<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1999
SECURITIES ACT FILE NO. 33-46216
INVESTMENT COMPANY ACT FILE NO. 811-6581
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
<TABLE>
<C> <S>
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 9 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 10 /X/
(Check appropriate box or boxes)
</TABLE>
------------------------
MERRILL LYNCH DRAGON FUND, INC.
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
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:
BROWN & WOOD LLP Michael J. Hennewinkel, Esq.
One World Trade Center MERRILL LYNCH ASSET MANAGEMENT
New York, New York 10048-0557 P.O. Box 9011
Attention: Thomas R. Smith, Jr., Esq. Princeton, New Jersey 08543-9011
</TABLE>
------------------------
It is proposed that this filing will become effective (check appropriate
box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 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.
------------------------
TITLE OF SECURITIES BEING REGISTERED: Common Stock, par value $.10 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not use this prospectus to sell securities until the registration statement
containing this prospectus, which has been filed with the Securities and
Exchange Commission, is effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
SUBJECT TO COMPLETION [LOGO]
PRELIMINARY PROSPECTUS DATED FEBRUARY 26, 1999
Merrill Lynch Dragon Fund, Inc.
_April __, 1999
This Prospectus contains information you should
know before investing, including information about
risks. Please read it before you invest and keep it
for future reference.
The Securities and Exchange Commission has not
approved or disapproved these securities or passed
upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal
offense.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
PAGE
[ICON] KEY FACTS
------------------------------------------------------
The Merrill Lynch Dragon Fund at a Glance .......... 3
Risk/Return Bar Chart .............................. 4
Fees and Expenses .................................. 6
[ICON] DETAILS ABOUT THE FUND
------------------------------------------------------
How the Fund Invests ............................... 8
Investment Risks ................................... 9
[ICON] YOUR ACCOUNT
------------------------------------------------------
Merrill Lynch Select Pricing-SM- System ........... 18
How to Buy, Sell, Transfer and Exchange Shares .... 23
Participation in Merrill Lynch Fee-Based
Programs .......................................... 27
[ICON] MANAGEMENT OF THE FUND
------------------------------------------------------
Merrill Lynch Asset Management .................... 29
Financial Highlights .............................. 30
[ICON] FOR MORE INFORMATION
------------------------------------------------------
Shareholder Reports ....................... Back Cover
Statement of Additional Information ....... Back Cover
</TABLE>
MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
KEY FACTS [ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
ASIA-PACIFIC REGION -- all countries in Asia and the Pacific Basin other than
Japan, Australia and New Zealand.
COMMON STOCK -- shares of ownership of a corporation.
CONVERTIBLE BONDS -- a bond that is exchangeable for shares of common stock of
the issuer or another company.
EQUITY SECURITIES -- common stock or securities whose price is linked to the
value of common stock.
THE MERRILL LYNCH DRAGON FUND AT A GLANCE
--------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek long
term capital appreciation by investing primarily
in developing Asia-Pacific equity and debt
securities.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
Under normal market conditions, the Fund expects
to invest at least 65% of its assets in securities
of issuers located in developing countries in the
ASIA-PACIFIC REGION. The Fund expects that a
majority of its assets will be invested in COMMON
STOCK of companies located in the Asia-Pacific
region including China, South Korea, Singapore,
Taiwan, Hong Kong, Malaysia, Sri Lanka, Indonesia,
The Philippines, India, Pakistan, Turkey and
Brunei. The Fund will also invest in debt
securities of companies located in the
Asia-Pacific region, including bonds of
Asia-Pacific governments and CONVERTIBLE BONDS of
companies doing business in the region. We cannot
guarantee that the Fund will achieve its
objective.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any fund, the value of the Fund's
investments -- and therefore the value of Fund
shares -- may go up or down. These changes may
occur because a particular stock or bond market is
rising or falling. At other times, there are
specific factors that may affect the value of a
particular investment. If the value of the Fund's
investments goes down, you may lose money.
The Fund will invest most of its assets in
non-U.S. securities. Foreign investing involves
special risks -- including foreign currency risk
and the possibility of substantial volatility due
to adverse political, economic or other
developments. Foreign securities may also be less
liquid and harder to value than U.S. securities.
These risks are greater for investments in
developing markets such as the Asia-Pacific
markets in which the Fund invests.
The Fund is a non-diversified fund, which means
that it may invest more of its assets in fewer
companies than if it were a diversified fund. By
concentrating in a smaller number of investments,
the Fund's risk is increased because each
investment has a greater effect on the Fund's
performance.
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you
if you:
- Are looking for capital appreciation for
long term goals such as retirement or
funding a child's education.
- Want a professionally managed portfolio.
- Are looking for exposure to the
Asia-Pacific region markets.
- Are willing to accept the risks of
foreign investing in order to seek
potentially higher long term returns.
- Are not looking for a significant amount
of current income.
MERRILL LYNCH DRAGON FUND, INC. 3
<PAGE>
[ICON] KEY FACTS
RISK/RETURN BAR CHART
--------------------------------------------
The bar chart and table shown below
provide an indication of the risks
of investing in the Fund. The bar
chart shows changes in the Fund's
performance for Class B shares for
each complete calendar year since
the Fund's inception. Sales charges
are not reflected in the bar chart.
If these amounts were reflected,
returns would be less than those
shown. The table compares the
average annual total returns for
each class of the Fund's shares for
the periods shown with those of the
Morgan Stanley Capital
International ("MSCI") All Country
Far East Free Ex-Japan Index and
the MSCI All Country Far East Free
Ex-Japan Composite Index. How the
Fund performed in the past is not
necessarily an indication of how
the Fund will perform in the
future.
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 86.15%
1994 -17.86%
1995 6.49%
1996 12.41%
1997 -41.40%
1998 -17.06%
</TABLE>
During the period shown in the bar chart, the
highest return for a quarter was 40.93% (quarter
ended December 31, 1993) and the lowest return for
a quarter was -30.20% (quarter ended December 31,
1997).
4 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED PAST PAST SINCE
DECEMBER 31, 1998) ONE YEAR FIVE YEARS INCEPTION
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Merrill Lynch Dragon Fund, Inc.*--Class A -20.62% N/A -14.76%+
MSCI All Country Far East Free Ex-Japan Index** -4.83% N/A -12.77%#
MSCI All Country Far East Free Ex-Japan Composite Index*** -4.36% N/A -14.52%#
- ----------------------------------------------------------------------------------------------------------------
Merrill Lynch Dragon Fund, Inc.*--Class B -20.36% -13.73% -1.54%++
MSCI All Country Far East Free Ex-Japan Index** -4.83% -11.95% 1.10%##
MSCI All Country Far East Free Ex-Japan Composite Index*** -4.36% -13.43% -0.19%##
- ----------------------------------------------------------------------------------------------------------------
Merrill Lynch Dragon Fund, Inc.*--Class C 17.82% N/A -14.51%+
MSCI All Country Far East Free Ex-Japan Index** -4.83% N/A -12.77%#
MSCI All Country Far East Free Ex-Japan Composite Index*** -4.36% N/A -14.52%#
- ----------------------------------------------------------------------------------------------------------------
Merrill Lynch Dragon Fund, Inc.*--Class D -20.77% -13.96% -1.56%++
MSCI All Country Far East Free Ex-Japan Index** -4.83% -11.95% 1.10%##
MSCI All Country Far East Free Ex-Japan Composite Index*** -4.36% -13.43% -0.19%##
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged capitalization-weighted Index is comprised of a
representative sampling of stocks of large-, medium- and
small-capitalization companies in Hong Kong, Indonesia, South Korea, the
Philippines, Singapore, China, Taiwan and Thailand that are freely
purchasable by foreign investors. Effective October 30, 1998, Malaysia was
removed from the Index. Past performance is not predictive of future
performance.
*** This unmanaged capitalization-weighted Index is comprised of a
representative sampling of stocks of large-, medium- and
small-capitalization companies in Hong Kong, Indonesia, South Korea, the
Philippines, Singapore, China and Thailand that are freely purchasable by
foreign investors. This Index included Taiwan from September 1996 to
October 1998. Effective October 30, 1998, Malaysia was removed from the
Index. Past performance is not predictive of future performance.
+ Inception date is October 21, 1994.
++ Inception date is May 29, 1992.
# Since October 31, 1994.
## Since May 29, 1992.
MERRILL LYNCH DRAGON FUND, INC. 5
<PAGE>
[ICON] KEY FACTS
UNDERSTANDING
EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEE -- a fee paid to the Manager for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities dealers
for account maintenance activities.
FEES AND EXPENSES
--------------------------------------------------
The Fund offers four different classes of shares.
Although your money will be invested the same way
no matter which class of shares you buy, there are
differences among the fees and expenses associated
with each class. Not everyone is eligible to buy
every class. After determining which classes you
are eligible to buy, decide which class best suits
your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses
that you may pay if you buy and hold the different
classes of shares of the Fund. Future expenses may
be greater or less than those indicated below.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID
DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B(a) CLASS C CLASS D
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) 5.25%(b) None None 5.25%(b)
- ----------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever
is lower) None(c) 4.0%(b) 1.0%(b) None(c)
- ----------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
- ----------------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- ----------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- ----------------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- ----------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)
- ----------------------------------------------------------------------------------------------------------
Management Fee 1.00% 1.00% 1.00% 1.00%
- ----------------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(d) None 1.00% 1.00% 0.25%
- ----------------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency fees)(e) 0.46% 0.54% 0.54% 0.47%
- ----------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(f) 1.46% 2.54% 2.54% 1.72%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares for a long
time, it may cost you more in distribution (12b-1) fees than the maximum
sales charge that you would have paid if you had bought one of the other
classes.
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended December 31, 1998, the Fund paid the Transfer Agent fees totaling
$1,256,107. The Manager provides accounting services to the Fund at its
cost. For the fiscal year ended December 31, 1998, the Fund reimbursed the
Manager $69,836 for these services.
(f) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
6 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
EXAMPLES:
These examples are intended to help you
compare the cost of investing in the Fund
with the cost of investing in other mutual
funds.
These examples assume that you invest
$10,000 in the Fund for the time periods
indicated, that your investment has a 5%
return each year, that you pay the sales
charges, if any, that apply to the
particular class and that the Fund's
operating expenses remain the same. This
assumption is not meant to indicate you will
receive a 5% annual rate of return. Your
annual return may be more or less than the
5% used in this example. Although your
actual costs may be higher or lower, based
on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR
SHARES:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Class A $666 $ 962 $1,281 $2,180
- ----------------------------------------------------------
Class B $657 $ 991 $1,350 $2,692*
- ----------------------------------------------------------
Class C $357 $ 791 $1,350 $2,875
- ----------------------------------------------------------
Class D $691 $1,038 $1,409 $2,449
- ----------------------------------------------------------
</TABLE>
EXPENSES IF YOU DID NOT REDEEM YOUR
SHARES:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Class A $666 $ 962 $1,281 $2,180
- ----------------------------------------------------------
Class B $257 $ 791 $1,350 $2,692*
- ----------------------------------------------------------
Class C $257 $ 791 $1,350 $2,875
- ----------------------------------------------------------
Class D $691 $1,038 $1,409 $2,449
- ----------------------------------------------------------
</TABLE>
* Assumes conversion to Class D shares approximately eight years after
purchase. See note (a) to the Fees and Expenses table above.
MERRILL LYNCH DRAGON FUND, INC. 7
<PAGE>
[ICON] DETAILS ABOUT THE FUND
DETAILS ABOUT THE FUND [ICON]
ABOUT THE
PORTFOLIO MANAGER
Kara W.Y. Tan Bhala is a Senior Vice President and the portfolio manager of the
Fund. Ms. Tan Bhala has been a First Vice President of the Merrill Lynch Asset
Management since 1997, a Senior Portfolio Manager of the Merrill Lynch Asset
Management and Fund Asset Management since 1992, and a Vice President of the
Merrill Lynch Asset Management from 1992 to 1997.
ABOUT THE MANAGER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
--------------------------------------------------
The Fund's investment objective is to seek long
term capital appreciation by investing primarily
in developing Asia-Pacific equity and debt
securities. In other words, the Fund seeks to
achieve capital growth over the long term. Under
normal market conditions, Fund management tries to
do this by investing at least 65% of the Fund's
assets in equity securities of issuers located in
developing countries in the Asia-Pacific region
and in debt securities of companies and
governments in the Asia-Pacific region. We cannot
guarantee that the Fund will meet its objective.
The Asia-Pacific region has some of the world's
most vibrant developing economies. Although these
economies have experienced very significant
turmoil over the last few years, Fund management
believes that the economies and securities markets
of the region present attractive long term
investment opportunities. The Fund considers all
of the countries in Asia and the Pacific Basin
region, other than Japan, Australia and New
Zealand, to be developing countries. These
countries include:
<TABLE>
<S> <C>
- - China - Indonesia
- - South Korea - The Philippines
- - Singapore - India
- - Taiwan - Pakistan
- - Hong Kong - Turkey
- - Malaysia - Brunei
- - Sri Lanka
</TABLE>
The Fund is non-diversified, which means that the
Fund can invest more than 5% of its assets in the
securities of a single company or issuer. The Fund
will, however, usually try to diversify its
investments geographically over the Asia-Pacific
region. The Fund considers a security to be an
Asia-Pacific security if at least 50% of the
issuer's assets, gross revenues or profits in the
last two years are from activities in an
Asia-Pacific country. Under certain market
conditions, Fund management may invest the Fund's
assets, without limitation, in short term
securities or cash as a temporary defensive
measure. Temporary defensive positions may limit
the potential for the Fund to achieve its goal of
long term capital appreciation.
8 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
EQUITY SECURITIES -- Although the Fund is not
required to have any set percentage of its assets
invested in equity securities, the Fund will tend
to be invested primarily in equity securities in
order to achieve its goal of long term capital
appreciation. The Fund can invest in all types of
equity securities including common stock,
preferred stock, warrants and stock
MERRILL LYNCH DRAGON FUND, INC. 9
<PAGE>
[ICON] DETAILS ABOUT THE FUND
purchase rights. The Fund may purchase securities
of companies directly in the securities markets in
developing Asia-Pacific countries or through
American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs) or Global Depositary
Receipts (GDRs).
DEBT SECURITIES -- The Fund will invest in
developing Asia-Pacific debt securities to
decrease the volatility of the Fund and because
the relatively high yield of developing
Asia-Pacific debt securities can be used to offset
the Fund's operating expenses. Although the Fund
can invest in all types of debt securities, it
tends to invest in convertible bonds and debt
securities of Asia-Pacific governments. The Fund
may also invest in high yield or "junk" bonds.
These debt securities often involve investment
risks that are described below.
OPTIONS, FUTURES AND OTHER DERIVATIVES -- The Fund
may use options, futures, forward contracts and
swap agreements both to increase the return of the
Fund and to hedge, or protect, the value of its
assets against adverse movements in currency
exchange rates and interest rates and movements in
the securities markets. The use of options,
futures and forward contracts can be effective in
protecting or enhancing the value of the Fund's
assets. While these instruments involve certain
risks, the Fund will not engage in certain
strategies that are considered highly risky and
speculative.
INVESTMENT RISKS
- ----------------------------------------------------------------------------
This section contains a summary discussion of the
general risks of investing in the Fund. As with
any mutual fund, there can be no guarantee that
the Fund will meet its goals or that the Fund's
performance will be positive for any period of
time.
CONCENTRATION RISK -- The Fund is a
non-diversified fund. By concentrating in a
smaller number of investments, the Fund's risk is
increased because each investment has a greater
effect on the Fund's performance.
MARKET AND SELECTION RISK -- Market risk is the
risk that the stock or bond markets in certain of
the countries in which the Fund invests will go
down in value, including the possibility that the
market will go down sharply and
10 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
unpredictably. Selection risk is the risk that the
investments that Fund management selects will
underperform the stock or bond markets or other
funds with similar investment objectives and
investment strategies.
FOREIGN MARKET RISK -- Since the Fund invests in
foreign securities, it offers the potential for
more diversification than an investment only in
the United States. This is because stocks traded
on foreign markets have often (though not always)
performed differently than stocks in the United
States. However, such investments involve special
risks not present in U.S. investments that can
increase the chances that the Fund will lose
money. In particular, the Fund is subject to the
risk that because there are generally fewer
investors on foreign exchanges and a smaller
number of shares traded each day, it may make it
difficult for the Fund to buy and sell securities
on those exchanges. In addition, prices of foreign
securities may go up and down more than prices of
securities traded in the United States.
FOREIGN ECONOMY RISK -- The economies of certain
foreign markets often do not compare favorably
with that of the United States with respect to
such issues as growth of gross national product,
reinvestment of capital, resources and balance of
payments position. Certain such economies may rely
heavily on particular industries or foreign
capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions
against a particular country or countries, changes
in international trading patterns, trade barriers
and other protectionist or retaliatory measures.
Investments in foreign markets may also be
adversely affected by governmental actions such as
the imposition of capital controls,
nationalization of companies or industries,
expropriation of assets or the imposition of
punitive taxes. In addition, the governments of
certain countries may prohibit or impose
substantial restrictions on foreign investing in
their capital markets or in certain industries.
Any of these actions could severely affect
security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer
the Fund's assets or income back into the United
States, or otherwise adversely affect the Fund's
operations. In September 1998, Malaysia imposed
currency controls that limit the Fund's ability to
repatriate proceeds of Malaysian investments. In
February 1999, these controls were replaced by an
exit tax. As of December 31, 1998 the portion of
the Fund's net assets invested in Malaysia is
approximately 4.7%. Other foreign market risks
include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable
legal judgments in foreign courts, and political
and social instability. Legal remedies available
to investors in certain foreign countries may be
less extensive than those available to investors
in the United States or other foreign countries.
MERRILL LYNCH DRAGON FUND, INC. 11
<PAGE>
[ICON] DETAILS ABOUT THE FUND
CURRENCY RISK -- Securities in which the Fund
invests are usually denominated or quoted in
currencies other than the U.S. dollar. Changes in
foreign currency exchange rates affect the value
of the Fund's portfolio. Generally, when the U.S.
dollar rises in value against a foreign currency,
a security denominated in that currency loses
value because the currency is worth fewer U.S.
dollars. Conversely, when the U.S. dollar
decreases in value against a foreign currency, a
security denominated in that currency gains value
because the currency is worth more U.S. dollars.
This risk, generally known as "currency risk,"
means that a stronger U.S. dollar will reduce
returns for U.S. investors while a weak U.S.
dollar will increase those returns.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING
STANDARDS -- Many foreign governments supervise
and regulate stock exchanges, brokers and the sale
of securities less than the United States does.
Some countries may not have laws to protect
investors the way that the United States
securities laws do. For example, some countries
may have no laws or rules against insider trading.
Insider trading occurs when a person buys or sells
a company's securities based on non-public
information about that company. Accounting
standards in other countries are not necessarily
the same as in the United States. If the
accounting standards in another country do not
require as much detail as U.S. accounting
standards, it may be harder for Fund management to
completely and accurately determine a company's
financial condition. Also, brokerage commissions
and other costs of buying or selling securities
often are higher in foreign countries than they
are in the United States. This reduces the amount
the Fund can earn on its investments.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE
UNITED STATES -- The Fund generally holds its
foreign securities in which it invests outside the
United States in foreign banks and securities
depositories. Some foreign banks and securities
depositories may be recently organized or new to
the foreign custody business. In addition, there
may be limited or no regulatory oversight over
their operations. Also, the laws of certain
countries may put limits on the Fund's ability to
recover its assets if a foreign bank, depository
or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more
expensive for the Fund to buy, sell and hold
securities in certain foreign markets than in the
U.S. The increased expense of investing in foreign
markets reduces the amount the Fund can earn on
its investments and typically results in a higher
operating expense ratio for the Fund than
investment companies invested only in the U.S.
12 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
Dividends or interest on, or proceeds from the
sale of, foreign securities may be subject to
foreign withholding and other taxes. Shareholders
may be able to take a credit or a deduction for
foreign taxes paid by the Fund, if certain
requirements are met.
SETTLEMENT RISK -- Settlement and clearance
procedures in certain foreign markets differ
significantly from those in the United States.
Foreign settlement and clearance procedures and
trade regulations also may involve certain risks
(such as delays in payment for or delivery of
securities) not typically involved with the
settlement of U.S. investments. Communications
between the United States and developing market
countries may be unreliable, increasing the risk
of delayed settlements or losses of security
certificates. Settlements in certain foreign
countries at times have not kept pace with the
number of securities transactions; these problems
may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is
delayed in settling a purchase of securities, it
may miss attractive investment opportunities and
certain of its assets may be uninvested with no
return earned thereon for some period. If the Fund
cannot settle or is delayed in settling a sale of
securities, it may lose money if the value of the
security then declines or, if it has contracted to
sell the security to another party, the Fund could
be liable to that party for any losses incurred.
DEVELOPING MARKETS RISK -- The risks of foreign
investments are usually much greater for
developing markets. Investments in developing
markets may be considered speculative. Developing
markets include those in countries defined as
emerging or developing by the World Bank, the
International Finance Corporation or the United
Nations. Developing markets are riskier because
they develop unevenly and may never fully develop.
They are more likely to experience hyperinflation
and currency devaluations, which adversely affects
returns to U.S. investors. In addition, the
securities markets in many of these countries have
far lower trading volumes and less liquidity than
developed markets. Since these markets are so
small, investments in them may be more likely to
suffer sharp and frequent price changes or long
term price depression because of adverse
publicity, investor perceptions or the actions of
a few large investors. In addition, traditional
measures of investment value used in the United
States, such as price to earnings ratios, may not
apply to certain small markets.
Many developing markets have histories of
political instability and abrupt changes in
policies. As a result, their governments are more
likely to take actions that are hostile or
detrimental to private enterprise or foreign
investment than those of more developed countries.
Certain developing
MERRILL LYNCH DRAGON FUND, INC. 13
<PAGE>
[ICON] DETAILS ABOUT THE FUND
markets may also face other significant internal
or external risks, including the risk of war, and
ethnic, religious, and racial conflicts. In
addition, governments in many developing market
countries participate to a significant degree in
their economies and securities markets, which may
impair investment and economic growth.
BORROWING AND LEVERAGE -- The Fund may borrow for
temporary emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in
the net asset value of Fund shares and in the
yield on the Fund's portfolio. Borrowing will cost
the Fund interest expense and other fees. The cost
of borrowing may reduce the Fund's return. Certain
securities that the Fund buys may create leverage
including, for example, when issued securities,
forward commitments, options, warrants and reverse
repurchase agreements.
Risks associated with certain types of securities
in which the Fund may invest include:
DEBT SECURITIES -- Debt securities, such as bonds,
involve credit risk. This is the risk that the
borrower will not make timely payments of
principal and interest. The degree of credit risk
depends on the issuer's financial condition and on
the terms of the bonds. These securities are also
subject to interest rate risk. This is the risk
that the value of the security may fall when
interest rates rise. In general, the market price
of debt securities with longer maturities will go
up or down more in response to changes in interest
rates than the market price of shorter term
securities.
SOVEREIGN DEBT -- The Fund may invest in sovereign
debt securities. These securities are issued or
guaranteed by foreign government entities.
Investments in sovereign debt are subject to the
risk that a government entity may delay or refuse
to pay interest or to repay principal on its
sovereign debt. Some of these reasons may include
cash flow problems, insufficient foreign currency
reserves, political considerations, the relative
size of its debt position to its economy or its
failure to put in place economic reforms required
by the International Monetary Fund or other
multilateral agencies. If a government entity
defaults, it may ask for more time in which to pay
or for further loans. There is no legal process
for collecting sovereign debts that a government
does not pay or bankruptcy proceeding by which all
or part of sovereign debt that a government entity
has not repaid may be collected.
JUNK BONDS -- Junk bonds are debt securities that
are rated below investment grade by the major
rating agencies or are unrated securities that
Fund management believes are of comparable
quality. Although junk bonds
14 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
generally pay higher rates of interest than
investment grade bonds, they are high risk
investments that may cause income and principal
losses for the Fund. Junk bonds generally are less
liquid and experience more price volatility than
higher rated debt securities. The issuers of junk
bonds may have a larger amount of outstanding debt
relative to their assets than issuers of
investment grade bonds. In the event of an
issuer's bankruptcy, claims of other creditors may
have priority over the claims of junk bond
holders, leaving few or no assets available to
repay junk bond holders. Junk bonds may be subject
to greater call and redemption risk than higher
rated debt securities.
ILLIQUID SECURITIES -- The Fund may invest up to
15% of its net assets in illiquid securities that
it cannot easily resell within seven days at
current value or that have contractual or legal
restrictions on resale. If the Fund buys illiquid
securities it may be unable to quickly resell them
or may be able to sell them only at a price below
current value.
RESTRICTED SECURITIES -- Restricted securities
have contractual or legal restrictions on their
resale. They include private placement securities
that the Fund buys directly from the issuer.
Private placement and other restricted securities
may not be listed on an exchange and may have no
active trading market.
Restricted securities may be illiquid. The Fund
may be unable to sell them on short notice or may
be able to sell them only at a price below current
value. The Fund may get only limited information
about the issuer, so it may be less able to
predict a loss. In addition, if Fund management
receives material adverse nonpublic information
about the issuer, the Fund will not be able to
sell the security.
RULE 144A SECURITIES -- Rule 144A securities are
restricted securities that can be resold to
qualified institutional buyers but not to the
general public. Rule 144A securities may have an
active trading market, but carry the risk that the
active trading market may not continue.
CONVERTIBLES -- Convertibles are generally debt
securities or preferred stocks that may be
converted into common stock. Convertibles
typically pay current income as either interest
(debt security convertibles) or dividends
(preferred stocks). A convertible's value usually
reflects both the stream of current income
payments and the value of the underlying common
stock. The market value of a convertible performs
like a regular debt security; that is, if market
MERRILL LYNCH DRAGON FUND, INC. 15
<PAGE>
[ICON] DETAILS ABOUT THE FUND
interest rates rise, the value of a convertible
usually falls. Since it is convertible into common
stock, the convertible also has the same types of
market and issuer risk as the value of the
underlying common stock.
WARRANTS -- A warrant gives the Fund the right to
buy a quantity of stock. The warrant specifies the
amount of underlying stock, the purchase (or
"exercise") price, and the date the warrant
expires. The Fund has no obligation to exercise
the warrant and buy the stock.
A warrant has value only if the Fund exercises it
before it expires. If the price of the underlying
stock does not rise above the exercise price
before the warrant expires, the warrant generally
expires without any value and the Fund loses any
amount it paid for the warrant. Thus, investments
in warrants may involve substantially more risk
than investments in common stock. Warrants may
trade in the same markets as their underlying
stock; however, the price of the warrant does not
necessarily move with the price of the underlying
stock.
WHEN ISSUED SECURITIES AND DELAYED DELIVERY
SECURITIES -- When issued and delayed delivery
securities involve the risk that the security the
Fund buys will lose value prior to its delivery.
There also is the risk that the security will not
be issued or that the other party will not meet
its obligation. If this occurs, the Fund both
loses the investment opportunity for the assets it
has set aside to pay for the security and any gain
in the security's price.
INDEXED AND INVERSE FLOATING RATE
SECURITIES -- The Fund may invest in securities
whose potential returns are directly related to
changes in an underlying index or interest rate,
known as indexed securities. The return on indexed
securities will rise when the underlying index or
interest rate rises and fall when the index or
interest rate falls. The Fund may also invest in
securities whose return is inversely related to
changes in an interest rate (inverse floaters). In
general, income on inverse floaters will decrease
when interest rates increase and increase when
interest rates decrease. Investments in inverse
floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses
of principal. In addition, certain indexed
securities and inverse floaters may increase or
decrease in value at a greater rate than the
underlying interest rate, which effectively
leverages the Fund's investment. Indexed
securities and inverse floaters are derivative
securities and can be considered speculative.
Indexed and inverse securities involve credit risk
and certain indexed and inverse securities may
involve currency risk, leverage risk and liquidity
risk.
16 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
REPURCHASE AGREEMENTS; PURCHASE AND SALE
CONTRACTS -- The Fund may enter into certain types
of repurchase agreements or purchase and sale
contracts. Under a repurchase agreement, the
seller agrees to repurchase a security (typically
a security issued or guaranteed by the U.S.
Government) at a mutually agreed upon time and
price. This insulates the Fund from changes in the
market value of the security during the period,
except for currency fluctuations. A purchase and
sale contract is similar to a repurchase
agreement, but purchase and sale contracts provide
that the purchaser receives any interest on the
security paid during the period. If the seller
fails to repurchase the security in either
situation and the market value declines, the Fund
may lose money.
DERIVATIVES -- The Fund may use derivative
instruments including futures, forwards, options,
indexed securities, inverse securities and swaps.
Derivatives are financial instruments whose value
is derived from another security, a commodity
(such as oil or gold) or an index such as the
Standard & Poor's Composite 500 Index. Derivatives
allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other
types of instruments. Derivatives are volatile and
involve significant risks, including:
LEVERAGE RISK -- the risk associated
with certain types of investments or
trading strategies (such as borrowing
money to increase the amount of
investments) that relatively small
market movements may result in large
changes in the value of an investment.
Certain investments or trading
strategies that involve leverage can
result in losses that greatly exceed
the amount originally invested.
CREDIT RISK -- the risk that the
counterparty (the party on the other
side of the transaction) on a
derivative transaction will be unable
to honor its financial obligation to
the Fund.
CURRENCY RISK -- the risk that changes
in the exchange rate between currencies
will adversely affect the value (in
U.S. dollar terms) of an investment.
LIQUIDITY RISK -- the risk that
certain securities may be difficult or
impossible to sell at the time that the
seller would like or at the price that
the seller believes the security is
currently worth.
MERRILL LYNCH DRAGON FUND, INC. 17
<PAGE>
[ICON] DETAILS ABOUT THE FUND
INTEREST RATE RISK -- the risk that
prices of fixed income securities will
fluctuate as a function of interest
rate movement.
The Fund may use derivatives for hedging purposes,
including anticipatory hedges. Hedging is a
strategy in which the Fund uses a derivative to
offset the risk that other Fund holdings may
decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if
the market moves in a different manner than
anticipated by the Fund or if the cost of the
derivative outweighs the benefit of the hedge.
Hedging also involves the risk that changes in the
value of the derivative will not match those of
the holdings being hedged as expected by the Fund,
in which case any losses on the holdings being
hedged may not be reduced. There can be no
assurance that the Fund's hedging strategy will
reduce risk or that hedging transactions will be
either available or cost effective. The Fund is
not required to use hedging and may choose not to
do so.
The Fund may also use indexed securities to gain
exposure to certain markets when it deems these
derivatives to be potentially more advantageous
than the purchase of equity securities in those
markets.
SWAP AGREEMENTS -- Swap agreements involve the
risk that the party with whom the Fund has entered
into the swap will default on its obligation to
pay the Fund and the risk that the Fund will not
be able to meet its obligations to pay the other
party to the agreement.
SECURITIES LENDING -- The Fund may lend securities
to financial institutions which provide government
securities as collateral. Securities lending
involves the risk that the borrower may fail to
return the securities in a timely manner or at
all. As a result, the Fund may lose money and
there may be a delay in recovering the loaned
securities. The Fund could also lose money if it
does not recover the securities and the value of
the collateral falls. These events could trigger
adverse tax consequences to the Fund.
STATEMENT OF ADDITIONAL INFORMATION
- ----------------------------------------------------------------------------
If you would like further information about the
Fund, including how it invests, please see the
Statement of Additional Information.
18 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
[ICON]
YOUR ACCOUNT [ICON]
MERRILL LYNCH SELECT PRICING-SM- SYSTEM
--------------------------------------------------
The Fund offers four share classes, each with its
own sales charge and expense structure, allowing
you to invest in the way that best suits your
needs. Each share class represents an ownership
interest in the same investment portfolio. When
you choose your class of shares you should
consider the size of your investment and how long
you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which
share class is best suited to your personal
financial goals.
For example, if you select Class A or Class D
shares, you generally pay a sales charge at the
time of purchase. If you buy Class D shares, you
also pay an ongoing account maintenance fee of
0.25%. You may be eligible for a sales charge
waiver.
If you select Class B or C shares, you will invest
the full amount of your purchase price, but you
will be subject to a distribution fee of 0.75% and
an account maintenance fee of 0.25%. Because these
fees are paid out of the Fund's assets on an
ongoing basis, over time these fees increase the
cost of your investment and may cost you more than
paying an initial sales charge. In addition, you
may be subject to a deferred sales charge when you
sell Class B or C shares.
The Fund's shares are distributed by Merrill Lynch
Funds Distributor, a division of Princeton Funds
Distributor, Inc., an affiliate of Merrill Lynch.
18 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing-SM-
System.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
- Current Class A Limited availability Limited availability Limited availability
shareholders through other securities through other securities through other securities
- Certain Retirement dealers. dealers. dealers.
Plans
- Participants in certain
Merrill Lynch sponsored
programs
- Certain affiliates of
Merrill Lynch.
- ---------------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time of No. Entire purchase price No. Entire purchase price Yes. Payable at time of
Charge? purchase. Lower sales is invested in shares of is invested in shares of purchase. Lower sales
charges available for the Fund. the Fund. charges available for
larger investments. larger investments.
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged for Yes. Payable if you Yes. Payable if you No. (May be charged for
Charge? purchases over $1 million redeem within four years redeem within one year of purchases over $1 million
that are redeemed within of purchase. purchase. that are redeemed within
one year.) one year.)
- ---------------------------------------------------------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account Maintenance 0.25% Account Maintenance 0.25% Account Maintenance
and Distribution Fee Fee Fee
Fees? 0.75% Distribution Fee. 0.75% Distribution Fee. No Distribution Fee.
- ---------------------------------------------------------------------------------------------------------------------------------
Conversion to Class No. Yes, automatically after No. No.
D shares? approximately eight
years.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH DRAGON FUND, INC. 19
<PAGE>
[ICON] YOUR ACCOUNT
RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing System funds that you
agree to buy within a 13 month period. Certain restrictions apply.
CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class A or Class D shares, you will
pay a sales charge at the time of purchase.
<TABLE>
<CAPTION>
DEALER
COMPENSATION
AS A % OF
AS A % OF AS A % OF OFFERING
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* 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.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This
charge is 1% of the lesser of the original cost of the shares being
redeemed or your redemption proceeds. 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.
No initial sales charge applies to Class A or
Class D shares that you buy through reinvestment
of dividends or distributions.
A reduced or waived sales charge on a purchase of
Class A or Class D shares may apply for:
- Purchases under a RIGHT OF ACCUMULATION
or LETTER OF INTENT.
- TMA-SM- Managed Trusts.
- Certain Merrill Lynch investment or
central asset accounts.
- Certain employer-sponsored retirement
or savings plans.
- Purchases using proceeds from the sale
of certain Merrill Lynch closed-end
funds under certain circumstances.
20 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
- Certain investors, including directors
or trustees of Merrill Lynch mutual
funds and Merrill Lynch employees.
- Certain Merrill Lynch fee-based
programs.
Only certain investors are eligible to buy Class A
shares. Your Financial Consultant can help you
determine whether you are eligible to buy Class A
shares or to participate in any of these programs.
If you decide to buy shares under the initial
sales charge alternative and you are eligible to
buy both Class A and Class D shares, you should
buy Class A since Class D shares are subject to an
account maintenance fee, while Class A shares are
not.
If you redeem Class A or Class D shares and within
30 days buy new shares of the same class, you will
not pay a sales charge on the new purchase amount.
The amount eligible for this "Reinstatement
Privilege" may not exceed the amount of your
redemption proceeds. To exercise the privilege,
contact your Merrill Lynch Financial Consultant or
the Fund's Transfer Agent at 1-800-MER-FUND.
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 here differ from the Class A shares
offered prior to October 21, 1994, in many
respects, including eligible investors, sales
charges and exchange privilege.
CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS
If you select Class B or Class C shares, you do
not pay an initial sales charge at the time of
purchase. However, if you redeem your Class B
shares within four years after purchase, or your
Class C shares within one year after purchase, you
may be required to pay a deferred sales charge.
You will also pay distribution fees of 0.75% and
account maintenance fees of 0.25% each year under
distribution plans that the Fund has adopted under
Rule 12b-1. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these
fees increase the cost of your investment and may
cost you more than paying an initial sales charge.
The Distributor uses the money that it receives
from the deferred sales charges and the
distribution fees to cover the costs of marketing,
advertising and compensating the Merrill Lynch
Financial Consultant or other securities dealer
who assists you in purchasing Fund shares.
MERRILL LYNCH DRAGON FUND, INC. 21
<PAGE>
[ICON] YOUR ACCOUNT
CLASS B SHARES
If you redeem Class B shares within four years
after purchase, you may be charged a deferred
sales charge. The amount of the charge gradually
decreases as you hold your shares over time,
according to the following schedule:
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE SALES 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>
* The percentage charge will apply to the lesser of
the original cost of the shares being redeemed or
the proceeds of your redemption. Shares acquired
through reinvestment of dividends or
distributions are not subject to a deferred sales
charge. Not all Merrill Lynch funds have
identical deferred sales charge schedules. If you
exchange your shares for shares of another fund,
the higher charge will apply.
The deferred sales charge relating to Class B
shares may be reduced or waived in certain
circumstances, such as:
- Certain post-retirement withdrawals
from an IRA or other retirement plan if
you are over 59 1/2 years old.
- Redemption by certain eligible 401(a)
and 401(k) plans, certain related
accounts and certain retirement plan
rollovers.
- Redemption in connection with
participation in certain Merrill Lynch
fee-based programs.
- Withdrawals resulting from shareholder
death or disability as long as the
waiver request is made within one year
of death or disability or, if later,
reasonably promptly following
completion of probate, or in connection
with involuntary termination of an
account in which Fund shares are held.
- Withdrawal through the Merrill Lynch
Systematic Withdrawal Plan of up to 10%
per year of your Class B account value
at the time the plan is established.
Your Class B shares convert automatically into
Class D shares approximately eight years after
purchase. Any Class B shares received through
reinvestment of dividends or distributions paid on
converting shares will also convert at
22 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
that time. Class D shares are subject to lower
annual expenses than Class B
shares. The conversion of Class B to Class D
shares is not a taxable event for Federal income
tax purposes.
Different conversion schedules apply to Class B
shares of different Merrill Lynch mutual funds.
For example, Class B shares of a fixed-income fund
convert approximately ten years after purchase
compared to approximately eight years for equity
funds. If you acquire your Class B shares in an
exchange from another fund with a shorter
conversion schedule, the Fund's eight year
conversion schedule will apply. If you exchange
your Class B shares in the Fund for Class B shares
of a fund with a longer conversion schedule, the
other fund's conversion schedule will apply. The
length of time that you hold both the original and
exchanged Class B shares in both funds will count
toward the conversion schedule. The conversion
schedule may be modified in certain other cases as
well.
CLASS C SHARES
If you redeem Class C shares within one year after
purchase, you may be charged a deferred sales
charge of 1.00%. The charge will apply to the
lesser of the original cost of the shares being
redeemed or the proceeds of your redemption. You
will not be charged a deferred sales charge when
you redeem shares that you acquire through
reinvestment of Fund dividends or distributions.
The deferred sales charge relating to Class C
shares may be reduced or waived in connection with
participation in certain Merrill Lynch fee-based
programs, involuntary termination of an account in
which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion
privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- ----------------------------------------------------------------------------
The chart below summarizes how to buy, sell,
transfer and exchange shares through Merrill Lynch
or other securities dealers. You may also buy
shares through the Transfer Agent. To learn more
about buying shares through the Transfer Agent,
call 1-800-MER-FUND. Because the selection of a
mutual fund involves many considerations, your
Merrill Lynch Financial Consultant may help you
with this decision.
MERRILL LYNCH DRAGON FUND, INC. 23
<PAGE>
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
<S> <C> <C>
- ----------------------------------------------------------------------------------------
Buy Shares First, select the Refer to the Merrill Lynch Select
share class Pricing table on page 19. Be sure to
appropriate for you read this prospectus carefully.
----------------------------------------------------------------
Next, determine the The minimum initial investment for the
amount of your Fund is $1,000 for all accounts
investment except:
- $250 for certain Merrill Lynch
fee-based programs
- $100 for retirement plans
(The minimums for initial investments
may be waived under certain
circumstances.)
----------------------------------------------------------------
Have your Merrill The price of your shares is based on
Lynch Financial the next calculation of net asset
Consultant or value after your order is placed. Any
securities dealer purchase orders placed within fifteen
submit your purchase minutes after the close of business on
order the New York Stock Exchange will be
priced at the net asset value
determined that day.
Purchase orders placed after that time
will be priced at the net asset value
determined on the next business day.
The Fund may reject any order to buy
shares and may suspend the sale of
shares at any time. Merrill Lynch may
charge a processing fee to confirm a
purchase. This fee is currently $5.35.
----------------------------------------------------------------
Or contact the To purchase shares directly, call the
Transfer Agent Transfer Agent at 1-800-MER-FUND and
request a purchase application. Mail
the completed purchase application to
the Transfer Agent at the address on
the inside back cover of this
Prospectus.
- ----------------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for additional
Investment shares purchases is $50 for all accounts
except $1 for retirement plans.
(The minimums for additional purchases
may be waived under certain
circumstances.)
----------------------------------------------------------------
Acquire additional All dividends and capital gains
shares through the distributions are automatically
automatic dividend reinvested without a sales charge.
reinvestment plan
----------------------------------------------------------------
Participate in the You may invest a specific amount on a
automatic investment periodic basis through certain Merrill
plan Lynch investment or central asset
accounts.
- ----------------------------------------------------------------------------------------
Transfer Shares to Transfer to a You may transfer your Fund shares only
Another Securities participating to another securities dealer that has
Dealer securities dealer entered into an agreement with Merrill
Lynch. All shareholder services will
be available for the transferred
shares. You may only purchase
additional shares of funds previously
owned before the transfer. All future
trading of these assets must be
coordinated by the receiving firm.
- ----------------------------------------------------------------------------------------
</TABLE>
24 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
<S> <C> <C>
- --------------------------------------------------------------------------------
Transfer Shares to Transfer to a You must either:
Another Securities non-participating - Transfer your shares to an
Dealer (continued) securities dealer account with the Transfer
Agent;
or
- Sell your shares.
- --------------------------------------------------------------------------------
Sell Your Shares Have your Merrill The price of your shares is based on
Lynch Financial the next calculation of net asset
Consultant or value after your order is placed. For
securities dealer your redemption request to be priced
submit your sales at the net asset value on the day of
order your request, you must submit your
request to your dealer within fifteen
minutes after that day's close of
business on the New York Stock
Exchange (generally 4:00 p.m. Eastern
time). Any redemption request placed
after that time will be priced at the
net asset value at the close of
business on the next business day.
Dealers must submit redemption
requests to the Fund not more than
thirty minutes after the close of
business on the New York Stock
Exchange on the day the request was
received.
Securities dealers, including Merrill
Lynch, may charge a fee to process a
redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No
processing fee is charged if you
redeem shares directly through the
Transfer Agent.
The Fund may reject an order to sell
shares under certain circumstances.
------------------------------------------------------------
Sell through the You may sell shares held at the
Transfer Agent Transfer Agent by writing to the
Transfer Agent at the address on the
inside back cover of this prospectus.
All shareholders on the account must
sign the letter and signatures must be
guaranteed. If you hold stock
certificates, return the certificates
with the letter. The Transfer Agent
will normally mail redemption proceeds
within seven days following receipt of
a properly completed request. If you
make a redemption request before the
Fund has collected payment for the
purchase of shares, the Fund or the
Transfer Agent may delay mailing your
proceeds. This delay will usually not
exceed ten days.
If you hold share certificates, they
must be delivered to the Transfer
Agent before they can be converted.
Check with the Transfer Agent or your
Merrill Lynch Financial Consultant for
details.
- --------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH DRAGON FUND, INC. 25
<PAGE>
[ICON] YOUR ACCOUNT
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
<S> <C> <C>
- --------------------------------------------------------------------------------
Sell Shares Participate in the You can choose to receive systematic
Systematically Fund's Systematic payments from your Fund account either
Withdrawal Plan by check or through direct deposit to
your bank account on a monthly or
quarterly basis. If you have a Merrill
Lynch CMA-Registered Trademark-,
CBA-Registered Trademark- or
Retirement Account you can arrange for
systematic redemptions of a fixed
dollar amount on a monthly,
bi-monthly, quarterly, semi-annual or
annual basis, subject to certain
conditions. Under either method you
must have dividends and other
distributions automatically
reinvested. For Class B and C shares
your total annual withdrawals cannot
be more than 10% per year of the value
of your shares at the time your plan
is established. The deferred sales
charge is waived for systematic
redemptions. Ask your Merrill Lynch
Financial Consultant for details.
- --------------------------------------------------------------------------------
Exchange Your Select the fund into You can exchange your shares of the
Shares which you want to Fund for shares of many other Merrill
exchange. Be sure to Lynch mutual funds. You must have held
read that fund's the shares used in the exchange for at
prospectus least 15 calendar days before you can
exchange to another fund.
Each class of Fund shares is generally
exchangeable for shares of the same
class of another fund. If you own
Class A shares and wish to exchange
into a fund in which you have no Class
A shares, you will exchange into Class
D shares.
Some of the Merrill Lynch mutual funds
impose a different initial or deferred
sales charge schedule. If you exchange
Class A or D shares for shares of a
fund with a higher initial sales
charge than you originally paid, you
will be charged the difference at the
time of exchange. If you exchange
Class B shares for shares of a fund
with a different deferred sales charge
schedule, the higher schedule will
apply. The time you hold Class B or C
shares in both funds will count when
determining your holding period for
calculating a deferred sales charge at
redemption. If you exchange Class A or
D shares for money market fund shares,
you will receive Class A shares of
Summit Cash Reserves Fund. Class B or
C shares of the Fund will be exchanged
for Class B shares of Summit.
Although there is currently no limit
on the number of exchanges that you
can make, the exchange privilege may
be modified or terminated at any time
in the future.
- --------------------------------------------------------------------------------
</TABLE>
26 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
--------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE,
plus any applicable sales charge. This is the
offering price. Shares are also redeemed at their
net asset value, minus any applicable deferred
sales charge. The Fund calculates its net asset
value (generally by using market quotations) each
day the New York Stock Exchange is open, fifteen
minutes after the close of business on the
Exchange (the Exchange generally closes at 4:00
p.m. Eastern time). The net asset value used in
determining your price is the next one calculated
after your purchase or redemption order is placed.
Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not
price its shares. As a result, the Fund's net
asset value may change on days when you will not
be able to purchase or redeem the Fund's shares.
Generally, Class A shares will have the highest
net asset value because that class has the lowest
expenses, and Class D shares will have a higher
net asset value than Class B or Class C shares.
Also dividends paid on Class A and Class D shares
will generally be higher than dividends paid on
Class B and Class C shares because Class A and
Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- ----------------------------------------------------------------------------
If you participate in certain fee-based programs
offered by Merrill Lynch, you may be able to buy
Class A shares at net asset value, including by
exchanges from other share classes. Sales charges
on the shares being exchanged may be reduced or
waived under certain circumstances.
You generally cannot transfer shares held through
a fee-based program into another account. Instead,
you will have to redeem your shares held through
the program and purchase shares of another class,
which may be subject to distribution and account
maintenance fees. This may be a taxable event and
you will pay any applicable sales charges.
If you leave one of these programs, your shares
may be redeemed or automatically exchanged into
another class of Fund shares or into a money
market fund. The class you receive may be the
class you originally owned when you entered the
program, or in certain cases, a different class.
If the exchange is into Class B shares, the period
before conversion to Class D shares may be
modified. Any redemption or exchange will be at
net asset value. However, if you participate in
the program for less than a specified period, you
may be charged a fee in accordance with the terms
of the program.
MERRILL LYNCH DRAGON FUND, INC. 27
<PAGE>
[ICON] YOUR ACCOUNT
DIVIDENDS -- ordinary income and capital gains paid to shareholders.
Dividends may be reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you
buy shares when a fund has realized but not yet distributed income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before
investing you may want to consult your tax adviser.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS AND TAXES
- ----------------------------------------------------------------------------
The Fund will distribute any net investment income
and any net realized long or short term capital
gains at least annually. The Fund may also pay a
special distribution at the end of the calendar
year to comply with Federal tax requirements. If
your account is with Merrill Lynch and you would
like to receive DIVIDENDS in cash, contact your
Merrill Lynch Financial Consultant. If your
account is with the Transfer Agent and you would
like to receive dividends in cash, contact the
Transfer Agent.
You will pay tax on dividends from the Fund
whether you receive them in cash or additional
shares. If you redeem Fund shares or exchange them
for shares of another fund, any gain on the
transaction may be subject to tax. The Fund
intends to make distributions that will either be
taxed as ordinary income or capital gains. Capital
gain dividends are generally taxed at different
rates than ordinary income dividends.
If you are neither a lawful permanent resident nor
a citizen of the U.S. or if you are a foreign
entity, the Fund's ordinary income dividends
(which include distributions of net short-term
capital gains) will generally be subject to a 30%
U.S. withholding tax, unless a lower treaty rate
applies.
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 United States may reduce
or eliminate such taxes. You may be able to claim
a credit or take a deduction for foreign taxes
paid by the Fund if certain requirements are met.
By law, the Fund must withhold 31% of your
dividends and proceeds if you have not provided a
taxpayer identification number or social security
number.
This section summarizes some of the consequences
under current Federal tax law of an investment in
the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about
the potential tax consequences of an investment in
the Fund under all applicable tax laws.
28 MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
MANAGEMENT OF THE FUND [ICON]
MERRILL LYNCH ASSET MANAGEMENT
--------------------------------------------------
Merrill Lynch Asset Management, the Fund's
Manager, manages the Fund's investments and its
business operations under the overall supervision
of the Fund's Board of Directors. The Manager has
the responsibility for making all investment
decisions for the Fund. The Manager has a
sub-advisory agreement with Merrill Lynch Asset
Management U.K. Limited, an affiliate. The Manager
has paid no fees to date to MLAM U.K. pursuant to
the sub-advisory agreement. The Fund pays the
Manager a fee at the annual rate of 1.00% of the
average daily net assets of the Fund.
Merrill Lynch Asset Management is part of Merrill
Lynch Asset Management Group, which had
approximately $507 billion in investment company
and other portfolio assets under management as of
January 1999. This amount includes assets managed
for Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two
digits to designate years. These systems may not
be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem").
The Fund could be adversely affected if the
computer systems used by the Fund's management or
other Fund service providers do not properly
address this problem before January 1, 2000. The
Fund's management expects to have addressed this
problem before then, and does not anticipate that
the services it provides will be adversely
affected. The Fund's other service providers have
told the Fund management that they also expect to
resolve the Year 2000 Problem, and the Fund
management will continue to monitor the situation
as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund
could be negatively affected. The Year 2000
Problem could also have a negative impact on the
companies in which the Fund invests, and this
could hurt the Fund's investment returns.
MERRILL LYNCH DRAGON FUND, INC. 29
<PAGE>
[ICON] MANAGEMENT OF THE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects the
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
FOR THE
PERIOD
OCTOBER 21,
FOR THE YEAR ENDED 1994+
DECEMBER 31, TO DECEMBER
INCREASE (DECREASE) IN ------------------------------------------------------------- 31,
NET ASSET VALUE: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $ $ 18.09 $ 15.99 $ 15.05 $ 17.43
------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net .12 .14 .12 .02
------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and foreign
currency transactions -- net (7.51) 2.03 1.00 (1.91)
------------------------------------------------------------------------------------------------------------------
Total from investment operations (7.39) 2.17 1.12 (1.89)
------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net -- -- -- -- --
In excess of investment
income -- net -- -- (.18) (.13)
Realized gain on
investments -- net -- (1.68) (.07) -- (.27)
In excess of realized
gain on investments -- net (.21) -- -- (.09)
------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.89) (.07) (.18) (.49)
------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ $ 8.81 $ 18.09 $ 15.99 $ 15.05
------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
------------------------------------------------------------------------------------------------------------------
Based on net asset value per
share % (40.77)% 13.59% 7.44% (10.82)%#
------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
------------------------------------------------------------------------------------------------------------------
Expenses % 1.35% 1.33% 1.37% 1.54%*
------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net % .73% .78% .74% .84%*
------------------------------------------------------------------------------------------------------------------
Supplemental Data:
------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $ $ 14,431 $ 49,943 $ 31,591 $ 3,383
------------------------------------------------------------------------------------------------------------------
Portfolio turnover % 21.11% 30.63% 24.52% 16.45%
------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B++
--------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
INCREASE (DECREASE) IN --------------------------------------------------------------------------
NET ASSET VALUE: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
-----------------------------------
Per Share Operating Performance:
-----------------------------------
Net asset value, beginning of
period $ $ 17.89 $ 15.98 $ 15.03 $ 18.74
-----------------------------------
Investment income (loss) -- net (.04) (.04) (.03) (.07)
-----------------------------------
Realized and unrealized gain
(loss) on investments and foreign
currency transactions -- net (7.38) 2.02 1.00 (3.28)
-----------------------------------
Total from investment operations (7.42) 1.98 .97 (3.35)
-----------------------------------
Less dividends and distributions:
Investment income -- net -- -- -- -- --
In excess of investment
income -- net -- -- -- (.02) --
Realized gain on
investments -- net -- (1.68) (.07) -- (.27)
In excess of realized
gain on investments -- net (.21) -- -- (.09)
-----------------------------------
Total dividends and distributions -- (1.89) (.07) (.02) (.36)
-----------------------------------
Net asset value, end of period $ $ 8.58 $ 17.89 $ 15.98 $ 15.03
-----------------------------------
Total Investment Return:**
-----------------------------------
Based on net asset value per
share % (41.40)% 12.41% 6.49% (17.86)%
-----------------------------------
Ratios to Average Net Assets:
-----------------------------------
Expenses % 2.39% 2.36% 2.41% 2.40%
-----------------------------------
Investment income (loss) -- net % (.26)% (.24)% (.20)% (.42)%
-----------------------------------
Supplemental Data:
-----------------------------------
Net assets, end of period (in
thousands) $ $ 374,914 $1,157,944 $ 991,281 $ 917,384
-----------------------------------
Portfolio turnover % 21.11% 30.63% 24.52% 16.45%
-----------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
MERRILL LYNCH DRAGON FUND, INC.
30
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C++
-------------------------------------------------------
FOR THE
PERIOD
OCTOBER 21
FOR THE YEAR ENDED 1994+
DECEMBER 31, TO DECEMBER
INCREASE (DECREASE) IN ------------------------------------------ 31,
NET ASSET VALUE: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
Per Share Operating Performance:
-------------------------------------------------------------------------------------------
Net asset value, beginning of
period $ $ 17.68 $ 15.79 $ 14.92 $ 17.29
-------------------------------------------------------------------------------------------
Investment income (loss) -- net (.04) (.04) (.04) (.01)
-------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and foreign
currency transactions -- net (7.29) 2.00 1.00 (1.89)
-------------------------------------------------------------------------------------------
Total from investment operations (7.33) 1.96 .96 (1.90)
-------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net -- -- -- -- --
In excess of investment
income -- net -- -- -- (.09) (.11)
Realized gain on
investments -- net (1.68) (.07) -- (.27)
In excess of realized gain on
investments -- net -- (.21) -- -- (.09)
-------------------------------------------------------------------------------------------
Total dividends and distributions -- (1.89) (.07) (.09) (.47)
-------------------------------------------------------------------------------------------
Net asset value, end of period $ $ 8.46 $ 17.68 $ 15.79 $ 14.92
-------------------------------------------------------------------------------------------
Total Investment Return:**
-------------------------------------------------------------------------------------------
Based on net asset value per
share % (41.38)% 12.43% 6.46% (10.98)%#
-------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
-------------------------------------------------------------------------------------------
Expenses % 2.41% 2.37% 2.42% 2.57%*
-------------------------------------------------------------------------------------------
Investment income (loss) -- net % (.28)% (.23)% (.28)% (.17)%*
-------------------------------------------------------------------------------------------
Supplemental Data:
-------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $ $22,111 $62,113 $29,042 $ 5,329
-------------------------------------------------------------------------------------------
Portfolio turnover % 21.11% 30.63% 24.52% 16.45%
-------------------------------------------------------------------------------------------
<CAPTION>
CLASS D++
----------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
INCREASE (DECREASE) IN ----------------------------------------------------------
NET ASSET VALUE: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
-----------------------------------
Per Share Operating Performance:
-----------------------------------
Net asset value, beginning of
period $ $ 18.11 $ 16.05 $ 15.08 $ 18.77
-----------------------------------
Investment income (loss) -- net .09 .09 .09 .06
-----------------------------------
Realized and unrealized gain
(loss) on investments and foreign
currency transactions -- net (7.51) 2.04 1.02 (3.30)
-----------------------------------
Total from investment operations (7.42) 2.13 1.11 (3.24)
-----------------------------------
Less dividends and distributions:
Investment income -- net -- -- -- -- --
In excess of investment
income -- net -- -- -- (.14) (.09)
Realized gain on
investments -- net (1.68) (.07) -- (.27)
In excess of realized gain on
investments -- net -- (.21) -- -- (.09)
-----------------------------------
Total dividends and distributions -- (1.89) (.07) (.14) (.45)
-----------------------------------
Net asset value, end of period $ $ 8.80 $ 18.11 $ 16.05 $ 15.08
-----------------------------------
Total Investment Return:**
-----------------------------------
Based on net asset value per
share % (40.89)% 13.29% 7.35% (17.24)%
-----------------------------------
Ratios to Average Net Assets:
-----------------------------------
Expenses % 1.61% 1.58% 1.63% 1.63%
-----------------------------------
Investment income (loss) -- net % .53% .53% .59% .34%
-----------------------------------
Supplemental Data:
-----------------------------------
Net assets, end of period (in
thousands) $ $115,318 $297,179 $285,485 $249,903
-----------------------------------
Portfolio turnover 21.11% 30.63% 24.52% 16.45%
-----------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
# Aggregate total investment returns.
MERRILL LYNCH DRAGON FUND, INC. 31
<PAGE>
<TABLE>
<S> <C> <C>
POTENTIAL
------------------------- INVESTORS ----------------------------
| |
| OPEN AN ACCOUNT (TWO OPTIONS) |
| |
-1- -2-
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
or SECURITIES DEALER FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
ADVISES SHAREHOLDERS ON THEIR FUND Jacksonville, Florida 32232-5289
INVESTMENTS.
PERFORMS RECORDKEEPING
| AND REPORTING SERVICES.
|
| DISTRIBUTOR |
| |
| MERRILL LYNCH FUNDS DISTRIBUTOR, |
| a division of Princeton Funds Distributor, Inc. |
----------------- P.O. Box 9081 --------------------
Princeton, New Jersey 08543-9081
ARRANGES FOR THE SALE OF FUND SHARES.
|
|
|
|
THE FUND
----------------------- ------------------------
| THE BOARD OF DIRECTORS |
| OVERSEES THE FUND |
| |
COUNSEL | | CUSTODIAN
| |
BROWN & WOOD LLP | | BROWN BROTHERS HARRIMAN & CO.
One World Trade Center | | 40 Water Street
New York, New York 10048-0557 | | Boston, Massachusetts 02109
| |
PROVIDES LEGAL ADVICE TO THE FUND. | | HOLDS THE FUND'S ASSETS FOR SAFEKEEPING.
| |
| |
| |
| |
| |
INDEPENDENT AUDITORS ------------------ ----------------- MANAGER
DELOITTE & TOUCHE LLP MERRILL LYNCH ASSET MANAGEMENT
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
AUDITS THE FINANCIAL Plainsboro, New Jersey 08536
STATEMENTS OF THE FUND ON BEHALF OF
THE SHAREHOLDERS. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
MANAGES THE FUND'S DAY-TO-DAY ACTIVITIES.
</TABLE>
MERRILL LYNCH DRAGON FUND, INC.
<PAGE>
FOR MORE INFORMATION [ICON]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM INFORMATION
CONTAINED IN THIS PROSPECTUS.
Investment Company Act file #811-6581
Code #16261-04-99
- -C- Merrill Lynch Asset Management, L.P.
[LOGO]
PROSPECTUS
Merrill Lynch
Dragon Fund, Inc.
April , 1999
<PAGE>
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THIS STATEMENT OF ADDITIONAL INFORMATION IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 26, 1999
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 equity and debt securities of issuers domiciled in
developing countries located in Asia and the Pacific Basin ("Asia-Pacific
countries").
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 Fund expects that under normal market
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. For more information on the Fund's investment
objectives and policies, see "Investment Objective and Policies."
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. See
"Purchase of Shares."
-------------------
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 ,
1999 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
(800) MER-FUND or by writing the Fund at the above address. The Prospectus is
incorporated by reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by reference into the
Prospectus. The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
-------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
--------------
The date of this Statement of Additional Information is April , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies.......................................................................... 2
Risk Factors and Special Considerations.................................................................. 4
Other Investment Policies, Practices, and Risk Factors................................................... 8
Derivatives.............................................................................................. 11
Investment Restrictions.................................................................................. 17
Portfolio Turnover....................................................................................... 19
Management of the Fund..................................................................................... 20
Directors and Officers................................................................................... 20
Compensation of Directors................................................................................ 21
Management and Advisory Arrangements..................................................................... 22
Code of Ethics........................................................................................... 24
Purchase of Shares......................................................................................... 24
Initial Sales Charge Alternatives -- Class A and Class D Shares.......................................... 25
Deferred Sales Charge Alternatives -- Class B and Class C Shares......................................... 29
Distribution Plans....................................................................................... 32
Limitations on the Payment of Deferred Sales Charges..................................................... 34
Redemption of Shares....................................................................................... 35
Redemption............................................................................................... 36
Repurchase............................................................................................... 36
Reinstatement Privilege -- Class A and Class D Shares.................................................... 37
Pricing of Shares.......................................................................................... 37
Determination of Net Asset Value......................................................................... 37
Computation of Offering Price Per Share.................................................................. 38
Portfolio Transactions and Brokerage....................................................................... 38
Shareholder Services....................................................................................... 40
Investment Account....................................................................................... 40
Exchange Privilege....................................................................................... 41
Fee-Based Programs....................................................................................... 43
Retirement Plans......................................................................................... 43
Automatic Investment Plans............................................................................... 43
Automatic Dividend Reinvestment Plan..................................................................... 44
Systematic Withdrawal Plan............................................................................... 44
Dividends and Taxes........................................................................................ 45
Dividends................................................................................................ 45
Taxes.................................................................................................... 46
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions.............................. 48
Special Rules for Certain Foreign Currency Transactions.................................................. 48
Performance Data........................................................................................... 50
General Information........................................................................................ 53
Description of Shares.................................................................................... 53
Independent Auditors..................................................................................... 53
Custodian................................................................................................ 53
Transfer Agent........................................................................................... 54
Legal Counsel............................................................................................ 54
Reports to Shareholders.................................................................................. 54
Shareholder Inquiries.................................................................................... 54
Additional Information................................................................................... 54
Financial Statements....................................................................................... 54
Appendix A--Ratings of Debt Securities..................................................................... A-1
</TABLE>
<PAGE>
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 of 1940,
as amended (the "Investment Company Act"). The Fund is authorized to employ a
variety of investment techniques to hedge against market and currency risk,
although suitable hedging instruments may not be available on a timely basis and
on acceptable terms. There can be no assurance that the Fund's investment
objective will be achieved.
For the purposes of the Fund's investment objective, developing Asia-Pacific
countries include Hong Kong, South Korea, Singapore, Taiwan, Thailand, Malaysia,
Indonesia, China, the Philippines, India, Pakistan, Turkey, Brunei and Sri
Lanka. Japan, Australia and New Zealand, because they have more developed
economies, are not included. A security ordinarily will be considered to be a
developing Asia-Pacific security when its issuer is organized in, or its primary
trading market is located in, a developing country in Asia or in the Pacific
Basin. The Fund may consider a security to be a developing Asia-Pacific
security, without reference to its issuer's domicile or to its primary trading
market, when at least 50% of the issuer's non-current assets, capitalization,
gross revenues or profits in any one of the two most recent fiscal years
represents (directly or indirectly through subsidiaries) assets or activities
located in such countries. The Fund may acquire developing Asia-Pacific
securities that are denominated in currencies other than a developing
Asia-Pacific currency. The Fund also may consider a debt security that is
denominated in a developing Asia-Pacific currency to be a developing
Asia-Pacific security without reference to its principal trading market or to
the location of its issuer. The Fund may consider investment companies to be
located in the country or countries in which they primarily make their portfolio
investments.
While some developing Asia-Pacific countries have been among the most
rapidly growing economies in the world in recent years, a number of Asia-Pacific
countries have recently experienced significant financial turmoil. Merrill Lynch
Asset Management, L.P., the Fund's manager ("MLAM" or the "Manager") believes
regional growth will occur in certain Asia-Pacific countries to the extent
government policies are directed towards market-oriented economic reform. There
has been growth resulting from an increase in domestic demand in certain
Asia-Pacific countires. In addition, the governments have been introducing
deregulatory reforms to encourage development of their securities markets and,
in varying degrees, permit foreign investment. 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 long term 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.
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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) or junk bonds, 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.
The Fund may invest in debt securities ("sovereign debt") issued or
guaranteed by developing Asia-Pacific governments (including developing
Asia-Pacific countries, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), debt securities issued or
guaranteed by international organizations designated or supported by multiple
foreign governmental entities (which are not obligations of foreign governments)
to promote economic reconstruction or development ("supranational entities"),
debt securities issued by corporations or financial institutions or debt
securities issued by the U.S. Government or an agency or instrumentality
thereof.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related governmental
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank") and the Asian Development Bank. The governmental
members or "stockholders" usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in developing Asia-Pacific
countries, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities including money market securities
denominated in U.S. dollars or foreign currencies ("Temporary Investments"). The
Fund may invest in the securities of developing Asia-Pacific issuers in the form
of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") or other securities convertible into
securities of developing Asia-Pacific issuers. The Fund may invest in
unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose
material information in the United States, and therefore, there may not be a
correlation between such information and the market value of such ADRs. The Fund
may also invest in venture capital investments and illiquid privately placed
securities, provided that such investments, together with other illiquid
securities held by the Fund, do not exceed 15% of the Fund's net assets.
CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest payments paid on corporate debt securities or the dividend
preference on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the conversion
privilege. Synthetic convertible securities may be either (i) a debt security or
preferred stock that may be convertible only under certain contingent
circumstances or that may pay the holder a cash amount based on the value of
shares of underlying common stock partly or wholly in lieu of a conversion right
(a "Cash-Settled Convertible") or (ii) a combination of separate securities
chosen by the Manager in order to create the economic characteristics of a
convertible security, I.E., a fixed income security paired with a security with
equity conversion features, such as an option or warrant (a "Manufactured
Convertible").
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion feature, however,
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the interest rate or dividend preference on a convertible security is generally
less than would be the case if the securities were issued in nonconvertible
form.
In analyzing convertible securities, the Manager will consider both the
yield on the convertible security and the potential capital appreciation that is
offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible securities
held by the Fund are denominated in United States dollars, the underlying equity
securities may be quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share price
is quoted will affect the value of the convertible security. As described below,
the Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (I.E., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
RISK FACTORS AND SPECIAL CONSIDERATIONS
RISKS OF INVESTING IN DEVELOPING ASIA-PACIFIC COUNTRIES. In addition to the
risks of foreign investing and the risks of investing in developing markets
described in the Prospectus, the developing market Asia-Pacific countries in
which the Fund invests are subject to certain additional or specific risks. The
Fund expects to make substantial investments in Asia-Pacific countries. There is
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 these markets
also may be affected by developments with respect to more established markets in
the region such as in Japan and Hong Kong. Brokers in developing market
Asia-Pacific countries typically are fewer in number and less well capitalized
than brokers in the United States. These factors, combined with the U.S.
regulatory
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requirements for open-end investment companies and the restrictions on foreign
investment discussed below, result in potentially fewer investment opportunities
for the Fund and may have an adverse impact on the investment performance of the
Fund.
Many of the developing market Asia-Pacific countries may be subject to a
greater degree of economic, political and social instability than is the case in
the United States and Western European countries. Such instability may result
from, among other things: (i) authoritarian governments or military involvement
in political and economic decision-making, including changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection. 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
present 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.
The legal systems in certain developing market Asia-Pacific countries also
may have an adverse impact on the Fund. For example, while the potential
liability of a shareholder in a U.S. corporation with respect to acts of the
corporation is generally limited to the amount of the shareholder's investment,
the notion of limited liability is less clear in certain emerging market
Asia-Pacific countries. Similarly, the rights of investors in developing market
Asia-Pacific companies may be more limited than those of shareholders of U.S.
corporations. It may be difficult or impossible to obtain and/or enforce a
judgment in a developing market Asia-Pacific country.
Governments of many developing market Asia-Pacific countries have exercised
and continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government owns or controls many companies,
including the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in developing
market 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, economic statistics of developing market Asia-Pacific countries may be
less reliable than economic statistics of more developed nations.
In addition to the relative lack of publicly available information about
developing market Asia-Pacific issuers and the possibility that such issuers may
not be subject to the same accounting, auditing and financial reporting
standards as U.S. companies, inflation accounting rules in some developing
market Asia-Pacific countries require companies that keep accounting records in
the local currency, for both tax and accounting purposes, to restate certain
assets and liabilities 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 market 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. (See "Sovereign Debt" below.)
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.
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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. There can be
no assurance that the Fund will be able to obtain required governmental
approvals in a timely manner. In addition, changes to restrictions on foreign
ownership of securities subsequent to the Fund's purchase of such securities may
have an adverse effect on the value of such shares. Certain countries may
restrict investment opportunities in issuers or industries deemed important to
national interests.
The manner in which foreign investors may invest in companies in certain
developing Asia-Pacific countries, as well as limitations on such investments,
also may have an adverse impact on the operations of the Fund. For example, the
Fund may be required in certain of such countries to invest initially through a
local broker or other entity and then have the shares purchased re-registered in
the name of the Fund. Re-registration may in some instances not be able to occur
on a timely basis, resulting in a delay during which the Fund may be denied
certain of its rights as an investor, including rights as to dividends or to be
made aware of certain corporate actions. There also may be instances where the
Fund places a purchase order but is subsequently informed, at the time of
re-registration, that the permissible allocation of the investment to foreign
investors has been filled, depriving the Fund of the ability to make its desired
investment at that time.
Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or the proceeds of sales
of securities by foreign investors. The Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments. For example, in September 1998, Malaysia imposed
currency controls that have limited the Fund's ability to repatriate proceeds of
Malaysian investments. In February 1999, the Malaysian government announced that
these controls were being replaced by an exit tax. The precise nature of some of
the restrictions is currently unclear. It is also possible that Malaysia will
impose additional restrictions or that certain other countries may impose
similar restrictions or other restrictions relating to their currencies or to
securities of issuers in those countries. The Fund's investments in Malaysia
together with any investments it might make in illiquid securities may not be
available to meet redemptions. As of December 31, 1998, the portion of the
Fund's net assets invested in Malaysia is approximately 4.7%. Depending on a
variety of financial factors, the percentage of the Fund's portfolio subject to
currency controls may increase. In the event other countries impose similar
controls, the portion of the Fund's assets that may be used to meet redemptions
may be further decreased. 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, 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
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Asia-Pacific countries. Shares of certain investment companies may at times be
acquired only at market prices representing premiums to their net asset values.
If the Fund acquires shares of other investment companies, shareholders would
bear both their proportionate share of expenses of the Fund (including
management and advisory fees) and, indirectly, the expenses of such other
investment companies.
In certain countries, banks or other financial institutions may be among the
leading companies or have actively traded securities. The Investment Company Act
restricts the Fund's investments in any equity securities of an issuer which, in
its most recent fiscal year, derived more than 15% of its revenues from
"securities related activities," as defined by the rules thereunder. These
provisions may restrict the Fund's investments in certain foreign banks and
other financial institutions.
LIMITATIONS ON SHARE TRANSACTIONS. To permit the Fund to invest the net
proceeds from the sale of its shares in an orderly manner, the Fund may, from
time to time, suspend the sale of its shares, except for dividend reinvestment.
The Fund also reserves the right to limit the number of its shares that may be
purchased by a person during a specified period of time or in the aggregate.
JUNK BONDS. Although junk bonds generally pay higher rates of interest than
investment grade bonds, they are high risk investments that may cause income and
principal losses for the Fund. The major risks in junk bond investments include:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their interest
or principal payment obligations because of an economic downturn, specific
issuer developments or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations. The
issuer's ability to pay its debt obligations also may be lessened by specific
issuer developments, or the unavailability of additional financing.
Junk bonds are frequently ranked junior in claims by other creditors. If the
issuer cannot meet its obligations, the senior obligations are generally paid
off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If the issuer redeems
the junk bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds than
on other higher rated fixed income securities.
Junk bonds may be less liquid than higher rated fixed income securities even
under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid judgment may play a greater
role in valuing certain of the Fund's portfolio securities than is the case with
securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
SOVEREIGN DEBT. Certain developing market Asia-Pacific countries owe
significant amounts of debt to commercial banks and foreign governments.
Investments in sovereign debt are subject to the risk that a government entity
may delay or refuse to pay interest or repay principal on its sovereign debt.
Some of these reasons may include cash flow problems, insufficient foreign
currency reserves, political considerations, the relative size of its debt
position to its economy or its failure to put in place economic reforms required
by the International Monetary Fund or other multilateral agencies. If a
government entity defaults, it may ask for more time in which to pay or for
further loans. There is no legal process for
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collecting sovereign debts that a government does not pay or bankruptcy
proceeding by which all or part of sovereign debt that a government entity has
not repaid may be collected. The Fund may invest up to 5% of its total assets in
sovereign debt that is in default.
OTHER INVESTMENT POLICIES, PRACTICES, AND RISK FACTORS
SECURITIES LENDING. The Fund may lend securities with a value not exceeding
33 1/3% of its total assets to banks, brokers and other financial institutions.
In return, the Fund receives collateral in an amount equal to at least 100% of
the current market value of the loaned securities in cash or securities issued
or guaranteed by the U.S. Government. The Fund receives securities as collateral
for the loaned securities and the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for the loaned securities, which
increases the Fund's yield. The Fund may receive a flat fee for its loans. The
loans are terminable at any time and the borrower, after notice, is required to
return borrowed securities within five business days. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with its
loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, the Fund
could experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
ILLIQUID OR RESTRICTED SECURITIES. The Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases privately placed
securities may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. As a result of the
absence of a public trading market, privately placed securities may be less
liquid and more difficult to value than publicly traded securities. To the
extent that privately placed securities may be resold in privately negotiated
transactions, the prices realized from the sales, due to illiquidity, could be
less than those originally paid by the Fund or less than their fair market
value. In addition, issuers whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements that may be
applicable if their securities were publicly traded. If any privately placed
securities held by the Fund are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Fund may be required
to bear the expenses of registration. Certain of the Fund's investments in
private placements may consist of direct investments and may include investments
in smaller, less-seasoned issuers, which may involve greater risks. These
issuers may have limited product lines, markets or financial resources, or they
may be dependent on a limited management group. In making investments in such
securities, the Fund may obtain access to material nonpublic information which
may restrict the Fund's ability to conduct portfolio transactions in such
securities.
The Fund may purchase restricted securities that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act. The
Board of Directors has determined to treat as liquid Rule 144A securities that
are either freely tradable in their primary markets offshore or have been
determined to be liquid in accordance with the policies and procedures adopted
by the Fund's Board of
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Directors. The Board of Directors has adopted guidelines and delegated to the
Manager the daily function of determining and monitoring liquidity of restricted
securities. The Board of Directors, however, will retain sufficient oversight
and be ultimately responsible for the determinations. Since it is not possible
to predict with assurance exactly how this market for restricted securities sold
and offered under Rule 144A will continue to develop, the Board of Directors
will carefully monitor the Fund's investments in these securities. This
investment practice could have the effect of increasing the level of illiquidity
in the Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
SUITABILITY. The economic benefit of an investment in the Fund depends upon
many factors beyond the control of the Fund, the Manager and its affiliates.
Because of its emphasis on foreign securities, the Fund should be considered a
vehicle for diversification and not as a balanced investment program. The
suitability for any particular investor of a purchase of shares in the Fund will
depend upon, among other things, such investor's investment objectives and such
investor's ability to accept the risks associated with investing in foreign
securities, including the risk of loss of principal.
WARRANTS. Buying a warrant does not make the Fund a shareholder of the
underlying stock. The warrant holder has no right to dividends or votes on the
underlying stock. A warrant does not carry any right to assets of the issuer,
and for this reason investment in warrants may be more speculative than other
equity-based investments.
BORROWING AND LEVERAGE. 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. The use of leverage by
the Fund creates an opportunity for greater total return, but, at the same time,
creates special risks. For example, leveraging may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Although
the principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowings are outstanding. Borrowings will create
interest expenses for the Fund which can exceed the income from the assets
purchased with the borrowings. To the extent the income or capital appreciation
derived from securities purchased with borrowed funds exceeds the interest the
Fund will have to pay on the borrowings, the Fund's return will be greater than
if leverage had not been used. Conversely, if the income or capital appreciation
from the securities purchased with such borrowed funds is not sufficient to
cover the cost of borrowing, the return to the Fund will be less than if
leverage had not been used, and therefore the amount available for distribution
to shareholders as dividends and other distributions will be reduced. In the
latter case, the Manager in its best judgment nevertheless may determine to
maintain the Fund's leveraged position if it expects that the benefits to the
Fund's shareholders of maintaining the leveraged position will outweigh the
current reduced return.
Certain types of borrowings by the Fund may result in the Fund being subject
to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Manager from managing the Fund's
portfolio in accordance with the Fund's investment objectives and policies.
However, a breach of any such covenants not cured within the specified cure
period may result in acceleration of outstanding indebtedness and require the
Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the Manager, provided that
the terms of such borrowings are no less favorable than those available from
comparable sources of funds in the marketplace. The fee paid to the Manager will
be calculated on the basis of the Fund's assets including proceeds from
borrowings.
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FEES AND EXPENSES. The management fee (at the annual rate of 1.00% of the
Fund's average daily net assets) and other operating expenses of the Fund may be
higher than the management fees and operating expenses of other mutual funds
managed by the Manager and other managers of investment companies investing
exclusively in the securities of U.S. issuers. The management fee and operating
expenses, however, are believed by the Manager to be comparable to expenses of
other open-end management investment companies that invest primarily in the
securities of issuers in developing market countries with investment objectives
similar to the investment objective of the Fund.
WHEN ISSUED SECURITIES AND DELAYED DELIVERY SECURITIES. The Fund may
purchase or sell securities that it is entitled to receive on a when issued
basis. The Fund may also purchase or sell securities on a delayed delivery
basis. These transactions involve the purchase or sale of securities by the Fund
at an established price with payment and delivery taking place in the future.
The Fund enters into these transactions to obtain what is considered an
advantageous price to the Fund at the time of entering into the transaction. The
Fund has not established any limit on the percentage of its assets that may be
committed in connection with these transactions. When the Fund purchases
securities in these transactions, the Fund segregates liquid securities in an
amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when issued basis
will be issued. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may not
benefit from an appreciation in the value of the security during the commitment
period.
STANDBY COMMITMENT AGREEMENTS. The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities which may be issued and sold to the Fund
at the option of the issuer. The price of the security is fixed at the time of
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.
The Fund will enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered advantageous to
the Fund. 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 securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with 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 other party agrees, upon
entering into the contract with the Fund, to repurchase the security at a
mutually agreed upon time and price in a specified currency, thereby determining
the yield during the term of the agreement. This results in a fixed rate of
return insulated from market fluctuations during such period although it may be
affected by currency fluctuations. In the case of
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repurchase agreements, the prices at which the trades are conducted do not
reflect the accrued interest on the underlying obligations; whereas, in the case
of purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, often less than one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement; the Fund does not have the right to seek additional collateral in the
case of purchase and sale contracts. In the event of default by the seller under
a repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market values of such securities
and the accrued interest on the securities. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
resulting from market fluctuations following the failure of the seller to
perform. 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 the
purchase and sale contracts are not repurchase agreements as such term is
understood in the banking and brokerage community. 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, together with all other illiquid
securities.
DERIVATIVES
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the Standard & Poor's Composite 500 Index or the prime lending rate).
Derivatives allow the Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments.
HEDGING The Fund may use Derivatives for hedging purposes. Hedging is a
strategy in which a Derivative is used to offset the risk that other Fund
holdings may decrease in value. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite manner
to market movements. While hedging can reduce losses, it can also reduce or
eliminate gains if the market moves in a different manner than anticipated by
the Fund or if the cost of the Derivative outweighs the benefit of the hedge.
Hedging also involves the risk that changes in the value of the Derivative will
not match those of the holdings being hedged as expected by the Fund, in which
case any losses on the holdings being hedged may not be reduced.
The Fund may use the following types of Derivative instruments and trading
strategies:
INDEXED AND INVERSE SECURITIES. The Fund may invest in securities the
potential return of which is based on an index. As an illustration, the Fund may
invest in a debt security that pays interest based on the current value of an
interest rate index, such as the prime rate. The Fund may also invest in a debt
security which returns principal at maturity based on the level of a securities
index or a basket of securities, or based on the relative changes of two
indices. In addition, the Fund may invest in securities the potential return of
which is based inversely on the change in an index (that is, a security the
value of which will move in the opposite direction of changes to an index). For
example, the Fund may invest in securities that pay a higher rate of interest
when a particular index decreases and pay a lower rate of interest (or do not
fully return principal) when the value of the index increases. If the Fund
invests in such securities, it may be subject to reduced or eliminated interest
payments or loss of principal in the event of an adverse
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movement in the relevant index or indices. Indexed and inverse securities
involve credit risk, and certain indexed and inverse securities may involve
leverage risk, liquidity risk and currency risk. The Fund may invest in indexed
and inverse securities for hedging purposes only. When used for hedging
purposes, indexed and inverse securities involve correlation risk.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT OPTIONS. The Fund may purchase put options on securities
held in its portfolio or securities or interest rate indices which are
correlated with securities held in its portfolio. When the Fund purchases a put
option, in consideration for an up front payment (the "option premium") the Fund
acquires a right to sell to another party specified securities owned by the Fund
at a specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put. Purchasing a put
option may involve correlation risk, and may also involve liquidity and credit
risk.
PURCHASING CALL OPTIONS. The Fund may also purchase call options on
securities it intends to purchase or securities or interest rate indices, which
are correlated with the types of securities it intends to purchase. When the
Fund purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities in which to invest in a
market the Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium. Purchasing a call option involves correlation risk, and may also
involve liquidity and credit risk.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold. However, the Fund
will not purchase options on securities if, as a result of such purchase, the
aggregate cost (option plus 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.
WRITING CALL OPTIONS. The Fund may write (I.E., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates with securities held in its portfolio. When the Fund writes a call
option, in return for an option premium the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or before
the expiration date, in the case of an option on securities, or agrees to pay to
another party an amount based on any gain in a specified securities index beyond
a specified level on or before the expiration date, in the case of an option on
a securities index. The Fund may write call options to earn income, through the
receipt of option premiums. In the event the party to which the Fund has written
an option fails to exercise its rights under the option because the value of the
underlying securities is less than the exercise price, the Fund will partially
offset any decline in the value of the underlying securities through the receipt
of the option premium. By writing a call option, however, the Fund limits its
ability to sell the underlying securities, and gives up the opportunity to
profit from any increase in the value of the underlying securities beyond the
exercise price, while the option remains outstanding. Writing a call option may
involve correlation risk.
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WRITING PUT OPTIONS. The Fund may also write put options on securities or
securities indices. When the Fund writes a put option, in return for an option
premium the Fund gives another party the right to sell to the Fund a specified
security at the exercise price on or before the expiration date, in the case of
an option on a security, or agrees to pay to another party an amount based on
any decline in a specified securities index below a specified level on or before
the expiration date, in the case of an option on a securities index. The Fund
may write put options to earn income, through the receipt of option premiums. In
the event the party to which the Fund has written an option fails to exercise
its rights under the option because the value of the underlying securities is
greater than the exercise price, the Fund will profit by the amount of the
option premium. By writing a put option, however, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of the security at the time of exercise as long as the put option is
outstanding, in the case of an option on a security, or make a cash payment
reflecting any decline in the index, in the case of an option on an index.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. The Fund will write a
put option on a security or a securities index only if the Fund would be willing
to purchase the security at the exercise price for investment purposes (in the
case of an option on a security) or is writing the put in connection with
trading strategies involving combinations of options--for example, the sale and
purchase of options with identical expiration dates on the same security or
index but different exercise prices (a technique called a "spread"). Writing a
put option may involve substantial leverage risks.
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Derivatives" below. A call option will also
be considered covered if the Fund owns the securities it would be required to
deliver upon exercise of the option (or, in the case of option on a securities
index, securities which substantially correlate with the performance of such
index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.
The Fund may not write covered options on underlying securities exceeding
15% of its total assets, taken at market value.
TYPES OF OPTIONS. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below.
FUTURES
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. No price is paid upon entering into
a futures contract. Rather, upon purchasing or selling a futures contract the
Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss
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experienced as a result of the futures position the prior day or be entitled to
a payment representing any profit experienced as a result of the futures
position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (I.E., contracts for which the underlying asset is a
currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity
pool" under regulations of the Commodity Futures Trading Commission.
SWAPS
The Fund is authorized to enter into equity swap agreements, which are OTC
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. Swap agreements may be
used to obtain exposure to an equity or market without owning or taking physical
custody of securities in circumstances in which direct investment is restricted
by local law or is otherwise impractical.
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 an equity swap transaction only if,
immediately following the time the Fund enters into the transaction, the
aggregate notional principal amount of equity swap transactions to which the
Fund is a party would not exceed 5% of the Fund's net assets.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.
FORWARD FOREIGN EXCHANGE TRANSACTIONS. Forward foreign exchange
transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date set
at the time of the contract. Spot foreign exchange transactions are similar but
require
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current, rather than future, settlement. The Fund will enter into foreign
exchange transactions only for purposes of hedging either a specific transaction
or a portfolio position. The Fund may enter into a foreign exchange transaction
for purposes of hedging a specific transaction by, for example, purchasing a
currency needed to settle a security transaction or selling a currency in which
the Fund has received or anticipates receiving a dividend or distribution. The
Fund may enter into a foreign exchange transaction for purposes of hedging a
portfolio position by selling forward a currency in which a portfolio position
of the Fund is denominated or by purchasing a currency in which the Fund
anticipates acquiring a portfolio position in the near future. The Fund may also
hedge portfolio positions through currency swaps, which are transactions in
which one currency is simultaneously bought for a second currency on a spot
basis and sold for the second currency on a forward basis. Forward foreign
exchange transactions involve substantial currency risk, and also involve credit
and liquidity risk.
CURRENCY FUTURES. The Fund may also hedge against the decline in the value
of a currency against the US dollar through use of currency futures or options
thereon. Currency futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts. See "Futures"
above. Currency futures involve substantial currency risk, and also involve
leverage risk.
CURRENCY OPTIONS. The Fund may also hedge against the decline in the value
of a currency against the US dollar through the use of currency options.
Currency options are similar to options on securities, but in consideration for
an option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below. Currency options involve substantial currency risk, and may
also involve credit, leverage or liquidity risk.
LIMITATIONS ON CURRENCY HEDGING. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. The Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). The Fund will
only enter into a cross-hedge if the Manager believes that (i) there is a
demonstrable high correlation between the currency in which the cross-hedge is
denominated and the currency being hedged, and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be
significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.
RISK FACTORS IN HEDGING FOREIGN CURRENCY RISKS. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. While the Fund's use of Currency Instruments to effect hedging strategies
is intended to reduce the volatility of the net asset value of the Fund's
shares, the net asset value of the Fund's shares will fluctuate. Moreover,
although Currency Instruments will be used with the intention of hedging against
adverse currency movements, transactions in Currency Instruments involve the
risk that anticipated currency movements will not be accurately predicted and
that the Fund's hedging strategies will be ineffective. To the extent that the
Fund hedges against anticipated currency movements which do not occur, the Fund
may realize losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the Fund will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in
currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able to
enter into a hedging transaction at an effective price, or (ii) the currency
exchange rate movement relates to a market with respect to which Currency
Instruments are not available (such as certain developing markets) and it is not
possible to engage in effective foreign currency hedging.
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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.
RISK FACTORS IN DERIVATIVES
Derivatives are volatile and involve significant risks.
Credit risk -- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be completely
offset by movements in the value of the hedged instruments.
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives." However, there can be
no assurance that, at any specific time, either a liquid secondary market will
exist for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be possible to close a
position in a Derivative without incurring substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve a substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. When
the Fund engages in such a transaction, the Fund will deposit in a segregated
account at its custodian liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Securities and Exchange Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund's
exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
DERIVATIVES.
Certain Derivatives traded in OTC markets, including indexed securities,
swaps and OTC options, involve substantial liquidity risk. The absence of
liquidity may make it difficult or impossible for the Fund to sell such
instruments promptly at an acceptable price. The absence of liquidity may also
make it more difficult for the Fund to ascertain a market value for such
instruments. The Fund will therefore acquire illiquid OTC instruments (i) if the
agreement pursuant to which the instrument is purchased contains a formula price
at which the instrument may be terminated or sold, or (ii) for which the Manager
anticipates 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 that dealer's quotation may be used.
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Because Derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that the Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in Strategic
Instruments traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Fund with a third-party guaranty
or other credit enhancement.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making of
investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its total
assets (including the amount borrowed), (ii) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund may
not pledge its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus
and Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act in selling
portfolio securities.
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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. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in reliance
on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the
Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies as
the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise determined
to be liquid pursuant to applicable law. 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
over-the-counter ("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
18
<PAGE>
the underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money." This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Directors of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or modify
this policy prior to the change or modification by the Commission staff of its
position.
In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the Fund
will, for purposes of investment restriction (1), treat securities issued or
guaranteed by the government of any one foreign country as the obligations of a
single issuer.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Manager, 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.
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
Code. See "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. Foreign government securities
(unlike U.S. Government securities) are not exempt from the diversification
requirements of the Code and the securities of each foreign government issuer
are considered to be obligations of a single issuer. A fund which elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's net asset value may fluctuate to a greater extent
than that of a diversified 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 investment company.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Manager, in light of a change in circumstances in general
market, economic or financial conditions. The rate of portfolio turnover is not
a limiting factor and, given the Fund's investment policies, it is anticipated
that there may be periods when high portfolio turnover will exist. The use of
covered call options at times when the underlying securities are appreciating in
value may
19
<PAGE>
result in higher portfolio turnover. The Fund pays brokerage commissions in
connection with writing call options and effecting closing purchase
transactions, as well as in connection with purchases and sales of portfolio
securities. High portfolio turnover may also result in negative tax
consequences, such as an increase in capital gains dividends or in ordinary
income dividends of accrued market discount. See "Distributions and Taxes --
Taxes." 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 all securities with maturities at the time of acquisition of one
year or less) by the monthly average value of the securities in the portfolio
during the year. The Fund's turnover rate may vary greatly from year to year or
during periods within a year. A high rate of portfolio turnover results in
correspondingly greater brokerage commission expenses.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors of the Fund consists of seven individuals, six of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Directors"). The Directors are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act.
Information about the Directors, executive officers and the portfolio
manager 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 Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND DIRECTOR(1)(2) -- Chairman of the
Manager and Fund Asset Management, L.P. ("FAM") (which terms as used herein
include their corporate predecessors) since 1997; President of the Manager and
FAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997 and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.
DONALD CECIL (72) -- DIRECTOR(2)(3) -- 1114 Avenue of the Americas, New
York, New York 10036. Special Limited Partner of Cumberland Associates (an
investment partnership) since 1982; Member of Institute of Chartered Financial
Analysts; Member and Chairman of Westchester County (N.Y.) Board of
Transportation.
ROLAND M. MACHOLD (62) -- DIRECTOR(2)(3) -- 1091 Princeton-Kingston Road,
Princeton, New Jersey 08540. Director of the State of New Jersey Division of
Investment from 1977 to 1988; Trustee of Bryn Mawr College since 1990 and of
Teacher's College, Columbia University since 1985; Co-Chair Emeritus and
Founding Director of the Council of Institutional Investors; Member of the
Capital Formation and Regulatory Processes Advisory Committee of the Securities
and Exchange Commission from 1995 to 1996; Member of the Institutional Investor
Advisory Committee of the New York Stock Exchange from 1992 to 1995.
EDWARD H. MEYER (72) -- DIRECTOR(2)(3) -- 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 (67) -- DIRECTOR(2)(3) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; 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 from 1986 to 1997.
20
<PAGE>
RICHARD R. WEST (61) -- DIRECTOR(2)(3) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993, and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding company) and Alexander's, Inc. (real
estate company).
EDWARD D. ZINBARG (64) -- DIRECTOR(2)(3) -- 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 (58) -- 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 Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
NORMAN R. HARVEY (65) -- 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 (39) -- SENIOR VICE PRESIDENT AND PORTFOLIO
MANAGER(1)(2) -- First Vice President of the Manager since 1997; Vice President
of the Manager from 1992 to 1997; Senior Portfolio Manager of the Manager and
FAM since 1992.
DONALD C. BURKE (38) -- VICE PRESIDENT AND TREASURER(1)(2) -- Senior Vice
President and Treasurer of the Manager and FAM since 1999; Senior Vice President
and Treasurer of Princeton Services since 1999; Vice President of PFD since
1999; First Vice President of the Manager from 1997 to 1999; Vice President of
the Manager from 1990 to 1997; Director of Taxation of the Manager since 1990.
PHILLIP S. GILLESPIE (35) -- SECRETARY(1)(2) -- Attorney associated with the
Manager and FAM since 1998; Assistant General Counsel of Chancellor LGT Asset
Management, Inc. from 1997 to 1998; Senior Counsel and Attorney in the Division
of Investment Management and the Office of General Counsel at the U.S.
Securities and Exchange Commission from 1993 to 1997.
- ------------
(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 certain other
investment companies for which the Manager or FAM acts as the investment
adviser.
(3) Member of the Fund's Audit and Nominating Committee which is responsible for
the selection of the independent auditors and the selection and nomination
of non-interested Directors.
As of April , 1999, 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 an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates members of its Audit
and Nominating Committee (the "Committee"), which consists of all the
non-interested Directors, a fee of $500 per meeting attended. The Fund pays the
Chairman of the Committee an additional fee of $250 per meeting attended. The
Fund reimburses each non-interested Director for his out-of-pocket expenses
relating to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended December 31, 1998 and the aggregate
compensation paid to them from all registered investment
21
<PAGE>
companies advised by the Manager and its affiliate, FAM ("MLAM/FAM-advised
funds"), for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
PENSION OR AGGREGATE
RETIREMENT ESTIMATED COMPENSATION FROM
POSITION BENEFITS ANNUAL FUND AND OTHER
WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME FUND FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
- ------------------------------------ ------------ --------------- ------------------ ------------- ------------------
<S> <C> <C> <C> <C> <C>
Donald Cecil........................ Director $ 8,500 None None $ 277,808
Roland M. Machold(2)................ Director $ 1,083 None None $ 39,208
Edward H. Meyer..................... Director $ 5,500 None None $ 214,558
Charles C. Reilly................... Director $ 7,500 None None $ 362,858
Richard R. West..................... Director $ 7,500 None None $ 334,125
Edward D. Zinbarg................... Director $ 7,500 None None $ 133,959
</TABLE>
- -------------
(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Cecil (34 registered investment companies consisting of 34 portfolios); Mr.
Machold (19 registered investment companies consisting of 19 portfolios);
Mr. Meyer (34 registered investment companies consisting of 34 portfolios);
Mr. Reilly (56 registered investment companies consisting of 69 portfolios);
Mr. West (58 registered investment companies consisting of 83 portfolios);
and Mr. Zinbarg (19 registered investment companies consisting of 19
portfolios).
(2) Mr. Machold was elected a Director of the Fund and director or trustee of
certain other MLAM/FAM advised funds on October 20, 1998.
Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares -- Initial Sales Charges Alternatives -- Class A
and Class D Shares -- Reduced Initial Sales Charges -- Purchase Privilege of
Certain Persons."
MANAGEMENT AND ADVISORY ARRANGEMENTS
MANAGEMENT SERVICES. The Manager provides the Fund with investment advisory
and management services. Subject to the supervision of the Board of Directors,
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. The Manager
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management of
the Fund.
MANAGEMENT FEE. The Fund has entered into a management agreement with the
Manager (the "Management Agreement"), pursuant to which the Manager receives for
its services to the Fund monthly compensation at the annual rate of 1.00% of the
average daily net assets of the Fund. The table below sets forth information
about the total management fees paid by the Fund to the Manager for the periods
indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, MANAGEMENT FEE
- ---------------------------------------------------------- ------------------------
<S> <C>
1998...................................................... $
1997...................................................... $
1996...................................................... $
</TABLE>
The Manager has entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K.") effective as of April 1997 pursuant
to which MLAM U.K. provides investment advisory services to the Manager with
respect to the Fund. For the fiscal years ended December 31, 1997 and 1998, the
Manager paid no fees to MLAM U.K. pursuant to this agreement.
PAYMENT OF FUND EXPENSES. 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 ML & Co. or
any of its
22
<PAGE>
affiliates. The Fund pays all other expenses incurred in the operation of the
Fund, including among other things: taxes, expenses for legal and auditing
services, costs of printing proxies, stock certificates, shareholder reports,
prospectuses and statements of additional information, except to the extent paid
by Merrill Lynch Funds Distributor, a division of PFD (the "Distributor");
charges of the custodian and the transfer agent; expenses of redemption of
shares; Commission fees; expenses of registering the shares under Federal and
state securities laws; fees and expenses of unaffiliated Directors; accounting
and pricing costs (including the daily calculations 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 for the Fund by the Manager and the Fund
reimburses the Manager for its costs in connection with such services. See
"Purchase of Shares -- Distribution Plans."
ORGANIZATION OF THE MANAGER. The Manager is a limited partnership, the
partners of which are ML & Co., a financial services holding company and the
parent of Merrill Lynch, 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.
The following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch
International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc.,
a subsidiary of ML & Co.
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 of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the Fund.
TRANSFER AGENCY SERVICES. Financial Data Services, Inc. (the "Transfer
Agent"), 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 opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
$11.00 per Class A or Class D account and $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and out-of-
pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts which close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
DISTRIBUTION EXPENSES. The Fund has entered into four separate distribution
agreements with the Distributor in connection with the continuous offering 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.
23
<PAGE>
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager pre-clear any personal
securities investment (with limited exceptions, such as government securities).
The pre-clearance 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 that 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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
The Fund offers 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 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 (also known as service 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 contingent deferred sales charges ("CDSCs"), distribution fees
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 do 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 are calculated in the same
manner at the same time and 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 CDSCs 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 Merrill Lynch Select Pricing-SM- System is used by more than 50
registered investment companies advised by MLAM or FAM. Funds advised by MLAM or
FAM that utilize the Merrill Lynch Select Pricing-SM- System are referred to
herein as "Select Pricing Funds."
As of 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 privileges and the classes of persons to whom
such shares are offered.
24
<PAGE>
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. 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 $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.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
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 who previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other Select Pricing 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 charge on new initial sales charge purchases.
In addition, the ongoing Class B and Class C account maintenance and
distribution fees will cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than the initial sales
charge shares. The ongoing Class D account maintenance fees will cause Class D
shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class A shares.
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 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 which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
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 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
25
<PAGE>
Select Pricing 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 certain 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. 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 are met. In addition, Class A shares of
the Fund and certain other Select Pricing Funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions 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 Select Pricing Funds.
CLASS A AND CLASS D SALES CHARGE INFORMATION
<TABLE>
<CAPTION>
CLASS A SHARES
- ---------------------------------------------------------------------------------------------------------------
For the Fiscal Gross Sales Sales Charges Sales Charges CDSCs Received on
Year Ended December Charges Retained by Paid to Redemption of
31, Collected Distributor Merrill Lynch Load-Waived Shares
- --------------------- ----------------- ------------------- ----------------- -----------------------------
<S> <C> <C> <C> <C>
1998 $ 786 $ 37 $ 749 $ 0
1997 $ 2,183 $ 146 $ 2,037 0
1996 $ 4,396 $ 322 $ 4,074 0
</TABLE>
<TABLE>
<CAPTION>
CLASS D SHARES
- -----------------------------------------------------------------------------------------------------
For the Fiscal Gross Sales Sales Charges Sales Charges CDSCs Received on
Year Ended Charges Retained by Paid to Redemption of
December 31, Collected Distributor Merrill Lynch Load-Waived Shares
- --------------------- --------------- ----------------- ----------------- -----------------------
<S> <C> <C> <C> <C>
1998 $ 226,542 $ 16,437 $ 210,105 $ 58,953
1997 $ 208,084 $ 14,111 $ 193,973 0
1996 $ 940,709 $ 64,419 $ 876,291 0
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
REDUCED INITIAL SALES CHARGES
REINVESTED DIVIDENDS AND CAPITAL GAINS. 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.
RIGHT OF ACCUMULATION. 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 any other Select Pricing 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. 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
26
<PAGE>
pension, profit-sharing or other employee benefit plans may not be combined with
other shares to qualify for the right of accumulation.
LETTER OF INTENT. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent is not a binding obligation to purchase any amount of Class A
or Class D shares; however, 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 Intent may be included under a
subsequent Letter of Intent 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 Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, may be included as
a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intent (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 at least 5.0% 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
Intent must be at least 5.0% 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 further reduced percentage
sales charge that would be applicable to a single purchase equal to the total
dollar value of the Class A or Class D shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charge 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 Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
TMA-SM- MANAGED TRUSTS. Class A shares are offered at net asset value to
TMA-SM- Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
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 investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
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.
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.
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
27
<PAGE>
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. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund's suitability
standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that 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
shares 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 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 that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and, second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that 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 shares of such
other mutual fund and that 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.
CLOSED-END FUND INVESTMENT OPTION. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM 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 buy
Class A shares) or Class D shares of the Fund and other Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible 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
28
<PAGE>
Fund. Upon exercise of this investment option, shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. will receive Class A shares of the Fund and
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund,
except that shareholders already owning Class A shares of the Fund will be
eligible to purchase additional Class A shares pursuant to this option, if such
additional Class A shares will be held in the same account as the existing Class
A shares and the other requirements pertaining to the reinvestment privilege are
met. In order to exercise this investment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each
as defined in the eligible fund's prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this investment option will
be accepted only on the day that the related tender offer terminates and will be
effected at the net asset value of the designated class of the Fund on such day.
ACQUISITION OF CERTAIN INVESTMENT COMPANIES. The public offering price of
Class D shares 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 personal holding company or 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, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
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 Select Pricing 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. See "Pricing of Shares -- Determination of Net Asset Value" below.
Because no initial sales charges are deducted at the time of the 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 that do not qualify for
the 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
29
<PAGE>
after a conversion period of approximately eight years, and thereafter investors
will be subject to lower ongoing fees.
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. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. 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. 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. 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.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------------------------------------------ ---------------------
<S> <C>
0-1..................................................................... 4.0%
1-2..................................................................... 3.0%
2-3..................................................................... 2.0%
3-4..................................................................... 1.0%
4 and thereafter........................................................ None
</TABLE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon 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 charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC may be 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
(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, or, if later, reasonably promptly following
completion of probate. The Class B CDSC may also be waived on redemptions of
shares by certain eligible 401(a) and eligible 401(k) plans. The CDSC also may
be 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.
The Class B CDSC may be waived for any Class B shares that were acquired and
held at the time of the redemption in an Employee Access-SM- Account available
through employers providing eligible 401(k) plans. The Class B CDSC also may be
waived for any Class B shares that are purchased by a Merrill Lynch rollover IRA
that was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group and held in such account at the time of redemption. The
Class B CDSC may be waived or its terms may be modified in connection with
certain fee-based programs. The Class B CDSC may also be waived in connection
with involuntary termination of an account in which Fund shares are held
30
<PAGE>
or for withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee-Based Programs" and "-- Systematic Withdrawal
Plan."
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER
ARRANGEMENTS. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the CDSC
upon redemption, 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. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing 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.
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 value 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 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 the 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.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing 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 on to the holding period
for the shares acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
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.
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.
CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. 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
31
<PAGE>
possible rate being charged. 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. 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. The Class C CDSC may be waived in connection with certain
fee-based programs, involuntary termination of an account in which Fund shares
are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
See "Shareholder Services -- Fee-Based Programs."
CLASS B AND CLASS C SALES CHARGE INFORMATION
<TABLE>
<CAPTION>
CLASS B SHARES*
- ----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended December 31, by Distributor Merrill Lynch
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
1998 $ 621,859 $ 621,859
1997 $ 2,701,166 $ 2,701,166
1996 $ 2,026,515 $ 2,026,515
</TABLE>
* Additional Class B CDSCs payable to the Distributor
with respect to the fiscal years ended December 31,
1997 and 1998 may have been waived or converted to a
contingent obligation in connection with a
shareholder's participation in certain fee-based
programs.
<TABLE>
<CAPTION>
CLASS C SHARES
- ----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended December 31, by Distributor Merrill Lynch
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
1998 $ 54,446 $ 54,446
1997 $ 64,200 $ 64,200
1996 $ 71,125 $ 71,125
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in whole
or in part by the Distributor to defray the expenses of dealers (including
Merrill Lynch) related to providing distribution-related services to the Fund in
connection with the sale of the Class B and Class C shares, such as the payment
of compensation to financial consultants for selling Class B and Class C shares
from the dealer's 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.
See "Distribution Plans" below. 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.
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" 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.
The Distribution Plans for Class B, Class C and Class D shares each provides
that the Fund pay the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid
32
<PAGE>
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 with respect to Class B, Class C and Class D
shares. Each of those classes has exclusive voting rights with respect to the
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).
The Distribution Plans for Class B and Class C shares each provides that the
Fund also pay 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. 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 each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
Independent Directors shall be committed to the discretion of the Independent
Directors then in office. In approving each Distribution Plan in accordance with
Rule 12b-1, the Independent Directors concluded that there is reasonable
likelihood that each 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 shareholders and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in an easily
accessible place.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. 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 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.
33
<PAGE>
As of December 31, 1998, the fully allocated accrual revenues of the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded the fully allocated accrual expenses by
approximately $ ( % of Class B net assets at that date). As of December
31, 1998, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $37,869,145
(18.31% of Class B net assets at that date). As of December 31, 1998, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for the
period since the commencement of operations of Class C shares exceeded the fully
allocated accrual revenues by approximately $ ( % of Class C net assets
at that date). As of December 31, 1998, direct cash revenues for the period
since the commencement of operations of Class C shares exceeded direct cash
expenses by $1,024,915 (6.64% of Class C net assets at that date).
For the fiscal year ended December 31, 1998, the Fund paid the Distributor
$ pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $ million),
all of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended December 31, 1998, the Fund paid the Distributor
$ pursuant to the Class C Distribution Plan (based on average daily net
assets subject to such Class C Distribution Plan of approximately $ 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, 1998, the Fund paid the Distributor $
pursuant to the Class D Distribution Plan (based on average daily net assets
subject to such Class D Distribution Plan of approximately $ million), all of
which was paid to Merrill Lynch for providing account maintenance activities in
connection with 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 fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any CDSCs will be paid
to the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of December 31,
1998 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made
34
<PAGE>
under the NASD maximum sales charge rule and, with respect to the Class B
shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE DISTRIBUTION
ALLOWABLE INTEREST AMOUNTS FEE AT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGE(2) BALANCE(3) PAYABLE DISTRIBUTOR(4) BALANCE LEVEL(5)
----------- ------------ -------- -------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD MAY
29, 1992 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1998
Under NASD Rule as Adopted......... $ 1,198,068 $74,239 $22,655 $96,894 $46,853 $50,041 $ 1,551
Under Distributor's Voluntary
Waiver........................... $ 1,198,068 $74,239 $ 6,631 $80,870 $46,853 $34,017 $ 1,551
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1998
Under NASD Rule as Adopted......... $ 106,450 $5,850 $ 1,507 $ 7,357 $ 1,247 $ 6,110 $ 116
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund").
Upon such an exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund
into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as
reported in THE WALL STREET JOURNAL, plus 1.0%, as permitted under the NASD
Rule.
(4) 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 "What
are the Fund's fees and expenses?" in the Prospectus. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior to
the expiration of the applicable CDSC period and invested the proceeds,
without the imposition of a sales charge, in Class A shares in conjunction
with the shareholder's participation in the Merrill Lynch Mutual Fund
Advisor (Merrill Lynch MFA-SM-) Program (the "MFA Program"). The CDSC is
booked as a contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program.
(5) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum (with respect to Class B shares) or
the NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
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 that 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 right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Commission as a result
of which disposal of portfolio securities or determination of the net asset
value of the Fund is not reasonably practicable, and for such other periods as
the Commission may by order permit for the protection of shareholders of the
Fund.
35
<PAGE>
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities held
by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
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. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption requests must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payments 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 United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (E.G., cash, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to fifteen minutes after
the regular close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time), and such request is received by the Fund from such dealer
not later than 30 minutes after the close of business on the NYSE on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE, in
order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that 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 $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent on
accounts held at 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 adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem Fund shares as set forth above.
36
<PAGE>
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of the Fund
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.
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of 15 minutes after the close of business on
the NYSE on each day the NYSE is open for trading. The NYSE generally closes at
4:00 p.m., Eastern time. 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 NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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, rounded to the nearest cent.
Expenses, including the fees payable to the Manager and Distributor, 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 the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of 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 for long positions, and
at the last available ask price for short positions. 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 Trustees as the primary market. Long
positions in 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. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Short positions in securities traded in the OTC market are valued at the
last available ask price in the OTC market prior to the time of valuation. 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
37
<PAGE>
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 financial
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the
Directors of the Fund. Such valuations and procedures will be reviewed
periodically by the Directors.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that may not be reflected in the computation of the Fund's net asset value.
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 and number of shares outstanding on December 31, 1998 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Assets............................................... $ $ $ $
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Number of Shares Outstanding.............................
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net Asset Value Per Share (net assets divided by number
of shares outstanding)................................. $ $ $ $
Sales Charge (for Class A and Class D shares: 5.25% of
offering price; 5.54% of net asset value per share)*... ** **
------------ ------------ ------------ ------------
Offering Price........................................... $ $ $ $
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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 --
Contingent Deferred Sales Charges -- Class B Shares" and "-- Contingent
Deferred Sales Charges -- Class C Shares" herein.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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
38
<PAGE>
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.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
AGGREGATE BROKERAGE COMMISSIONS PAID
FISCAL YEAR ENDED DECEMBER 31, COMMISSIONS PAID TO MERRILL LYNCH
- ------------------------------------------------------ ------------------- -----------------
<S> <C> <C>
1998.................................................. $ $
1997.................................................. $ 4,424,209 $ 198,625
1996.................................................. $ 4,116,501 $ 307,021
</TABLE>
For the fiscal year ended December 31, 1998, the brokerage commissions paid
to Merrill Lynch represented % of the aggregate brokerage commissions paid
and involved % of the Fund's dollar amount of transactions involving payment
of commissions during the year.
The Fund invests in certain securities traded in the over-the-counter market
and, where possible, deals directly with the dealers who make a market in the
securities involved, except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with such persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Commission. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principal for their own accounts,
affiliated persons of the Fund, including Merrill Lynch and any of its
affiliates, will not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, the Fund may
not purchase securities during the existence of any underwriting syndicate for
such securities of which Merrill Lynch is a member or in a private placement in
which Merrill Lynch serves as placement agent except pursuant to procedures
adopted by the Board of Directors of the Fund that either comply with rules
adopted by the Commission or with interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Directors have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Directors will
reconsider this matter from time to time.
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
39
<PAGE>
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 Exchange Act 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
setting forth 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. Securities may be held by, or be appropriate investments for, the Fund
as well as other funds or investment advisory clients of the Manager or FAM.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Manager or an affiliate when one or
more clients of the Manager or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for which the Manager
or an affiliate acts as Manager, 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 an affiliate 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans 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, by
calling the telephone number on the cover page hereof, 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 capital gain distributions. The statements will also show any other activity
in the account since the preceding statement. Shareholders will also receive
separate confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gains distributions. A shareholder with an account held at the
Transfer Agent may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D
40
<PAGE>
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 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 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 in the new brokerage firm's name.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
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. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
EXCHANGES OF CLASS A AND CLASS D SHARES. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing 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 Select
Pricing 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 Select Pricing 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 D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
Class A shares of Summit ("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 charges 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 or 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 generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
EXCHANGES OF CLASS B AND CLASS C SHARES. Each Select Pricing Fund with
Class B or 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 Select Pricing Fund or for Class B shares of Summit
41
<PAGE>
("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 or Class C shares of the fund from which the
exchange has been made. For purposes of computing the CDSC 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 shares. For example, an investor may exchange Class B or Class C
shares of the Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special
Value Fund") after having held the Fund's 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.
EXCHANGES FOR SHARES OF A MONEY MARKET FUND. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other money market funds and subsequently
wish to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if any. The holding
period for the money market fund shares will not count toward satisfaction of
the holding period requirement for reduction of the CDSC imposed on such shares,
if any, and, with respect to Class B shares, toward satisfaction of the
Conversion Period. However, the holding period for Class B or Class C shares
received in exchange for such money market fund shares will be aggregated with
the holding period for the original shares for purposes of reducing the CDSC or
satisfying the Conversion Period.
EXCHANGES BY PARTICIPANTS IN THE MFA PROGRAM. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA program, I.E., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified
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with respect to purchases of Class A and Class D shares by non-retirement plan
investors under the MFA program. First, the initial allocation of assets is made
under the MFA program. Then, any subsequent exchange under the MFA program of
Class A or Class D shares of a Select Pricing Fund for Class A or Class D shares
of the Fund will be made solely on the basis of the relative net asset values of
the shares being exchanged. Therefore, there will not be a charge for any
difference between the sales charge previously paid on the shares of the other
Select Pricing Fund and the sales charge payable on the shares of the Fund being
acquired in the exchange under the MFA program.
EXERCISE OF THE EXCHANGE PRIVILEGE. 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 to the general
public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be made. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
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 the Transfer Agent at
(1-800-MER-FUND) or 1-(800)-637-3863.
RETIREMENT PLANS
Individual retirement accounts and other retirement plans are available from
Merrill Lynch. Under these plans, investments may be made in the Fund and
certain of the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these plans is
available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100, and the minimum subsequent purchase is $1.
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) or
Class B, Class C or Class D shares at the applicable
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public offering price. These purchases may be made either through the
shareholder's securities dealer, or by mail directly to the Transfer Agent,
acting as agent for such securities dealer. Voluntary accumulation also can be
made through a service known as the Fund's Automatic Investment Plan. The Fund
would be authorized, on a regular basis, to provide systematic additions to the
Investment Account of such shareholder through charges of $50 or more to the
regular bank account of the shareholder by either pre-authorized checks or
automated clearing house debits. For investors who buy shares of the Fund
through Blueprint, no minimum charge to the investor's bank account is required.
Alternatively, an investor that maintains a CMA-Registered Trademark- or
CBA-Registered Trademark- account may arrange to have periodic investments made
in the Fund of amounts of $100 or more ($1 or more for retirement accounts) or
more through the CMA-Registered Trademark- or CBA-Registered Trademark-
Automated Investment Program.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in additional
full and fractional 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
monthly payment date for such dividends. No CDSC will be imposed upon redemption
of shares issued as a result of the automatic reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends paid in cash, rather
than reinvested in shares of the Fund or vice versa (provided that, in the event
that a payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares). Commencing ten
days after the receipt by the Transfer Agent of such notice, those instructions
will be effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend checks. Cash payments can also be directly
deposited to the shareholder's bank account.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
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
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient 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 the dollar amount and
the class of shares to be redeemed. With respect to shareholders who hold
accounts directly at the Transfer Agent, redemptions will be made at net asset
value as determined 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. With respect to
shareholders who hold accounts with their broker-dealer, redemptions will be
made at net asset value as determined 15 minutes after the close of business on
the NYSE (generally, 4:00 p.m., New York time) on the first, second, third, or
fourth Monday of each month or the first, second, third, or fourth Monday of the
last month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the close of business on
the following business day. The check for 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 shares in the
Investment Account are reinvested automatically in Fund shares. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
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With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares." Where the
systematic withdrawal plan is applied to Class B shares, upon conversion of the
last Class B shares in an account to Class D shares, the systematic withdrawal
plan will be applied thereafter to Class D shares if the shareholder so elects.
If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
Withdrawal payments should not be considered as dividends. 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 shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of the Fund from
investors that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Automatic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a
CMA-Registered Trademark-, CBA-Registered Trademark- Account or Retirement
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA-Registered Trademark- or
CBA-Registered Trademark- Systematic Redemption Program. The minimum fixed
dollar amount redeemable is $50. The proceeds of systematic redemptions will be
posted to the shareholder's account three business days after the date the
shares are redeemed. All redemptions are made at net asset value. A shareholder
may elect to have his or her shares redeemed on the first, second, third or
fourth Monday of each month, in the case of monthly redemptions, or of every
other month, in the case of bimonthly redemptions. For quarterly, semiannual or
annual redemptions, the shareholder may select the month in which the shares are
to be redeemed and may designate whether the redemption is to be made on the
first, second, third or fourth Monday of the month. If the Monday selected is
not a business day, the redemption will be processed at net asset value on the
next business day. The CMA-Registered Trademark- or CBA-Registered Trademark-
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automated Investment Program. For
more information on the CMA-Registered Trademark- or CBA-Registered Trademark-
Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch Financial Consultant.
DIVIDENDS AND TAXES
DIVIDENDS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such investment income are paid at least annually. All
net realized capital gains, if any, are distributed to the Fund's shareholders
at least annually. Premiums from expired call options written by the Fund and
net gains from closing purchase transactions are treated as short-term capital
gains for Federal income tax purposes. Shareholders may elect in writing to
receive any such dividends in cash. See "Shareholder Services -- Automatic
Dividend Reinvestment Plan" for information concerning the manner in which
dividends may be reinvested automatically in shares of the Fund. Dividends are
taxable to shareholders, as described below, whether they are invested in shares
of the Fund or received in cash. The per share dividends on Class B and Class C
shares will be lower than the per share dividends on Class A and Class D shares
as a result of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B and Class C shares; similarly, the
per share dividends on Class D shares will be lower than the per share dividends
on Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Pricing of Shares -- Determination of Net
Asset Value."
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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 the Fund 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 that 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.
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.
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 warrants, futures and options) ("capital gain dividends") are
taxable to shareholders as long-term 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 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). Certain categories of capital gains are
taxable at different rates. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a written notice
designating the amount of any capital gain dividends, as well as any amount of
capital gain dividends in the different categories of capital gain referred to
above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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 that 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.
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
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
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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.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States 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 applicability of the United States 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 United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States 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. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend paid by the Fund only if the shareholder meets
certain holding period requirements. The Fund also must meet these holding
period requirements, and if the Fund fails to do so, it will not be able to
"pass through" to shareholders the ability to claim a credit or deduction for
the related foreign taxes paid by the Fund. If the Fund satisfies the holding
period requirements and more than 50% in value of its 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 United States
income tax returns as gross income, treat such proportionate shares as taxes
paid by them, and deduct such proportionate shares in computing in their taxable
incomes or, alternatively, use them as foreign tax credits against their United
States income taxes. No deductions for foreign taxes, moreover, 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
United States withholding taxes 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 United States 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 and other information needed to claim
the foreign tax credit. 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 the 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.
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 in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as described in the Prospectus and in this
Statement of Additional Information. Some of these high yield 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 securities may
be treated as dividends for Federal income tax purposes; in such case, if the
issuer of such high yield 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.
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The Fund may invest up to 10% of its total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (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 recent legislation, the Fund
could 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 over their adjusted
basis and as ordinary loss any decrease in such value to the extent it did not
exceed prior increases. By making the mark-to-market election, the Fund could
avoid imposition of the interest charge with respect to 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.
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 exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
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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 future 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 such 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 countries in which the Fund intends to invest. No such
regulations have been issued.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
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 investment in the Fund.
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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 formulas 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 for various periods other than those
noted below. Such data will be computed as described above, except that (1) as
required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted 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 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 a longer period of time. 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" 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 take into account the
waiver of the CDSC and therefore may reflect greater total return since, due to
the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted. The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select Pricing-SM- System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated
50
<PAGE>
Class D shares, and historical performance data pertaining to such shares is
provided below under the caption "Class D."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended December 31, 1998........ % $ % $
Five Years Ended December 31, 1998...... -- -- % $
Inception (October 21, 1994) to December
31, 1998.............................. % $ -- --
Inception (May 29, 1992) to December 31,
1998.................................. -- -- % $
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended December 31,
1998.................................... % $ % $
1997.................................... (40.77)% $ 592.30 (41.40)% $ 586.00
1996.................................... 13.59% $1,135.90 12.41% 1,124.10
1995.................................... 7.44% $1,074.40 6.49% $1,064.90
1994.................................... -- -- (17.86)% $ 821.40
Inception (October 21, 1994) to December
31, 1994.............................. (10.82)% $ 891.80 -- --
1993.................................... -- -- 86.15% $1,861.50
Inception (May 29, 1992) to December 31,
1992.................................. -- -- 1.50% $1,015.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994) to December
31, 1998.............................. % $
Inception (May 29, 1992) to December 31,
1998.................................. -- -- % $
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------ ------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended December 31, 1998........ % $ % $
Five Years Ended
December 31, 1998..................... -- -- % $
Inception (October 21, 1994) to December
31, 1998.............................. % $ -- --
Inception (May 29, 1992) to
December 31, 1998..................... -- -- % $
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended December 31,
1998.................................... % $ % $
1997.................................... (41.38)% $ 586.20 (40.89)% $ 591.10
1996.................................... 12.43% $1,124.30 13.29% $1,132.90
1995.................................... 6.46% $1,064.60 7.35% $1,073.50
1994.................................... -- -- (17.24)% $ 827.60
Inception (October 21, 1994) to December
31, 1994.............................. (10.98)% $ 890.20 -- --
1993.................................... -- -- 87.46% $1,874.60
Inception (May 29, 1992) to December 31,
1992.................................. -- -- 2.02% $1,020.20
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994) to December
31, 1998.............................. % $ -- --
Inception (May 29, 1992) to December 31,
1998.................................. -- -- % $
</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"
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. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future 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.
52
<PAGE>
On occasion, the Fund may compare its performance to the MSCI All Country
Far East Free Ex-Japan Index, the MSCI All Country Far East Free Ex-Japan
Composite Index, the Standard & Poor's Composite 500 Index, the Dow Jones
Industrial Average, or to performance data published by Lipper Analytical
Services, Inc., Morningstar Publications, Inc. ("Morningstar"), CDA Investment
Technology, Inc., MONEY MAGAZINE, U.S. NEWS & WORLD REPORT, BUSINESS WEEK,
FORBES MAGAZINE, FORTUNE MAGAZINE or other industry publications. When comparing
its performance to a market index, the Fund may refer to various statistical
measures derived from the historic performance of the Fund and the index such as
standard deviation and beta. In addition, from time to time the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements 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.
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.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested 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
(the "Custodian"), acts as custodian of the Fund's assets. 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
53
<PAGE>
held in its offices outside the U.S. and with certain foreign banks and
securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's 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 "How to Buy, Sell,
Transfer and Exchange Shares -- Through the Transfer Agent" in the Prospectus.
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.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, 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 ML & Co., under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of any class of the Fund's shares as of April , 1999.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
54
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in "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 sometime 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 the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated "Caa" are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
DESCRIPTION OF SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
A-1
<PAGE>
Moody's makes no representation that rated bank or insurance company obligations
are exempt from registration under the Securities Act of 1933 or issued in
conformity with any other applicable law or regulation. Nor does Moody's
represent that any specific bank or insurance company obligation is legally
enforceable or a valid senior obligation of a rated issuer. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment ability of rated issuers:
PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a
superior abiity for repayment of senior short-term debt 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.
PRIME-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt 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.
PRIME-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term 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.
NOT PRIME. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names of
such suporting entity or entities are listed within the parenthesis beneath the
name of the issuer, or there is a footnote referring the reader to another page
for the name or names of the suporting 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.
Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighed solely as one factor in
an investment decision and you should make your own study and evaluation of any
issuer whose securities or debt obligations you consider buying or selling.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of our familiar bond rating symbols is used in the quality ranking of
preferred stock. 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.
A-2
<PAGE>
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
aa An issue which is rated "aa" is considered to be a high-grade preferred stock. This
rating indicates that there is a 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 dividends 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
thus be regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issuer ranks in the lower end of its
generic rating category.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current opinion
of the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, 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 obligor or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform any 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.
A-3
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
<TABLE>
<S> <C>
I. Likelihood of payment--capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. 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. The obligor's
capacity to meet its financial commitment on the obligation is extremely strong.
AA Debt rated "AA" differs from the highest rated obligations only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the obligation is still
strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the obligation.
Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having significant
speculative characteristics. "BB" indicates the least degree of speculation and "C"
the highest. While such debt will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major exposures to
adverse conditions.
BB Debt rated "BB" is less vulnerable to non-payment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B Debt rated "B" is more vulnerable to non-payment than obligations rated "BB", but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitments on the
obligation.
CCC Debt rated "CCC" is currently vulnerable to non-payment, and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation. In the event of adverse business, financial,
or economic conditions, the obligator is not likely to have the capacity to meet its
financial commitment on the obligation.
CC The rating "CC" is currently highly vulnerable to non-payment.
C The "C" rating may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken, but payments on this obligation are being
continued.
D The "D" rating, unlike other ratings, is not prospective; rather, it is used only
where a default has actually occurred--and not where a default is only expected.
Standard & Poor's changes ratings to "D" either:
- On the day an interest and/or principal payment is due and is not paid. An
exception is made if there is a grace period and Standard & Poor's believes that
a payment will be made, in which case the rating can be maintained; or
</TABLE>
A-4
<PAGE>
<TABLE>
<S> <C>
- Upon voluntary bankruptcy filing or similar action. An exception is made if
Standard & Poor's expects that debt service payments will continue to be made on
a specific issue. In the absence of a payment default or bankruptcy filing, a
technical default (I.E., covenant violation) is not sufficient for assigning a
"D" rating.
An issuer credit rating (also known as a corporate credit rating, counterparty credit
rating, natural rating, senior implied rating, or default risk rating) is changed to
"N.M." (for "not meaningful") upon:
- The first occurrence of a payment default on any financial obligation, rated or
unrated, other than a financial obligation subject to a bona fide commercial
dispute. (In this context, preferred stock is not considered to be a financial
obligation. Thus, a missed preferred stock dividend does not necessarily mean
that the issuer credit rating is changed to "N.M.");
- A voluntary bankruptcy filing by the issuer, or similar action--even if the
issuer continues debt service payments on some financial obligations; or
- Seizure of a rated bank by a regulator or placement of an insurer under
regulatory supervision owing to its financial condition. Such regulatory actions
imply substantial uncertainty about the issuer's ability to continue meeting
financial obligations. (An issuer's claims-paying ability rating would go to
"R" if the issuer were placed under regulatory supervision because of its
financial condition.)
</TABLE>
PLUS (+) or MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
N.R. indicates 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. Also, the laws
of various states governing legal investment impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries in general.
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 having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 A short-term obligation rated "A-1" is rated in the highest category by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
</TABLE>
A-5
<PAGE>
<TABLE>
<S> <C>
A-3 A short-term obligation rated "A-3" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated "B" is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties which
could lead to the obligor's inadequate capacity to meet its financial commitment on
the obligation.
C A short-term obligation rated "C" is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the obligor
to meet its financial commitment on the obligation.
D Debt rated "D" is in payment default. The "D" rating category is used when interest
payments or principal payments are not made on the date due, even if the applicable
grace period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained by Standard & Poor's from other
sources it considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information or based on other
circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which 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.
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.
The ratings are based on the following considerations:
<TABLE>
<S> <C>
I. Likelihood of payment-capacity and willingness of the issuer to meet the timely
payment of preferred stock dividends and any applicable sinking fund requirements in
accordance with the terms of the obligation;
II. Nature of, and provisions of, the issue;
III. Relative position of the issue in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
</TABLE>
A-6
<PAGE>
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue rated AA also qualifies as a high-quality, fixed-income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate capacity to pay the preferred
stock obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this category than for
issues in the A category.
BB Preferred stock rated BB, B and CCC are regarded, on balance, as predominantly
B speculative with respect to the issuer's capacity to pay preferred stock obligations.
CCC BB indicates the lowest degree of speculation and CCC the highest. 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 that is in arrears on dividends
or sinking fund payments, but that is currently paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in default on debt
instruments.
N.R. This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
</TABLE>
PLUS (+) or MINUS (-): To provide more detailed indications of preferred
stock quality, 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-7
<PAGE>
CODE #16260-04-99
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----
<C> <S>
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 -- 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)
4(a) -- Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P.(b)
(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 Fund Asset Management, L.P. and Merrill
Lynch Asset Management U.K. Limited.(e)
5(a) -- Form of Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(a)
(b) -- Form of Class B Shares Distribution Agreement between the Registrant
and the Distributor(a)
(c) -- Letter Agreement between the Registrant and Princeton Funds
Distributor, Inc. (formerly known as Merrill Lynch Funds Distributor,
Inc.) (the "Distributor") with respect to the Merrill Lynch Mutual Fund
Adviser Program.(d)
(d) -- Form of Class C Shares Distribution Agreement between the Registrant
and the Distributor(a)
(e) -- Form of Class D Shares Distribution Agreement between the Registrant
and the Distributor(a)
6 -- None.
7 -- Custody Agreement between the Registrant and Brown Brothers Harriman &
Co.(a)
8(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between the Registrant and Financial Data Services,
Inc.(a)
(b) -- License Agreement relating to the use of name between the Registrant
and Merrill Lynch & Co., Inc.(a)
9 -- Opinion of Brown & Wood LLP, counsel to the Registrant.(g)
10 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch Asset Management, L.P.(a)
13(a) -- Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
(b) -- Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
(c) -- Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
14(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----
<C> <S>
(d) -- Financial Data Schedule for Class D Shares.
15 -- Merrill Lynch Select Pricing-SM- System Plan Pursuant to Rule 18f-3.(f)
</TABLE>
- ------------------------
(a) Filed on April 27, 1995, as an Exhibit to Post-Effective Amendment No. 5 to
the 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) Filed on April 28, 1997, as an Exhibit to Post-Effective Amendment No. 7 to
the Registration Statement.
(f) 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).
(g) Previously filed as an Exhibit to the Registration Statement.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 25. 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 Class A, Class B, Class C
and Class D Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, 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) advances may be made only on
receipt of a written affirmation of such person's good faith belief that the
standard of conduct necessary for indemnification has been met and a written
undertaking to repay any such advance if it is ultimately determined that the
standard of conduct has not been met; and (ii) (a) such promise must be secured
by a security for the undertaking in form and amount acceptable to the
Registrant, (b) the Registrant is insured against losses arising by receipt by
the advance, or (c) 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 at the time the
advance is proposed to be made, there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
C-2
<PAGE>
In Section 9 of the Class A, Class B, Class C and Class D Shares
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 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager"), acts as the
investment adviser for the following open-end registered 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 Convertible 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
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology 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 Real Estate Fund, Inc., 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 Hotchkis and Wiley funds
(advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisor Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Governmental 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 Corporate High
Yield 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 registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield
C-3
<PAGE>
Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt
Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida
Insured Fund III, MuniHoldings Florida Insured Fund IV, MuniHoldings Insured
Fund, Inc., MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings
New Jersey Insured Fund III, Inc., MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured Fund II,
Inc., MuniHoldings New York Insured Fund III, 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. and Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665. The
address of FAM, MLAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. ("Princeton Administrators") is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributer ("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 10281-1201. The address of the Fund's transfer agent, Financial
Data Services, Inc. ("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
January 1, 1997 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is
Executive Vice President and Mr. Burke is Vice President and Treasurer of all or
substantially all of the investment companies described in the first two
paragraphs of this Item 26, and Messrs. Giordano, Harvey and Monagle are
officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
<S> <C> <C>
ML & Co............................. Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services.................. General Partner General Partner of FAM
Arthur Zeikel....................... Chairman Chairman of FAM; President of FAM and MLAM
from 1977 to 1997; Chairman and Director of
Princeton Services; President of Princeton
Services from 1993 to 1997; Executive Vice
President of ML & Co.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
<S> <C> <C>
Jeffrey M. Peek..................... President President of FAM; President and Director of
Princeton Services; Executive Vice President
of ML & Co.; Managing Director and Co-Head of
the Investment Banking Division of Merrill
Lynch in 1997; Senior Vice President and
Director of the Global Securities and
Economics Division of Merrill Lynch from 1995
to 1997
Terry K. Glenn...................... Executive Vice President Executive Vice President of FAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators
Donald C. Burke..................... Senior Vice President, Senior Vice President and Treasurer of FAM;
Treasurer and Director of Senior Vice President and Treasurer of
Taxation Princeton Services; Vice President of PFD;
First Vice President of the Manager from 1997
to 1999; Vice President of the Manager from
1990 to 1997
Michael G. Clark.................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Treasurer
and Director of PFD; First Vice President of
the Manager from 1997 to 1999; Vice President
of the Manager from 1996 to 1997
Mark A. DeSario..................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Linda L. Federici................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Vincent R. Giordano................. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin................ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Norman R. Harvey.................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel.............. Senior Vice President, Senior Vice President, Secretary and General
Secretary and General Counsel of FAM; Senior Vice President of
Counsel Princeton Services
Philip L. Kirstein.................. Senior Vice President Senior Vice President of FAM; Senior Vice
President, General Counsel, Director and
Secretary of Princeton Services
Ronald M. Kloss..................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Debra W. Landsman-Yaros............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Vice
President of PFD
Stephen M. M. Miller................ Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President of
Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
<S> <C> <C>
Joseph T. Monagle, Jr............... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Brian A. Murdock.................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Gregory D. Upah..................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
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., Corporate High Yield Fund
III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt
Strategies Fund III, 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 Convertible Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology 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 Real Estate Fund, Inc., Merrill Lynch Series Fund,
Inc., Merrill Lynch Senior Floating Rate 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 Fund, Inc., Merrill
Lynch World Income Fund, Inc., The Corporate Fund Accumulation Program, Inc.,
The Municipal Fund Accumulation Program, Inc. and Worldwide DollarVest Fund,
Inc. The address of each of these registered 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,
1997, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel and Albert are officers of one
or more of the registered investment companies listed in the first two
paragraphs of this Item 26:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ -------------------------------- -----------------------------------------
<S> <C> <C>
Arthur Zeikel....................... Director and Chairman Chairman of FAM and MLAM; President of
FAM and MLAM from 1977 to 1997; Chairman
and Director of Princeton Services;
President of Princeton Services from 1993
to 1997; Executive Vice President of ML &
Co.
Alan J. Albert...................... Senior Managing Director Vice President of MLAM
Nicholas C.D. Hall.................. Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Carol Ann Langham................... Company Secretary None
Debra Anne Searle................... Assistant Company Secretary None
</TABLE>
C-6
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies referred
to in the first two paragraphs of Item 26 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 registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081, except
that the address of Messrs. Breen, Crook, Fatseas and Wasel is One Financial
Center, 23rd Floor, Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) WITH POSITION(S) AND OFFICE(S) WITH
NAME PFD REGISTRANT
- --------------------------------------------- -------------------------------- --------------------------------
<S> <C> <C>
Terry K. Glenn............................... President and Director Executive Vice President
Michael G. Clark............................. Treasurer and Director None
Thomas J. Verage............................. Director None
Robert W. Crook.............................. Senior Vice President None
Michael J. Brady............................. Vice President None
William M. Breen............................. Vice President None
Donald C. Burke.............................. Vice President Vice President and Treasurer
James T. Fatseas............................. Vice President None
Debra W. Landsman-Yaros...................... Vice President None
Michelle T. Lau.............................. Vice President None
Salvatore Venezia............................ Vice President None
William Wasel................................ Vice President None
Robert Harris................................ Secretary None
</TABLE>
(c) Not applicable.
ITEM 28. 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, Financial Data Services, Inc. (4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484).
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund -- Merrill
Lynch Asset Management" 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 30. UNDERTAKINGS.
Not applicable.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 26th day of February, 1999.
MERRILL LYNCH DRAGON FUND, INC.
(Registrant)
By: /s/ TERRY K. GLENN
-----------------------------------------
(Terry K. Glenn, Executive Vice President)
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following persons in the capacities and
on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
ARTHUR ZEIKEL* President and Director
- ------------------------------ (Principal Executive
(Arthur Zeikel) Officer)
Vice President and
DONALD C. BURKE* Treasurer
- ------------------------------ (Principal Financial and
(Donald C. Burke) Accounting Officer)
DONALD CECIL*
- ------------------------------ Director
(Donald Cecil)
ROLAND M. MACHOLD*
- ------------------------------ Director
(Roland M. Machold)
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)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ TERRY K. GLENN
-------------------------
(Terry K. Glenn, February 26, 1999
Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of each of the Maryland corporations listed
below and a trustee of each of the Massachusetts business trusts listed below,
hereby authorizes Arthur Zeikel, Terry K. Glenn, Donald C. Burke, Barbara G.
Fraser, Phillip S. Gillespie, Robert Harris, Philip M. Mandel, Ira P. Shapiro or
Michael J. Hennewinkel, or any of them, as attorney-in-fact, to sign on his
behalf any amendments to the Registration Statement for each of the following
registered investment companies and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission: Merrill Lynch Americas Income Fund,
Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.; Merrill Lynch Dragon
Fund, Inc,; Merrill Lynch Emerging Tigers Fund, Inc.; Merrill Lynch EuroFund;
Merrill Lynch Global Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for
Investment and Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch
Global SmallCap Fund, Inc.; Merrill Lynch Global Technology Fund, Inc.; Merrill
Lynch Global Value Fund, Inc.; Merrill Lynch Healthcare Fund, Inc.; Merrill
Lynch International Equity Fund; Merrill Lynch Latin America Fund, Inc.; Merrill
Lynch Middle East/Africa Fund, Inc.; Merrill Lynch Pacific Fund, Inc.; Merrill
Lynch Short-Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.;
and Worldwide DollarVest Fund, Inc.
Dated: January 21, 1999
/s/ DONALD CECIL
------------------------------------------
(Donald Cecil)
/s/ ROLAND M. MACHOLD
------------------------------------------
(Roland M. Machold)
/s/ EDWARD H. MEYER
------------------------------------------
(Edward H. Meyer)
/s/ CHARLES C. REILLY
------------------------------------------
(Charles C. Reilly)
/s/ RICHARD B. WEST
------------------------------------------
(Richard B. West)
/s/ ARTHUR ZEIKEL
------------------------------------------
(Arthur Zeikel)
/s/ EDWARD D. ZINBARG
------------------------------------------
(Edward D. Zinbarg)
C-9
<PAGE>
POWER OF ATTORNEY
The undersigned, the Vice President and Treasurer of each of the registered
investment companies listed below, hereby authorizes Arthur Zeikel, Terry K.
Glenn, Barbara G. Fraser, Phillip S. Gillespie, Robert Harris, Philip M. Mandel,
Ira P. Shapiro or Michael J. Hennewinkel, or any of them, as attorney-in-fact,
to sign on his behalf any amendments to the Registration Statement for each of
the following registered investment companies and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission: Merrill Lynch
Americas Income Fund, Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.;
Merrill Lynch Dragon Fund, Inc,; Merrill Lynch Emerging Tigers Fund, Inc.;
Merrill Lynch EuroFund; Merrill Lynch Global Allocation Fund, Inc.; Merrill
Lynch Global Bond Fund for Investment and Retirement; Merrill Lynch Global
Holdings, Inc.; Merrill Lynch Global SmallCap Fund, Inc.; Merrill Lynch Global
Technology Fund, Inc.; Merrill Lynch Global Value Fund, Inc.; Merrill Lynch
Healthcare Fund, Inc.; Merrill Lynch International Equity Fund; Merrill Lynch
Latin America Fund, Inc.; Merrill Lynch Middle East/Africa Fund, Inc.; Merrill
Lynch Pacific Fund, Inc.; Merrill Lynch Short-Term Global Income Fund, Inc.;
Merrill Lynch Technology Fund, Inc.; and Worldwide DollarVest Fund, Inc.
Dated: January 22, 1999
/s/ DONALD C. BURKE
------------------------------------------
(Donald C. Burke)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10 Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
14(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>
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Dragon Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 9 to Registration Statement No. 33-46216 of our report dated February 12,
1999 appearing in the annual report to shareholders of Merrill Lynch Dragon
Fund, Inc. for the year ended December 31, 1998, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
February 25, 1999
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