,938 1.9
10,796,000 Hutchison Whampoa, Ltd. 51,036,357 84,801,784 5.4
3,615,000 Swire Pacific Ltd. 'A' 21,539,530 34,471,974 2.2
8,058,000 Swire Pacific Ltd. 'B' 10,707,902 12,190,147 0.8
-------------- -------------- ------
138,064,274 206,857,815 13.2
Electronic/ 12,200,000 ASM Pacific Technology Ltd. 4,026,946 9,464,701 0.6
Semiconductors
Insurance 25,633,000 National Mutual Asia, Ltd. 13,051,294 24,360,299 1.6
Leisure US$ 12,367,000 HSH Overseas Finance Ltd.,
5% due 1/06/2001 (b) 13,702,646 14,129,298 0.9
Publishing & 8,270,000 South China Morning Post
Broadcasting Holdings Ltd. 5,040,886 6,843,548 0.5
5,213,000 Television Broadcasts Ltd. 20,622,840 20,827,735 1.3
-------------- -------------- ------
25,663,726 27,671,283 1.8
Real Estate 9,517,000 Cheung Kong Holdings Ltd. 53,448,004 84,599,657 5.4
4,093,688 New World Development Co., Ltd. 13,461,944 27,656,478 1.8
US$ 5,150,000 New World Development Co.,
Ltd., 4.375% due 12/11/2000 (b) 5,822,455 6,926,750 0.4
6,402,100 Sun Hung Kai Properties, Ltd. 46,348,749 78,432,761 5.0
7,280,751 Wharf Holdings Ltd. 25,378,541 36,337,857 2.3
-------------- -------------- ------
144,459,693 233,953,503 14.9
Utilities-- 18,132,665 Hong Kong and China Gas
Electric & Gas Company Ltd. 24,017,834 35,050,847 2.2
TOTAL LONG-TERM INVESTMENTS
IN HONG KONG 451,929,207 688,599,240 43.9
India Finance 1,029 Housing Development Finance
Corp., Ltd. 100,884 64,813 0.0
Steel 1,331 Essar Steel Ltd. 3,795 733 0.0
TOTAL LONG-TERM INVESTMENTS
IN INDIA 104,679 65,546 0.0
Indonesia Banking 14,517,459 P.T. Bank International
Indonesia (Foreign) 10,072,259 14,296,099 0.9
</TABLE>
49
<PAGE> 112
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
FACE AMOUNT/ VALUE PERCENT OF
COUNTRIES INDUSTRIES SHARES HELD LONG-TERM INVESTMENTS COST (NOTE 1a) NET ASSETS
<S> <S> <C> <S> <C> <C> <C>
Infrastructure 19,400,500 P.T. Citra Marga Nusaphala
Persada (Foreign) 12,949,979 15,201,578 1.0
Insurance 11,721,000 P.T. Lippo Life Insurance
(Foreign) 12,047,256 10,797,618 0.7
Telecommuni- 240,500 P.T. Telekomunikasi Indonesia
cations (Series B) (ADR)* 6,793,351 8,297,250 0.5
Tobacco 8,748,500 P.T. Hanjaya Mandala Sampoerna
(Foreign) 4,037,272 46,688,310 3.0
TOTAL LONG-TERM INVESTMENTS
IN INDONESIA 45,900,117 95,280,855 6.1
Malaysia Banking 3,692,000 Affin Holdings BHD 5,854,154 10,162,139 0.7
3,014,400 Arab-Malaysian Merchant Bank BHD 7,134,948 25,309,022 1.6
2,465,000 Malayan Banking BHD 9,836,948 27,334,653 1.7
7,382,333 Public Bank BHD (Foreign) 11,225,061 15,641,775 1.0
-------------- -------------- ------
34,051,111 78,447,589 5.0
Conglomerates 3,305,000 Malaysian Resources
Corporation BHD 13,688,114 13,023,663 0.8
11,040,560 Renong BHD 14,220,969 19,588,796 1.3
US$ 3,185,000 Renong BHD, 2.50% due
1/15/2005 (b) 3,742,823 3,710,525 0.2
-------------- -------------- ------
31,651,906 36,322,984 2.3
Construction 5,200,000 I.J.M. Corp. BHD 6,266,933 12,253,465 0.8
Diversified 1,358,000 United Engineers Berhad 11,925,657 12,262,337 0.8
Engineering US$ 2,000,000 United Engineering, Ltd.,
2% due 3/01/2004 (b) 2,937,500 3,040,000 0.2
Finance 91,000 Hong Leong Credit BHD 596,823 573,030 0.0
Food 1,721,700 Nestle Malaysia BHD 7,333,320 13,841,786 0.9
Leisure 5,116,000 Berjaya Sports ToTo BHD 12,957,878 25,529,347 1.6
1,882,000 Resorts World BHD 7,644,074 8,571,485 0.6
-------------- -------------- ------
20,601,952 34,100,832 2.2
Publishing & 2,173,000 Star Publications Malaysia
Broadcasting Berhad 7,475,073 8,562,911 0.5
Real Estate 2,723,000 Land & General BHD 6,708,694 6,524,416 0.4
Telecommuni- 1,791,000 Telekom Malaysia BHD 12,287,753 15,959,406 1.0
cations US$12,895,000 Telekom Malaysia BHD, 4%
due 10/03/2004 (b) 13,379,386 13,281,850 0.9
-------------- -------------- ------
25,667,139 29,241,256 1.9
Utilities-- 2,106,000 Tenaga Nasional Berhad 9,538,501 10,092,119 0.6
Electric & Gas
TOTAL LONG-TERM INVESTMENTS
IN MALAYSIA 164,754,609 245,262,725 15.6
Philippines Banking 1,144,900 Philippine Commercial
International Bank, Inc. 13,448,889 15,041,527 0.9
Beverages 3,773,864 San Miguel Corporation 'B' 5,817,118 16,670,534 1.1
Conglomerates 1,076,183 +Benpres Holdings Corp.
(GDR)**++ 8,255,098 7,802,327 0.5
Construction 11,451,300 +DMCI Holdings Inc. 7,179,793 7,522,274 0.5
International 20,347,155 International Container Terminal
Trade Services, Inc. (ICTSI) 7,785,441 10,653,975 0.7
Real Estate 12,711,990 Ayala Land, Inc. 'B' 12,689,126 14,522,456 0.9
Retail 59,964,170 SM Prime Holdings, Inc. 10,790,371 15,527,660 1.0
Utilities-- 2,055,935 Manila Electric Co. (MERALCO) 'B' 8,662,519 16,832,674 1.1
Electric & Gas
TOTAL LONG-TERM INVESTMENTS
IN THE PHILIPPINES 74,628,355 104,573,427 6.7
</TABLE>
50
<PAGE> 113
<TABLE>
<CAPTION>
MERRILL LYNCH DRAGON FUND, INC., DECEMBER 31, 1996
SCHEDULE OF INVESTMENTS (concluded) (IN US DOLLARS)
FACE AMOUNT/ VALUE PERCENT OF
COUNTRIES INDUSTRIES SHARES HELD LONG-TERM INVESTMENTS COST (NOTE 1a) NET ASSETS
<S> <S> <C> <S> <C> <C> <C>
Singapore Airlines 1,605,000 Singapore Airlines Ltd.
(Foreign) $ 12,704,463 $ 14,572,133 0.9%
Automotive 1,203,000 Cycle & Carriage, Ltd. 5,832,188 14,706,391 0.9
Banking 1,720,000 Development Bank of Singapore
Ltd. (Foreign) 19,114,401 23,239,920 1.5
1,147,976 Overseas Chinese Banking Corp.
(Foreign) 6,877,709 14,279,942 0.9
2,247,704 United Overseas Bank (Foreign) 16,101,465 25,067,331 1.6
-------------- -------------- ------
42,093,575 62,587,193 4.0
Beverages 1,247,600 Fraser & Neave Ltd. 14,614,946 12,843,466 0.8
Conglomerates 1,397,400 ACMA Ltd. 4,165,286 3,016,977 0.2
Publishing & 913,400 Singapore Press Holdings
Broadcasting Ltd. (Foreign) 9,980,798 18,022,476 1.2
Real Estate 1,862,000 City Development Ltd. 15,104,510 16,772,376 1.1
3,870,000 DBS Land Ltd. 12,140,189 14,248,284 0.9
-------------- -------------- ------
27,244,699 31,020,660 2.0
TOTAL LONG-TERM INVESTMENTS
IN SINGAPORE 116,635,955 156,769,296 10.0
South Korea Steel 93,600 Pohang Iron & Steel Co., Ltd. 8,685,845 5,433,799 0.3
Telecommuni- 20,289 Korea Mobile Telecommunications
cations Corp. 17,206,771 21,084,184 1.4
Utilities-- 437,580 Korean Electric & Power Corp. 15,055,387 12,776,817 0.8
Electric & Gas
TOTAL LONG-TERM INVESTMENTS
IN SOUTH KOREA 40,948,003 39,294,800 2.5
Thailand Banking 1,155,360 Bangkok Bank Public Company Ltd. 8,269,986 11,172,039 0.7
US$ 18,544,000 Bangkok Bank Public Company Ltd.,
3.25% due 3/03/2004 (b) 20,867,247 18,080,400 1.2
3,063,333 Industrial Finance Corp. of
Thailand 4,959,597 8,181,788 0.5
654,347 Siam Commercial Bank Public Co.
(Foreign) 6,217,446 4,745,527 0.3
US$ 9,791,000 Siam Commercial Bank Public Co.,
3.25% due 1/24/2004 (b) 10,884,329 8,640,558 0.6
754,300 Thai Farmers Bank, Ltd. (Foreign) 7,796,032 4,705,736 0.3
206,537 Thai Farmers Bank, Ltd. (Foreign)
(Warrants) (a) 204,387 195,287 0.0
-------------- -------------- ------
59,199,024 55,721,335 3.6
Financial 1,534,800 Finance One Co., Ltd. (Foreign) 6,904,837 3,111,849 0.2
Services 420,000 Phatra Thanakit Co., Ltd. 3,760,656 1,195,461 0.1
-------------- -------------- ------
10,665,493 4,307,310 0.3
Mutual Funds 18,477,000 Ruam Pattana Fund II 8,601,546 7,564,569 0.5
Oil & Gas 1,234,500 PTT Exploration and Production
Public Co., Ltd. (Foreign) 11,993,094 17,809,685 1.1
Real Estate 528,900 Land & House Public Co. (Foreign) 4,770,219 3,856,369 0.2
Telecommuni- 154,600 Advanced Information Service
cations Public Company Ltd. 1,064,329 1,314,103 0.1
TOTAL LONG-TERM INVESTMENTS
IN THAILAND 96,293,705 90,573,371 5.8
TOTAL LONG-TERM INVESTMENTS 1,041,760,099 1,485,471,112 94.8
</TABLE>
51
<PAGE> 114
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (IN US DOLLARS)
FACE AMOUNT/ VALUE PERCENT OF
COUNTRIES INDUSTRIES SHARES HELD LONG-TERM INVESTMENTS COST (NOTE 1a) NET ASSETS
<S> <S> <C> <S> <C> <C> <C>
United Commercial US$ 50,992,000 General Motors Acceptance Corp.,
States Paper*** 7.50% due 1/02/1997 50,981,377 50,981,377 3.3
34,350,000 Three Rivers Funding, 5.72%
due 1/21/1997 34,240,843 34,240,843 2.2
-------------- -------------- ------
85,222,220 85,222,220 5.5
US Government 10,000,000 Federal Home Loan Mortgage Corp.,
& Agency 5.45% due 1/06/1997 9,992,431 9,992,431 0.6
Obligations***
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 95,214,651 95,214,651 6.1
TOTAL INVESTMENTS $1,136,974,750 1,580,685,763 100.9
==============
LIABILITIES IN EXCESS OF OTHER ASSETS (13,506,581) (0.9)
-------------- ------
NET ASSETS $1,567,179,182 100.0%
============== ======
</TABLE>
*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 $7,802,000,
representing 0.5% of net assets.
<TABLE>
<CAPTION>
ACQUISITION VALUE
ISSUE DATE COST (NOTE 1a)
<S> <C> <C> <C>
Benpres Holdings Corp. (GDR) 2/08/1995 $8,255,098 $7,802,327
TOTAL $8,255,098 $7,802,327
========== ==========
</TABLE>
See Notes to Financial Statements.
52
<PAGE> 115
<TABLE>
<CAPTION>
MERRILL LYNCH DRAGON FUND, INC., DECEMBER 31, 1996
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,136,974,750)(Note 1a) .... $1,580,685,763
Foreign cash (Note 1c) .............................................. 4,604,383
Receivables:
Securities sold ...................................................$ 1,863,679
Interest .......................................................... 1,735,569
Capital shares sold ............................................... 1,551,253
Dividends ......................................................... 1,377,354 6,527,855
--------------
Deferred organization expenses (Note 1f) ............................ 7,194
Prepaid registration fees and other assets (Note 1f) ................ 117,665
--------------
Total assets ........................................................ 1,591,942,860
--------------
Liabilities: Payables:
Capital shares redeemed ........................................... 20,495,516
Investment adviser (Note 2) ....................................... 1,367,230
Distributor (Note 2) .............................................. 1,127,536 22,990,282
--------------
Accrued expenses and other liabilities .............................. 1,773,396
--------------
Total liabilities ................................................... 24,763,678
--------------
Net Assets: Net assets .......................................................... $1,567,179,182
==============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized ....................................... $ 276,050
Class B Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized ....................................... 6,471,933
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized ....................................... 351,220
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized ....................................... 1,640,519
Paid-in capital in excess of par .................................... 1,097,751,494
Accumulated distributions in excess of investment income--net ....... (9,384,694)
Undistributed realized capital gains on investments and
foreign currency transactions--net .................................. 26,375,864
Unrealized appreciation on investments and foreign currency
transactions--net ................................................... 443,696,796
--------------
Net assets $1,567,179,182
==============
Net Asset Class A--Based on net assets of $49,942,833 and 2,760,504
Value: shares outstanding ......................................... $ 18.09
==============
Class B--Based on net assets of $1,157,944,111 and 64,719,334
shares outstanding ......................................... $ 17.89
==============
Class C--Based on net assets of $62,112,801 and 3,512,195
shares outstanding ......................................... $ 17.68
==============
Class D--Based on net assets of $297,179,437 and 16,405,188
shares outstanding ......................................... $ 18.11
==============
</TABLE>
53
See Notes to Financial Statements.
<PAGE> 116
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Dividends (net of $1,027,833 foreign withholding tax) .............. $ 26,215,944
Income Interest and discount earned (net of $645 foreign withholding tax) . 7,660,994
(Notes 1d & 1e): --------------
Total income ....................................................... 33,876,938
--------------
Expenses: Investment advisory fees (Note 2) .................................. $ 15,984,061
Account maintenance and distribution fees--Class B (Note 2) ........ 11,795,965
Transfer agent fees--Class B (Note 2) .............................. 2,186,878
Custodian fees ..................................................... 2,064,536
Account maintenance fees--Class D (Note 2) ......................... 780,000
Account maintenance and distribution fees--Class C (Note 2) ........ 606,862
Transfer agent fees--Class D (Note 2) .............................. 480,074
Printing and shareholder reports ................................... 221,345
Registration fees (Note 1f) ........................................ 208,432
Accounting services (Note 2) ....................................... 124,707
Transfer agent fees--Class C (Note 2) .............................. 120,958
Professional fees .................................................. 99,005
Transfer agent fees--Class A (Note 2) .............................. 71,788
Directors' fees and expenses ....................................... 37,698
Amortization of organization expenses (Note 1f) .................... 17,267
Pricing fees ....................................................... 8,880
Other .............................................................. 50,966
--------------
Total expenses ..................................................... 34,859,422
--------------
Investment loss--net ............................................... (982,484)
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net ................................................. 49,562,464
(Loss) on Foreign currency transactions--net ............................... (356,904) 49,205,560
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net ................................................. 128,769,910
(Notes 1b, 1c, Foreign currency transactions--net ............................... 133,749 128,903,659
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and
foreign currency transactions ...................................... 178,109,219
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $ 177,126,735
==============
</TABLE>
See Notes to Financial Statements.
54
<PAGE> 117
<TABLE>
<CAPTION>
MERRILL LYNCH DRAGON FUND, INC., DECEMBER 31, 1996
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR
ENDED DECEMBER 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment loss--net .............................................. $ (982,484) $ (152,522)
Realized gain (loss) on investments and foreign
currency transactions--net ........................................ 49,205,560 (9,501,387)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net ................ 128,903,659 89,459,720
-------------- --------------
Net increase in net assets resulting from operations .............. 177,126,735 79,805,811
-------------- --------------
Dividends & In excess of investment income--net:
Distributions to Class A ......................................................... -- (312,371)
Shareholders Class B ......................................................... -- (1,509,738)
(Note 1g): Class C ......................................................... -- (151,749)
Class D ......................................................... -- (2,159,398)
Realized gain on investments--net:
Class A ......................................................... (191,338) --
Class B ......................................................... (4,598,194) --
Class C ......................................................... (250,735) --
Class D ......................................................... (1,140,627) --
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders ................................. (6,180,894) (4,133,256)
-------------- --------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions ...................................................... 58,833,959 85,728,447
(Note 4): -------------- --------------
Net Assets: Total increase in net assets ...................................... 229,779,800 161,401,002
Beginning of year ................................................. 1,337,399,382 1,175,998,380
-------------- --------------
End of year ....................................................... $1,567,179,182 $1,337,399,382
============== ==============
</TABLE>
See Notes to Financial Statements.
55
<PAGE> 118
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CLASS A++
FOR THE
PERIOD
The following per share data and ratios have been derived OCT. 21,
from information provided in the financial statements. FOR THE YEAR 1994+ TO
ENDED DECEMBER 31, DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period ...................... $ 15.99 $ 15.05 $ 17.43
Operating -------- -------- --------
Performance: Investment income--net .................................... .14 .12 .02
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net ........ 2.03 1.00 (1.91)
-------- -------- --------
Total from investment operations .......................... 2.17 1.12 (1.89)
-------- -------- --------
Less dividends and distributions:
In excess of investment income--net ..................... -- (.18) (.13)
Realized gain on investments--net ....................... (.07) -- (.27)
In excess of realized gain on investments--net .......... -- -- (.09)
-------- -------- --------
Total dividends and distributions ......................... (.07) (.18) (.49)
-------- -------- --------
Net asset value, end of period ............................ $ 18.09 $ 15.99 $ 15.05
======== ======== ========
Total Investment Based on net asset value per share ........................ 13.59% 7.44% (10.82%)++++
Return:** ======== ======== ========
Ratios to Average Expenses .................................................. 1.33% 1.37% 1.54%*
Net Assets: ======== ======== ========
Investment income--net .................................... .78% .74% .84%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) .................. $ 49,943 $ 31,591 $ 3,383
Data: ======== ======== ========
Portfolio turnover ........................................ 30.63% 24.52% 16.45%
======== ======== ========
Average commission rate paid++++ .......................... $ .0130 -- --
======== ======== ========
</TABLE>
*Annualized.
**Total investment returns exclude the effect of sales loads.
+Commencement of Operations.
++Based on average shares outstanding during the period.
+++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity securities.
The "Average Commission Rate Paid" includes commissions
paid in foreign currencies, which have been converted into
US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly
affect the rate shown.
++++Aggregate total investment return.
See Notes to Financial Statements.
56
<PAGE> 119
<TABLE>
<CAPTION>
MERRILL LYNCH DRAGON FUND, INC., DECEMBER 31, 1996
FINANCIAL HIGHLIGHTS (continued)
CLASS B++
FOR THE
The following per share data and ratios FOR THE PERIOD
have been derived from information TEN MONTHS MAY 29,
provided in the financial statements. ENDED 1992+ TO
FOR THE YEAR ENDED DEC. 31, DEC. 31, FEB. 28,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ......... $ 15.98 $ 15.03 $ 18.74 $ 11.01 $ 10.00
Operating ---------- -------- -------- -------- --------
Performance: Investment loss--net ......................... (.04) (.03) (.07) (.02) (.02)
Realized and unrealized gain (loss) on
investments and foreign
currency transactions--net ................... 2.02 1.00 (3.28) 7.86 1.05
---------- -------- -------- -------- --------
Total from investment operations ............. 1.98 .97 (3.35) 7.84 1.03
---------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ..................... -- -- -- --+++++ --
In excess of investment income--net ........ -- (.02) -- --+++++ (.02)
Realized gain on investments--net .......... (.07) -- (.27) (.11) --+++++
In excess of realized gain on
investments--net ........................... -- -- (.09) -- --
---------- -------- -------- -------- --------
Total dividends and distributions ............ (.07) (.02) (.36) (.11) (.02)
---------- -------- -------- -------- --------
Net asset value, end of period ............... $ 17.89 $ 15.98 $ 15.03 $ 18.74 $ 11.01
========== ======== ======== ======== ========
Total Investment Based on net asset value per share ........... 12.41% 6.49% (17.86%) 71.27%++++ 10.32%++++
Return:** ========== ======== ======== ======== ========
Ratios to Average Expenses ..................................... 2.36% 2.41% 2.40% 2.35%* 2.49%*
========== ======== ======== ======== ========
Net Assets: Investment loss--net ......................... (.24%) (.20%) (.42%) (.15%)* (.08%)*
========== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) ..... $1,157,944 $991,281 $917,384 $990,843 $365,430
Data: ========== ======== ======== ======== ========
Portfolio turnover ........................... 30.63% 24.52% 16.45% 16.62% 4.65%
========== ======== ======== ======== ========
Average commission rate paid++++ ............. $ .0130 -- -- -- --
========== ======== ======== ======== ========
</TABLE>
57
<PAGE> 120
<TABLE>
<CAPTION>
CLASS C++
FOR THE
PERIOD
The following per share data and ratios have been derived OCT. 21,
from information provided in the financial statements. FOR THE YEAR 1994+ TO
ENDED DECEMBER 31, DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period ...................... $ 15.79 $ 14.92 $ 17.29
Operating -------- -------- --------
Performance: Investment loss--net ...................................... (.04) (.04) (.01)
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .................... 2.00 1.00 (1.89)
-------- -------- --------
Total from investment operations .......................... 1.96 .96 (1.90)
-------- -------- --------
Less dividends and distributions:
In excess of investment income--net ..................... -- (.09) (.11)
Realized gain on investments--net ....................... (.07) -- (.27)
In excess of realized gain on investments--net .......... -- -- (.09)
-------- -------- --------
Total dividends and distributions ......................... (.07) (.09) (.47)
-------- -------- --------
Net asset value, end of period ............................ $ 17.68 $ 15.79 $ 14.92
======== ======== ========
Total Investment Based on net asset value per share ........................ 12.43% 6.46% (10.98%)++++
Return:** ======== ======== ========
Ratios to Average Expenses .................................................. 2.37% 2.42% 2.57%*
Net Assets: ======== ======== ========
Investment loss--net ...................................... (.23%) (.28%) (.17%)*
======== ======== ========
Supplemental Net assets, end of period (in thousands) .................. $ 62,113 $ 29,042 $ 5,329
Data: ======== ======== ========
Portfolio turnover ........................................ 30.63% 24.52% 16.45%
======== ======== ========
Average commission rate paid+++ ........................... $ .0130 -- --
======== ======== ========
</TABLE>
*Annualized.
**Total investment returns exclude the effect of sales loads.
+Commencement of Operations.
++Based on average shares outstanding during the period.
+++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity securities.
The "Average Commission Rate Paid" includes commissions
paid in foreign currencies, which have been converted into
US dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may significantly affect
the rate shown.
++++Aggregate total investment return.
+++++Amount was less than $.01 per share.
See Notes to Financial Statements.
58
<PAGE> 121
<TABLE>
<CAPTION>
MERRILL LYNCH DRAGON FUND, INC., DECEMBER 31, 1996
FINANCIAL HIGHLIGHTS (concluded)
CLASS D++
FOR THE
The following per share data and ratios FOR THE PERIOD
have been derived from information TEN MONTHS MAY 29,
provided in the financial statements. ENDED 1992+ TO
FOR THE YEAR ENDED DEC. 31, DEC. 31, FEB. 28,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period .......... $ 16.05 $ 15.08 $ 18.77 $ 11.01 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ........................ .09 .09 .06 .07 .05
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net .................... 2.04 1.02 (3.30) 7.88 1.04
-------- -------- -------- -------- --------
Total from investment operations .............. 2.13 1.11 (3.24) 7.95 1.09
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ...................... -- -- -- (.01) --+++++
In excess of investment income--net ......... -- (.14) (.09) (.07) (.08)
Realized gain on investments--net ........... (.07) -- (.27) (.11) --
In excess of realized gain on
investments--net ............................ -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions ............. (.07) (.14) (.45) (.19) (.08)
-------- -------- -------- -------- --------
Net asset value, end of period ................ $ 18.11 $ 16.05 $ 15.08 $ 18.77 $ 11.01
======== ======== ======== ======== ========
Total Investment Based on net asset value per share ............ 13.29% 7.35% (17.24%) 72.31%++++ 10.99%++++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses ...................................... 1.58% 1.63% 1.63% 1.59%* 1.73%*
Net Assets: ======== ======== ======== ======== ========
Investment income--net ........................ .53% .59% .34% .61%* .61%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) ...... $297,179 $285,485 $249,903 $311,848 $111,180
Data: ======== ======== ======== ======== ========
Portfolio turnover ............................ 30.63% 24.52% 16.45% 16.62% 4.65%
======== ======== ======== ======== ========
Average commission rate paid+++ ............... $ .0130 -- -- -- --
======== ======== ======== ======== ========
</TABLE>
*Annualized.
**Total investment returns exclude the effect of sales loads.
+Commencement of Operations.
++Based on average shares outstanding during the period.
+++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity securities.
The "Average Commission Rate Paid" includes commissions
paid in foreign currencies, which have been converted into
US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly
affect the rate shown.
++++Aggregate total investment return.
+++++Amount was less than $.01 per share.
See Notes to Financial Statements.
59
<PAGE> 122
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 other 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 sells an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current market
value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign
60
<PAGE> 123
MERRILL LYNCH DRAGON FUND, INC., DECEMBER 31, 1996
NOTES TO FINANCIAL STATEMENTS (continued)
currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined 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.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $1,043,777 have been reclassified between paid-in
capital in excess of par and accumulated distributions in excess of net
investment income and differences of $277,161 have been reclassified between
undistributed realized capital gains and accumulated distributions in excess of
net investment income. 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.
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:
<TABLE>
<CAPTION>
ACCOUNT DISTRIBUTION
MAINTENANCE FEE FEE
<S> <C> <C>
Class B ....................... 0.25% 0.75%
Class C ....................... 0.25% 0.75%
Class D ....................... 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended December 31, 1996, 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:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A .......................... $ 322 $ 4,074
Class D .......................... $64,619 $876,291
</TABLE>
For the year ended December 31, 1996, MLPF&S received contingent deferred sales
charges of $2,098,967 and $71,125 relating to transactions in Class B and Class
C Shares, respectively.
In addition, MLPF&S received $307,021 in commissions on the execution of
portfolio security transactions for the Fund for the year ended December 31,
1996.
61
<PAGE> 124
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, 1996 were $519,885,051 and $457,322,279, respectively.
Net realized and unrealized gains (losses) as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS (LOSSES) GAINS (LOSSES)
<S> <C> <C>
Long-term investments ........... $49,565,900 $443,711,013
Short-term investments .......... (3,436) --
Foreign currency transactions ... (356,904) (14,217)
----------- ------------
Total ........................... $49,205,560 $443,696,796
=========== ============
</TABLE>
As of December 31, 1996, net unrealized appreciation for Federal income tax
purposes aggregated $434,164,398, of which $476,975,886 related to appreciated
securities and $42,811,488 related to depreciated securities. At December 31,
1996, the aggregate cost of investments for Federal income tax purposes was
$1,146,521,365.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions for the years
ended December 31, 1996 and December 31, 1995 was $58,833,959 and $85,728,447,
respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED DECEMBER 31, 1996 SHARES AMOUNT
<S> <C> <C>
Shares sold ....................... 12,899,901 $ 220,044,411
Shares issued to shareholders
in reinvestment of
distributions ................... 9,549 166,434
------------ -------------
Total issued ...................... 12,909,450 220,210,845
Shares redeemed ................... (12,124,370) (208,148,463)
------------ -------------
Net increase ...................... 785,080 $ 12,062,382
============ =============
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED DECEMBER 31, 1995 SHARES AMOUNT
<S> <C> <C>
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
============ =============
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED DECEMBER 31, 1996 SHARES AMOUNT
<S> <C> <C>
Shares sold ....................... 25,325,787 $ 434,357,379
Shares issued to shareholders
in reinvestment of
distributions ................... 228,431 3,938,163
------------ -------------
Total issued ...................... 25,554,218 438,295,542
Shares redeemed ................... (22,696,021) (388,041,441)
Automatic conversion of shares .... (190,734) (3,243,492)
------------ -------------
Net increase ...................... 2,667,463 $ 47,010,609
============ =============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
<S> <C> <C>
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
============ =============
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED DECEMBER 31, 1996 SHARES AMOUNT
<S> <C> <C>
Shares sold .......................... 10,211,909 $ 171,725,625
Shares issued to shareholders
in reinvestment of distributions ... 13,170 224,411
------------ -------------
Total issued ......................... 10,225,079 171,950,036
Shares redeemed ...................... (8,552,384) (144,423,321)
------------ -------------
Net increase ......................... 1,672,695 $ 27,526,715
============ =============
</TABLE>
62
<PAGE> 125
MERRILL LYNCH DRAGON FUND, INC., DECEMBER 31, 1996
NOTES TO FINANCIAL STATEMENTS (concluded)
<TABLE>
<CAPTION>
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED DECEMBER 31, 1995 SHARES AMOUNT
<S> <C> <C>
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
============ =============
</TABLE>
<TABLE>
<CAPTION>
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED DECEMBER 31, 1996 SHARES AMOUNT
<S> <C> <C>
Shares sold .......................... 25,641,811 $ 438,051,376
Automatic conversion of shares ....... 189,401 3,243,492
Shares issued to shareholders
in reinvestment of distributions ... 55,362 966,068
------------ -------------
Total issued ......................... 25,886,574 442,260,936
Shares redeemed ...................... (27,271,316) (470,026,683)
------------ -------------
Net decrease ......................... (1,384,742) $ (27,765,747)
============ =============
</TABLE>
<TABLE>
<CAPTION>
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED DECEMBER 31, 1995 SHARES AMOUNT
<S> <C> <C>
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
============ =============
</TABLE>
5. COMMITMENTS:
At December 31, 1996, the Fund had entered into foreign exchange contracts under
which it had agreed to sell various foreign currencies with values of
approximately $1,491,000.
63
<PAGE> 126
- ------
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............. 13
Management and Advisory
Arrangements........................ 14
Purchase of Shares...................... 15
Initial Sales Charge Alternatives --
Class A and Class D Shares.......... 16
Reduced Initial Sales Charges......... 18
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements........................ 20
Distribution Plans.................... 20
Limitations on the Payment of Deferred
Sales Charges....................... 21
Redemption of Shares.................... 22
Deferred Sales Charges --
Class B and Class C Shares.......... 22
Portfolio Transactions and Brokerage.... 23
Determination of Net Asset Value........ 25
Shareholder Services.................... 26
Investment Account.................... 26
Automatic Investment Plans............ 26
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...... 30
Dividends and Distributions........... 30
Taxes................................. 30
Tax Treatment of Options, Futures and
Forward Foreign Exchange
Transactions........................ 33
Special Rules for Certain Foreign
Currency Transactions............... 34
Performance Data........................ 35
General Information..................... 37
Description of Shares................. 37
Computation of Offering Price Per
Share............................... 38
Independent Auditors.................. 38
Custodian............................. 38
Transfer Agent........................ 38
Legal Counsel......................... 39
Reports to Shareholders............... 39
Additional Information................ 39
Security Ownership of Certain
Beneficial Owners................... 39
Appendix................................ 40
Independent Auditors' Report............ 48
Financial Statements.................... 49
Code # 16260-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
DRAGON FUND, INC.
STATEMENT OF [MLYNCH COMPASS]
ADDITIONAL
INFORMATION
April 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 127
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
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>
<PAGE> 128
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the three-year period
ended December 31, 1996, 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, 1996.
Statement of Assets and Liabilities as of December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended December 31, 1996.
Financial Highlights for each of the years in the three-year period
ended December 31, 1996, 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 DESCRIPTION
- --- -----------------------------------------------------------------------------------
<S> <C> <C>
1 (a) -- Articles of Incorporation of the Registrant dated February 13, 1992.(a)
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant dated
October 17, 1994.(a)
(c) -- Articles Supplementary to the Articles of Incorporation of the Registrant dated
October 17, 1994.(a)
(d) -- Articles Supplementary to the Articles of Incorporation of the Registrant dated
September 1, 1995.(b)
2 -- By-Laws of the Registrant.(b)
3 -- None.
4 -- Copies of instruments defining the rights of shareholders, including the relevant
portions of the Articles of Incorporation, as amended, and By-Laws of the
Registrant.(c)
5 (a) -- Management Agreement between the Registrant and Merrill Lynch Asset Management
L.P.(a)
(b) -- Supplement to Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P. dated January 3, 1994.(d)
(c) -- Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and Merrill
Lynch Asset Management U.K. Limited.
6 (a) -- Class A Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
(b) -- Class B Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc.
with respect to the Merrill Lynch Mutual Fund Adviser Program.(d)
(d) -- Class C Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
(e) -- Class D Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
7 -- None.
8 -- Custody Agreement between the Registrant and Brown Brothers Harriman & Co.(a)
9 (a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between the Registrant and Merrill Lynch Financial Data Services, Inc.(a)
(b) -- License Agreement relating to the use of name between the Registrant and Merrill
Lynch & Co.(a)
10 -- None.
</TABLE>
C-1
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --- -----------------------------------------------------------------------------------
<S> <C> <C>
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, L.P.(a)
14 -- None.
15 (a) -- Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of the
Registrant.(a)
(b) -- Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of the
Registrant.(a)
(c) -- Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of the
Registrant.(a)
16 (a) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 to Class A Shares.(a)
(b) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 to Class B Shares.(a)
(c) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 to Class C Shares.(a)
(d) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 to Class D Shares.(a)
17 (a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(e)
</TABLE>
- ---------------
(a) Filed on April 27, 1995, as an Exhibit to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A under the Securities Act of
1933, as amended (File No. 33-46216) (the "Registration Statement").
(b) Filed on April 26, 1996, as an Exhibit to Post-Effective Amendment No. 6 to
the Registration Statement.
(c) 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 Registration Statement; the
Articles of Amendment to the Articles of Incorporation filed as Exhibit
(1)(b) to the Registration Statement; the Articles Supplementary to the
Articles of Incorporation filed as Exhibits (1)(c) and (1)(d) to the
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 Registration
Statement.
(d) Filed on April 28, 1994, as an Exhibit to Post-Effective Amendment No. 3 to
the Registration Statement.
(e) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996, relating to shares of Merrill Lynch
New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1997
------------------------------------------------------------- --------------
<S> <C>
Class A Common Stock, par value $0.10 per share.............. 10,288
Class B Common Stock, par value $0.10 per share.............. 108,463
Class C Common Stock, par value $0.10 per share.............. 8,570
Class D Common Stock, par value $0.10 per share.............. 21,900
</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> 130
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act"), 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 or she 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 assures 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, or (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, as amended (the
"1933 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 1933 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 1933 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 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(a) 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 Global Value Fund, Inc.,
Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc., and for the following closed-end investment companies:
Convertible Holdings,
C-3
<PAGE> 131
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 the Manager, acts as
the investment adviser for the following open-end investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey 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 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 Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the MLAM, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and 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, 1995, for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the first two paragraphs of this Item 28,
and Messrs. Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- -------------------------- ------------------------- ------------------------------------------
<S> <C> <C>
ML&Co..................... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services........ General Partner General Partner of FAM
Arthur Zeikel............. President President of FAM; President and Director
of Princeton Services; Director of MLFD;
Executive Vice President of ML&Co.
Terry K. Glenn............ Executive Vice President Executive Vice President of FAM; Executive
Vice President and Director of Princeton
Services; President and Director of
MLFD; Director of MLFDS; President of
Princeton Administrators, L.P.
</TABLE>
C-4
<PAGE> 132
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- -------------------------- ------------------------- ------------------------------------------
<S> <C> <C>
Vincent R. Giordano....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth Griffin......... Senior Vice President Senior Vice President of FAM
Michael J. Hennewinkel.... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Philip L. Kirstein........ Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of FAM; Senior Vice President,
Secretary General Counsel, Director and Secretary
of Princeton Services; Director of MLFD
Ronald M. Kloss........... Senior Vice President and Senior Vice President and Controller of
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.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael L. Quinn.......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch, from 1989 to
1995
Gerald M. Richard......... Senior Vice President and Senior Vice President and Treasurer of
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>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, 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 Basic
Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers 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
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and Worldwide
DollarVest Fund, Inc. The address of each of these investment companies is P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since January 1,
1995, for his own account or in the capacity of director, officer, partner or
trustee. In addition,
C-5
<PAGE> 133
Messrs. Zeikel, Albert, Bascand, Glenn, Harvey, Richard and Yardley are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH MLAM OTHER SUBSTANTIAL BUSINESS,
NAME U.K. PROFESSION, VOCATION OR EMPLOYMENT
- -------------------- ---------------------- ---------------------------------------------
<S> <C> <C>
Arthur Zeikel Director and Chairman President of the Manager and FAM; President
and Director of Princeton Services;
Director of MLFD; Executive Vice President
of ML&Co.
Alan J. Albert Senior Managing Vice President of the Manager
Director
Terry K. Glenn Director Executive Vice President of the Manager and
FAM; Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators, L.P.
Adrian Holmes Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand Director Director of Merrill Lynch Global Asset
Management
Edward Gobora Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride Director Managing Director of Merrill Lynch Global
Asset Management
Robert M. Ryan Director Vice President, Institutional Marketing, Debt
and Equity Group, Merrill Lynch Capital
Markets from 1989 to 1994
Gerald M. Richard Senior Vice President Senior Vice President and Treasurer of the
Manager and FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Stephen J. Yardley Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham Company Secretary None
Debra Anne Searle Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2665.
C-6
<PAGE> 134
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- ------------------------- ----------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Arthur Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Kevin P. Boman Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Michael G. Clark Vice President None
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 1940 Act, 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, the 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-7
<PAGE> 135
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 THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWNSHIP OF PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE 25TH DAY OF APRIL
1997.
MERRILL LYNCH DRAGON FUND, INC.
(Registrant)
By: /s/ GERALD M. RICHARD
------------------------------------
(Gerald M. Richard, Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE(S)
- ----------------------------------------------- ----------------------------- ---------------
<C> <C> <S>
ARTHUR ZEIKEL* President and Director
- ----------------------------------------------- (Principal Executive Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal
- ----------------------------------------------- Financial and Accounting
(Gerald M. Richard) Officer)
DONALD CECIL* Director
- -----------------------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director
- -----------------------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director
- -----------------------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director
- -----------------------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Director
- -----------------------------------------------
(Edward D. Zinbarg)
*By: /s/ GERALD M. RICHARD April 25, 1997
- -----------------------------------------------
(Gerald M. Richard, Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 136
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------
<C> <C> <S> <C>
5(c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management,
L.P. and Merrill Lynch Asset Management U.K. Limited.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
</TABLE>
<PAGE> 1
EXHIBIT 5(c)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the day of , by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
WHEREAS, MERRILL LYNCH DRAGON FUND, INC. (the "Fund") is a Maryland
corporation engaged in business as a non-diversified, open-end investment
company registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into a management agreement (the "Management
Agreement") dated April 14, 1992, pursuant to which MLAM provides management
and investment and advisory services to the Fund; and
<PAGE> 2
WHEREAS, MLAM U.K. is willing to provide investment advisory services
to MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the
Fund, for the period and on the terms and conditions set forth in this
Agreement. MLAM U.K. hereby accepts such employment and agrees during such
period, at its own expense, to render, or arrange for the rendering of, such
services and to assume the obligations herein set forth for the compensation
provided for herein. MLAM and its affiliates shall for all purposes herein be
deemed a Professional Investor as defined under the rules promulgated by IMRO
(hereinafter referred to as the "IMRO Rules"). MLAM U.K. and its affiliates
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and
shall provide MLAM with such investment research, advice
2
<PAGE> 3
and supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of the Fund; shall furnish continuously an
investment program for the Fund and shall make recommendations from time to
time as to which securities shall be purchased, sold or exchanged and what
portion of the assets of the Fund shall be held in the various securities in
which the Fund invests, options, futures, options on futures or cash; all of
the foregoing subject always to the restrictions of the Articles of
Incorporation and By-Laws of the Fund, as they may be amended and/or restated
from time to time, the provisions of the Investment Company Act and the
statements relating to the Fund's investment objective, investment policies and
investment restrictions as the same are set forth in the currently effective
prospectus and statement of additional information relating to the shares of
the Fund under the Securities Act of 1933, as amended (the "Prospectus" and
"Statement of Additional Information", respectively). MLAM U.K. shall make
recommendations and effect transactions with respect to foreign currency
matters, including foreign exchange contracts, foreign currency options,
foreign currency futures and related options on foreign currency futures and
forward foreign currency transactions. MLAM U.K. shall also make
recommendations or take action as to the manner in which voting rights, rights
to consent to corporate action and any other rights pertaining to the portfolio
securities of the Fund shall be exercised.
3
<PAGE> 4
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and
personnel necessary to perform its obligations under this Agreement and shall
at its own expense provide the office space, equipment and facilities which it
is obligated to provide under Article I hereof and shall pay all compensation
of officers of the Fund and all Directors of the Fund who are affiliated
persons of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by MLAM and MLAM U.K. but in no event in excess of
the amount that MLAM actually receives for providing services to the Fund
pursuant to the Management Agreement.
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory
4
<PAGE> 5
services rendered with respect to the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, MLAM U.K. shall include any affiliates of MLAM U.K. performing
services for MLAM contemplated hereby and directors, officers and employees of
MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that Directors, officers,
employees and shareholders of the Fund are or may become interested in MLAM
U.K. and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or may become similarly interested in the Fund, and that
MLAM U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K.
5
<PAGE> 6
MLAM has the right to obtain from MLAM U.K. a copy of the IMRO complaints
procedure and to approach IMRO directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty
that market makers will be prepared to deal in unlisted or thinly traded
securities and an accurate valuation may be hard to obtain. The value of
investments recommended by MLAM U.K. may be subject to exchange rate
fluctuations which may have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until the date of termination of the
Management Agreement (but not later than two years after the date hereof) and
thereafter, but only so long as such continuance is specifically approved at
least annually by (i) the Directors of the Fund or by the vote of a majority of
the
6
<PAGE> 7
outstanding voting securities of the Fund and (ii) a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Management Agreement. Any
termination shall be without prejudice to the completion of transactions
already initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective
7
<PAGE> 8
meanings specified in the Investment Company Act and the rules and regulations
thereunder, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By
-------------------------------------------
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By
-------------------------------------------
Title:
9
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Dragon Fund, Inc.
We consent to the use in Post-Effective Amendment No. 7 to Registration
Statement No. 33-46216 of our report dated February 10, 1997 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 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000884842
<NAME> MERRILL LYNCH DRAGON FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1136974750
<INVESTMENTS-AT-VALUE> 1580685763
<RECEIVABLES> 6527855
<ASSETS-OTHER> 4729242
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1591942860
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24763678
<TOTAL-LIABILITIES> 24763678
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1106491216
<SHARES-COMMON-STOCK> 2760504
<SHARES-COMMON-PRIOR> 1975424
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (9384694)
<ACCUMULATED-NET-GAINS> 26375864
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 443696796
<NET-ASSETS> 49942833
<DIVIDEND-INCOME> 26215944
<INTEREST-INCOME> 7660994
<OTHER-INCOME> 0
<EXPENSES-NET> (34859422)
<NET-INVESTMENT-INCOME> (982484)
<REALIZED-GAINS-CURRENT> 49205560
<APPREC-INCREASE-CURRENT> 128903659
<NET-CHANGE-FROM-OPS> 177126735
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (191338)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12899901
<NUMBER-OF-SHARES-REDEEMED> (12124370)
<SHARES-REINVESTED> 9549
<NET-CHANGE-IN-ASSETS> 229779800
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (16371641)
<OVERDISTRIB-NII-PRIOR> (9723148)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15984061
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 34859422
<AVERAGE-NET-ASSETS> 45872748
<PER-SHARE-NAV-BEGIN> 15.99
<PER-SHARE-NII> .14
<PER-SHARE-GAIN-APPREC> 2.03
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.07)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.09
<EXPENSE-RATIO> 1.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000884842
<NAME> MERRILL LYNCH DRAGON FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1136974750
<INVESTMENTS-AT-VALUE> 1580685763
<RECEIVABLES> 6527855
<ASSETS-OTHER> 4729242
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1591942860
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24763678
<TOTAL-LIABILITIES> 24763678
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1106491216
<SHARES-COMMON-STOCK> 64719334
<SHARES-COMMON-PRIOR> 62051871
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (9384694)
<ACCUMULATED-NET-GAINS> 26375864
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 443696796
<NET-ASSETS> 1157944111
<DIVIDEND-INCOME> 26215944
<INTEREST-INCOME> 7660994
<OTHER-INCOME> 0
<EXPENSES-NET> (34859422)
<NET-INVESTMENT-INCOME> (982484)
<REALIZED-GAINS-CURRENT> 49205560
<APPREC-INCREASE-CURRENT> 128903659
<NET-CHANGE-FROM-OPS> 177126735
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (4598194)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25325787
<NUMBER-OF-SHARES-REDEEMED> (22886755)
<SHARES-REINVESTED> 228431
<NET-CHANGE-IN-ASSETS> 229779800
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (16371641)
<OVERDISTRIB-NII-PRIOR> (9723148)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15984061
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