<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1994
SECURITIES ACT FILE NO. 33-53399
INVESTMENT COMPANY ACT FILE NO. 811-07171
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [_]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [X]
AMENDMENT NO. 1 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD 08536
(ZIP CODE)
PLAINSBORO, NEW JERSEY
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
----------------
COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
----------------
Approximate date of Proposed Public Offering:
As soon as practicable after the effective date
of this registration statement.
----------------
An indefinite number of Class A and Class B shares of common stock of the
Registrant is being registered by this Registration Statement under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
PART A
<C> <S> <C>
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Prospectus Summary; Fee Table
Item 3. Condensed Financial
Information............ Not Applicable
Item 4. General Description of
Registrant............. Investment Objective and Policies;
Item 5. Management of the Fund.. Additional Information
Fee Table; Management of the Fund; Inside
Back Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other
Securities............. Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered.......... Cover Page; Fee Table; Alternative Sales
Arrangements; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption of
Repurchase............. Fee Table; Alternative Sales Arrangements;
Item 9. Pending Legal Purchase of Shares; Redemption of Shares
Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and
History................ Not Applicable
Item 13. Investment Objective and
Policies............... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities............. Management of the Fund; Additional
Item 16. Investment Advisory and Information
Other Services......... Management of the Fund; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and
Other Practices........ Portfolio Transactions
Item 18. Capital Stock and Other
Securities............. General Information--Description of Shares
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.......... Purchase of Shares; Redemption of Shares;
Determination of Net Asset Value;
Shareholder Services
Item 20. Tax Status.............. Distributions and Taxes
Item 21. Underwriters............ Purchase of Shares
Item 22. Calculation of
Performance Data....... Performance Data
Item 23. Financial Statements.... Statement of Assets and Liabilities
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 23, 1994
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
- ----------
, 1994
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
-------------
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified, open-
end management investment company seeking long-term growth of capital by
investing primarily in a portfolio of equity securities of issuers with
relatively small market capitalizations ("SmallCap Issuers") located in various
foreign countries and in the United States. Under normal market conditions, the
Fund expects to invest at least 66% of its total assets in equity securities of
SmallCap Issuers. While the Fund expects to invest primarily in equity
securities of SmallCap Issuers, the Fund reserves the right to invest up to 34%
of its total assets, under normal market conditions, in equity securities of
issuers having larger individual market capitalizations and in debt securities.
It is anticipated that a substantial portion of the Fund's total assets will be
invested in the developed countries of Europe and the Far East and that a
significant portion of its total assets also may be invested in developing
countries. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. There can be no assurance that the Fund's
investment objective will be achieved. Investments on an international basis in
foreign securities markets involve certain risk factors, as do investments in
SmallCap Issuers. See "Risk Factors and Special Considerations" on page 9,
herein.
The Fund offers two classes of shares which may be purchased during the
subscription offering at $10.00 per share and during the continuous offering at
a price equal to the next determined net asset value per share, plus in both
cases a sales charge which, at the election of the purchaser, may be imposed
(i) at the time of purchase (the "Class A shares") or (ii) on a deferred basis
(the "Class B shares"). The deferred charges to which the Class B shares are
subject shall consist of a contingent deferred sales charge which may be
imposed on redemptions made within four years of purchase and an ongoing
account maintenance fee and distribution fee. These alternatives permit an
investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. Class A shares pay an ongoing account
maintenance fee at the annual rate of 0.25% of the Fund's average daily
(Continued on next page)
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated , 1994 (the "Statement of Additional Information"),
has been filed with the Securities and Exchange Commission and is available,
without charge, by calling or by writing the Fund at the above telephone number
or address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
-------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
(Continued from Cover Page)
net assets attributable to Class A shares; Class B shares pay an ongoing
account maintenance fee and an ongoing distribution fee at the annual rates of
0.25% and 0.75%, respectively, of the Fund's average daily net assets
attributable to the Class B shares. Investors should understand that the
purpose and function of the deferred sales charges with respect to the Class B
shares are the same as those of the initial sales charge with respect to the
Class A shares. Investors also should understand that over time the deferred
charges related to Class B shares may exceed the initial sales charge and
account maintenance fee with respect to Class A shares. See "Alternative Sales
Arrangements" on page 6.
Each Class A share and Class B share represents an identical interest in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance and distribution fees and
certain other costs resulting from the deferred sales charge arrangement, which
will cause Class B shares to have a higher expense ratio and to pay lower
dividends than Class A shares, which also bear the expense of an account
maintenance fee. The two classes also have different exchange privileges.
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), Box 9011,
Princeton, New Jersey 08543-9011 ((609) 282-2800), and other securities dealers
which have entered into selected dealer agreements with the Distributor,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
will solicit subscriptions for shares of the Fund during a period expected to
end on , 1994, unless extended. On the fifth business day after the
conclusion of the subscription period, the subscriptions will be payable, the
shares will be issued and the Fund will commence operations. The public
offering price of the shares during the subscription offering will be $10.00
per share in the case of Class B shares and $10.00 per share plus a sales
charge of 6.50%, subject to reductions on purchases in single transactions of
$10,000 or more, in the case of Class A shares. After the completion of the
initial subscription offering, the Fund will engage in a continuous offering of
its shares at a price equal to the next determined net asset value per share in
the case of Class B shares and the next determined net asset value per share,
plus a sales charge subject to reductions as noted above, in the case of Class
A shares. Shareholders may redeem their shares at any time at the next
determined net asset value. The Class B shares may be subject to a contingent
deferred sales charge if redeemed within four years of purchase and are subject
to ongoing account maintenance and distribution fees. The minimum initial
purchase during the subscription and continuous offerings is $1,000 and the
minimum subsequent purchase in the continuous offering is $50. Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Fund's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information.
THE FUND
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified, open-
end management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of capital
by investing primarily in a portfolio of equity securities of issuers with
relatively small market capitalizations ("SmallCap Issuers") located in various
foreign countries and in the United States. Under normal market conditions, the
Fund expects to invest at least 66% of its total assets in equity securities of
SmallCap Issuers. The Fund applies U.S. size standards in determining SmallCap
Issuers, and based on recent U.S. share prices, the Fund presently considers
SmallCap Issuers to be issuers with individual market capitalizations of no
greater than $1 billion. However, the Fund presently anticipates that it will
invest primarily in SmallCap Issuers having market capitalizations of $750
million or less. Under normal market conditions, the Fund also may invest up to
34% of its total assets in equity securities of issuers with individual market
capitalizations of greater than U.S.$1 billion ("LargeCap Issuers") and in debt
securities. The Fund may invest up to 100% of its assets in such securities for
temporary defensive purposes.
It is anticipated that a substantial portion of the Fund's total assets will
be invested in the developed countries of Europe and the Far East and that a
significant portion of its total assets also may be invested in developing
countries. While investments in markets of developing countries are subject to
considerable risks (see "Risk Factors and Special Considerations"), the Fund
believes that recent developments, including liberalization of government
policies, development of labor-intensive, export-oriented industries and rapid
growth of securities markets, in such developing countries could present
attractive investment opportunities.
The Fund is authorized to employ a variety of investment techniques to hedge
against market and currency risks. However, the Fund may not necessarily be
engaging in hedging activities when market or currency movements occur. See
"Investment Objective and Policies".
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investments in securities of SmallCap Issuers involve special considerations
and risks not typically associated with investments in securities of LargeCap
Issuers, including risks associated with limited product lines, markets or
financial and management resources; risks associated with lesser frequency and
volume of trading of stocks of SmallCap Issuers as compared to LargeCap Issuers
and the greater effect of abrupt or erratic price movements on SmallCap
Issuers; and risks associated with the sensitivity of SmallCap Issuers to
market changes.
In addition, investments in securities of issuers located in various foreign
countries involve special considerations and risks not typically associated
with investments in securities of U.S. issuers, including the risks associated
with international investing generally, such as currency fluctuations; the
risks of investing in countries with smaller capital markets, such as limited
liquidity, price volatility and restrictions on foreign investment; and the
risks associated with undeveloped economies of developing countries, including
3
<PAGE>
significant political and social uncertainties, government involvement in the
economies, overburdened infrastructures, archaic legal systems, environmental
problems, and obsolete financial systems. See "Risk Factors and Special
Considerations".
THE MANAGER
Merrill Lynch Asset Management, L.P. (the "Manager") acts as a manager for
the Fund and provides the Fund with management services. Merrill Lynch Asset
Management U.K. Limited ("MLAM U.K."), an indirect, wholly-owned subsidiary of
Merrill Lynch & Co., Inc. and an affiliate of the Manager, acts as the sub-
adviser for the Fund and provides investment advisory services to the Manager
with respect to the Fund. The Manager or its affiliate, Fund Asset Management,
L.P. ("FAM"), acts as the investment adviser for over 90 other registered
investment companies. The Manager and FAM also offer portfolio management and
portfolio analysis services to individuals and institutions. As of May 31,
1994, the Manager and FAM had a total of approximately $163.3 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Manager. See "Management of the Fund--
Management and Advisory Arrangements".
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund may be purchased during the subscription offering at
$10.00 per share and during the continuous offering at a price equal to the
next determined net asset value per share, plus a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of the
purchase (the "Class A shares") or (ii) on a deferred basis (the "Class B
shares"). Class A shares pay an ongoing account maintenance fee, and Class B
shares pay ongoing account maintenance and distribution fees. See "Alternative
Sales Arrangements" and "Purchase of Shares".
Shareholders may redeem their Class A and Class B shares at any time at the
next determined net asset value, except that Class B shares may be subject to a
contingent deferred sales charge on shares redeemed within four years of
purchase. See "Redemption of Shares".
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of its net
investment income. Dividends from such net investment income are paid at least
annually. All net realized long-term and short-term capital gains, if any, will
be distributed to the Fund's shareholders at least annually. See "Additional
Information--Dividends and Distributions".
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily as of
4:15 p.m., New York time, on each day during which the New York Stock Exchange
is open for trading. See "Additional Information--Determination of Net Asset
Value".
4
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
-------------- ---------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as
a percentage of offering price).............. 6.50%(a) None
Sales Charge Imposed on Dividend Reinvest-
ments........................................ None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption pro-
ceeds, whichever is lower)................... None(f) 4.0% during the
first year de-
creasing 1.0%
annually to 0%
after the
fourth year(b)
Exchange Fee.................................. None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Management Fees(c)............................ 0.85% 0.85%
Rule 12b-l Fees(d)............................ 0.25% 1.00%(g)
Other Expenses
Shareholder Servicing Costs(e).............. 0.11% 0.11%
Custodial Fees.............................. 0.34% 0.34%
Other....................................... 0.25% 0.25%
---- ----
Total Other Expenses........................ 0.70% 0.70%
---- ----
Total Fund Operating Expenses................. 1.80% 2.55%
==== ====
</TABLE>
- --------
(a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for
purchases of $1,000,000 and over. Certain investors making purchases of
$1,000,000 and over may, however, pay a contingent deferred sales charge
ranging from a high of 1.00% to a low of 0.25% of amounts redeemed within
the first year after purchase in lieu of the 0.75% initial sales charge.
See "Purchase of Shares--Initial Sales Charge Alternative--Class A
Shares"--page 29.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 31.
(c) See "Management of the Fund--Management and Advisory Arrangements"--page
24.
(d) See "Purchase of Shares--Alternative Sales Arrangements--Distribution
Plans"--page 28.
(e) See "Management of the Fund--Transfer Agency Services"--page 25.
(f) Certain investors making purchases of $1,000,000 and over may, however,
pay a contingent deferred sales charge ranging from a high of 1.00% to a
low of 0.25% of amounts redeemed within the first year after purchase in
lieu of the 0.75% initial sales charge. See "Purchase of Shares--Initial
Sales Charge Alternative--Class A Shares"--page 29.
(g) This amount represents the 0.25% account maintenance fee and the 0.75%
distribution fee applicable to Class B shares of the Fund.
5
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE
EXPENSES PAID
FOR THE PERIOD OF:
------------------
1 YEAR 3 YEARS
-------- ---------
<S> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum $65
front-end sales charge and assuming (1) an operating ex-
pense ratio of 1.80% for Class A shares and 2.55% for
Class B shares, (2) a 5% annual return throughout the pe-
riods and (3) redemption at the end of the period:
Class A.................................................. $ 82.10 $ 117.96
Class B.................................................. $ 65.81 $ 99.35
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A.................................................. $ 82.10 $ 117.96
Class B.................................................. $ 25.81 $ 79.35
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as mandated
by Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B shareholders who hold their
shares for an extended period of time may pay more in Rule 12b-1 distribution
fees than the economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Class A shares incur a sales charge when they are
purchased and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to the Class A shares. Although Class A
shares incur a sales charge when they are purchased, they enjoy the benefit of
not being subject to the ongoing distribution fee to which Class B shares are
subject or any sales charge when they are redeemed. Certain purchasers of Class
A shares qualify for reduced initial sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account
6
<PAGE>
maintenance and distribution fees of 0.25% and 0.75%, respectively, of the
Fund's average net assets attributable to the Class B shares and a sales charge
if they are redeemed within four years of purchase. Class B shares enjoy the
benefit of permitting all of the investor's dollars to work from the time the
investment is made. The ongoing distribution fee paid by Class B shares will
cause such shares to have a higher expense ratio and to pay lower dividends
than Class A shares. Both Class A shares and Class B shares pay an ongoing
account maintenance fee. Payment of the distribution fee is subject to certain
limits as set forth under "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Shares acquired under the initial sales charge alternative
would be subject to an ongoing account maintenance fee that is lower than the
sum of the ongoing account maintenance fee and distribution fee on Class B
shares. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all of their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees on Class B shares may exceed the
initial sales charge and ongoing account maintenance fee on Class A shares.
Again, however, such investors must weigh this consideration against the fact
that not all of their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution fees will be offset to the extent
any return is realized on the additional funds initially invested under the
deferred sales charge alternative. However, there can be no assurance as to the
return, if any, which will be realized on such additional funds. Certain other
investors might determine it to be more advantageous to have all their funds
invested initially, although remaining subject to continued account maintenance
and distribution fees and, for a four-year period of time, a contingent
deferred sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge, and
in the case of the Class B shares, such distribution expenses will be paid from
the proceeds of the ongoing distribution fees and the contingent deferred sales
charge incurred upon redemption within four years of purchase. Sales personnel
may receive different compensation for selling Class A or Class B shares.
Investors should understand that the purpose and function of the deferred sales
charges and account maintenance fee with respect to the Class B shares are the
same as those of the initial sales charge and account maintenance fee with
respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class, and the
account maintenance fee relating to Class A shares will be borne exclusively by
that class. See "Additional Information--Determination of Net Asset Value".
Class A and Class B shareholders of the Fund each have an exchange privilege
for Class A and Class B shares, respectively, of certain other mutual funds
sponsored by Merrill Lynch. Class A and Class B shareholders of the Fund may
also exchange their shares for shares of certain money market funds sponsored
by Merrill Lynch. See "Shareholder Services--Exchange Privilege".
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties
7
<PAGE>
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), and state laws, will seek to assure that no such conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE METHOD
OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND
OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND AN ACCOUNT MAINTENANCE FEE OR TO HAVE THE ENTIRE INITIAL PURCHASE
PRICE INVESTED IN THE FUND WITH THE INVESTMENT THEREAFTER BEING SUBJECT TO
ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION FEES. TO ASSIST INVESTORS IN
MAKING THIS DETERMINATION, THE FEE TABLE ON PAGE 5 SETS FORTH THE CHARGES
APPLICABLE TO EACH CLASS OF SHARES, AND A DISCUSSION OF RELEVANT FACTORS IN
MAKING SUCH DETERMINATION IS SET FORTH UNDER "PURCHASE OF SHARES--
ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 27.
8
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in SmallCap Issuers. Under normal market conditions, the Fund
expects to invest at least 66% of its assets in equity securities of SmallCap
Issuers. Based on recent U.S. share prices, the Fund considers SmallCap Issuers
to be issuers with individual market capitalizations of no greater than $1
billion. While the SmallCap Issuers in which the Fund will primarily invest may
offer greater opportunities for capital appreciation than LargeCap Issuers,
investments in smaller companies may involve greater risks and thus may be
considered speculative. For example, small companies may have limited product
lines, markets or financial resources, or they may be dependent on a limited
management group. Full development of these companies takes time and, for this
reason, the Fund should be considered as a long-term investment and not as a
vehicle for seeking short-term profits, nor should an investment in the Fund be
considered a complete investment program. In addition, many small company
stocks trade less frequently and in smaller volume, and may be subject to more
abrupt or erratic price movements, than stocks of large companies. The
securities of small companies may also be more sensitive to market changes than
the securities of large companies. These factors may result in above-average
fluctuations in the net asset value of the Fund's shares. The Fund is not an
appropriate investment for individual investors requiring safety of principal
or a predictable return of income from their investment.
International Investing. Investments on an international basis involve
certain risks not involved in domestic investment, including fluctuations in
foreign exchange rates, future political and economic developments, different
legal systems and the existence or possible imposition of exchange controls or
other foreign or U.S. governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial, political and social factors. Because the Fund will invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets.
These forces are, in turn, affected by international balance of payments and
other economic and financial conditions, government intervention, speculation
and other factors. With respect to certain countries, there may be the
possibility of expropriation of assets, confiscatory taxation, high rates of
inflation, political or social instability or diplomatic developments which
could affect investment in those countries. In addition, certain foreign
investments may be subject to foreign withholding taxes. As a result,
management of the Fund may determine that, notwithstanding otherwise favorable
investment criteria, it may not be practicable or appropriate to invest in a
particular country.
It is anticipated that a substantial portion of the securities held by the
Fund will not be registered with the Securities and Exchange Commission (the
"Commission"), nor will the issuers thereof be subject to the reporting
requirements of such agency. In that regard, there may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which U.S.
companies are subject. Moreover, because the Fund emphasizes the stocks of
issuers with smaller market capitalizations (by U.S. standards), the Fund can
be expected to have more difficulty obtaining information about the issuers or
valuing or disposing of its securities than it would if it were to concentrate
on more widely held stocks.
Foreign financial markets, while often growing in volume, have, for the most
part, substantially less volume than U.S. markets, and securities of many
foreign companies are less liquid and their prices may be
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more volatile than securities of comparable domestic companies. Such markets
have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment
securities may not be available in some countries having smaller capital
markets, which may result in the Fund incurring additional costs and delays in
transporting and custodying such securities outside such countries. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could result in
temporary periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems either could result in losses to the Fund due to subsequent declines
in value of the portfolio security or, if the Fund has entered into a contract
to sell the security, could result in possible liability to the purchaser.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the U.S. There is generally less
government supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the U.S.
It is presently anticipated that a significant portion of the Fund's assets
may be invested in the developing countries of the world, including, but not
limited to, countries located in Eastern Europe, Latin America and the Far
East. The risks noted above as well as in "Restrictions on Foreign Investment"
below are often heightened for investments in developing countries, which may
increase the volatility of the Fund's net asset value.
Certain developing countries are especially large debtors to commercial banks
and foreign governments. Trading in debt obligations ("sovereign debt
obligations") issued or guaranteed by developing governments or their agencies
and instrumentalities ("governmental entities") involves a high degree of risk.
The governmental entity that controls the repayment of sovereign debt
obligations may not be willing or able to repay the principal and/or interest
when due in accordance with the terms of such obligations. A governmental
entity's willingness or ability to repay principal and interest due in a timely
manner may be affected by, among other factors, its cash flow situation, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's dependence on expected disbursements from third parties,
the governmental entity's policy toward the International Monetary Fund and the
political constraints to which a governmental entity may be subject. As a
result, governmental entities may default on their sovereign debt obligations.
Holders of sovereign debt obligations (including the Fund) may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign
debt obligations on which governmental entities have defaulted may be collected
in whole or in part.
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts") or other securities convertible
into securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the securities underlying
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between
such information and the market value of the Depositary Receipts. Depositary
Receipts also involve the risks of other investments in foreign securities, as
discussed above.
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Restrictions on Foreign Investment. Some 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 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 in a company to only a
specific class of securities which may have less advantageous terms than
securities of the company available for purchase by nationals. Certain
countries may restrict investment opportunities in issuers or industries deemed
important to national interests.
The manner in which foreign investors may invest in companies in certain
countries, as well as limitations on such investments, may have an adverse
impact on the operations of the Fund. For example, the Fund may be required in
certain of such countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the
Fund. Re-registration may in some instances not be able to occur on a timely
basis, resulting in a delay during which the Fund may be denied certain of its
rights as an investor, including rights as to dividends or to be made aware of
certain corporate actions. There also may be instances where the Fund places a
purchase order but is subsequently informed, at the time of re-registration,
that the permissible allocation of the investment to foreign investors has been
filled, depriving the Fund of the ability to make its desired investment at
that time.
Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or the proceeds of
sales of securities by foreign investors. The Fund could be adversely affected
by delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments. No more than 15% of the Fund's net assets may be
comprised, in the aggregate, of assets which are (i) subject to material legal
restrictions on repatriation or (ii) invested in illiquid securities. Even
where there is no outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects of the operations of the
Fund.
A number of countries have authorized the formation of closed-end investment
companies to facilitate indirect foreign investment in their capital markets.
In accordance with the Investment Company Act, the Fund may invest up to 10% of
its total assets in securities of closed-end investment companies. This
restriction on investments in securities of closed-end investment companies may
limit opportunities for the Fund to invest indirectly in certain smaller
capital markets. Shares of certain closed-end investment companies may at times
be acquired only at market prices representing premiums to their net asset
values. If the Fund acquires shares in closed-end investment companies,
shareholders would bear both their proportionate share of expenses in the Fund
(including management fees) and, indirectly, the expenses of such closed-end
investment companies. The Fund also may seek, at its own cost, to create its
own investment entities under the laws of certain countries.
Investing in Debt Securities. While the Fund intends to invest primarily in
equity securities, the Fund reserves the right to invest up to 34% of its total
assets, under normal market conditions, in debt securities, including high
yield/high risk securities (as defined below), foreign sovereign debt
obligations, debt obligations of the U.S. government or its political
subdivisions ("U.S. Government Obligations") and short-term securities such as
money market securities or commercial paper. The Fund has established no rating
criteria for the debt securities in which it may invest, and such securities
may not be rated at all for creditworthiness. Securities rated in the medium to
lower rating categories of nationally recognized statistical rating
organizations and unrated securities of comparable quality ("high yield/high
risk securities") are predominately speculative with respect to the capacity to
pay interest and to repay principal in accordance
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<PAGE>
with the terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. These securities are
commonly referred to as "junk" bonds. Certain of the sovereign debt obligations
in which the Fund may invest may involve great risk and are deemed to be the
equivalent in terms of quality to high yield/high risk securities. The Fund may
have difficulty disposing of certain sovereign debt obligations because there
may be no liquid secondary trading market for such securities. The Fund may
invest up to 5% of its total assets in sovereign debt obligations that are in
default. Whenever, in the judgment of the Manager, market or economic
conditions warrant, the Fund may invest, for temporary defensive purposes, up
to 100% of the Fund's total assets in the debt securities discussed above. See
"Investment Objective and Policies--Characteristics of Certain Debt
Securities".
Derivative Investments. In order to seek to hedge various portfolio
positions, including to hedge against price movements in markets in which the
Fund anticipates increasing its exposure, the Fund may invest in certain
instruments which may be characterized as derivative investments. These
investments include various types of interest rate transactions, options and
futures. Such investments also may consist of indexed securities, including
inverse securities. The Fund has express limitations on the percentage of its
assets that may be committed to certain of such investments. Other of such
investments have no express quantitative limitations, although they may be made
solely for hedging purposes, not for speculation, and may in some cases require
limitations as to the type of permissible counter-party to the transaction.
Interest rate transactions involve the risk of an imperfect correlation between
the index used in the hedging transactions and that pertaining to the
securities which are the subject of such transactions. Similarly, utilization
of options and futures transactions involves the risk of imperfect correlation
in movements in the price of options and futures and movements in the price of
the securities or interest rates which are the subject of the hedge.
Investments in indexed securities, including inverse securities, subject the
Fund to the risks associated with changes in the particular indices, which may
include reduced or eliminated interest payments and losses of invested
principal. For a further discussion of these investments and their attendant
risks, see "Investment Objective and Policies--Description of Certain
Investments--Indexed and Inverse Securities," "Other Investment Policies and
Practices--Portfolio Strategies Involving Options, Futures and Forward Foreign
Exchange Transactions" and "Appendix A--Options, Futures and Forward Foreign
Exchange Transactions." Management of the Fund believes the above investments
are appropriate for the Fund.
Borrowing. The Fund may borrow up to 33 1/3% of its total assets, taken at
market value, but only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed 5%
of its total assets, except (a) to honor prior commitments or (b) to exercise
subscription rights when outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging increases the Fund's exposure to capital risk, and borrowed
funds are subject to interest costs which will reduce net income.
Fees and Expenses. The management fee (at the annual rate of 0.85% 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 investment advisers or of investment companies
investing exclusively in the U.S. securities market.
Other Special Considerations. The Fund may invest up to 15% of its total
assets in illiquid or otherwise not readily marketable securities. (However,
under the law of certain states, the Fund presently is limited with respect to
such investments to 10% of its net assets).
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide long-term growth
of capital by investing primarily in equity securities of companies with
relatively small market capitalizations ("SmallCap Issuers") located in various
foreign countries and in the United States. Under normal conditions, at least
66% of the Fund's total assets will be invested in equity securities of
SmallCap Issuers. The Fund applies U.S. size standards in determining SmallCap
Issuers, and based on recent U.S. share prices, the Fund presently considers
SmallCap Issuers to be issuers with individual market capitalizations of no
greater than $1 billion. However, the Fund presently intends to invest
primarily in SmallCap Issuers with capitalizations of $750 million or less. The
Fund does not generally expect to invest in SmallCap Issuers whose market
capitalizations are less than $50 million. Because the Fund is permitted to
apply the U.S. size standard on a global basis, it may invest in issuers that
might in some countries rank among the largest companies in terms of
capitalization. While the Fund expects to invest primarily in equity securities
of SmallCap Issuers, the Fund may invest up to 34% of its total assets, under
normal market conditions, in equity securities of companies with individual
market capitalizations of greater than U.S.$1 billion ("LargeCap Issuers") and
in debt securities. There can be no assurance that the Fund's investment
objective will be achieved. The investment objective of the Fund is a
fundamental policy and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities. The Fund may employ
a variety of investments and techniques to hedge against market and currency
risk.
The Fund's investment emphasis is on equities, primarily common stock and, to
a lesser extent, securities convertible into common stock, preferred stock and
rights to subscribe for common stock. The Manager believes that the equity
securities of specific SmallCap Issuers may present different opportunities for
long-term capital appreciation during varying portions of economic or
securities markets cycles, as well as during varying stages of their business
development. The market valuation of SmallCap Issuers tends to fluctuate during
economic or market cycles, presenting attractive investment opportunities at
various points during these cycles. However, investments in SmallCap Issuers
may involve greater risks. See "Risk Factors and Special Considerations". The
Fund may invest in securities of SmallCap Issuers in the relatively early
stages of business development which have a new technology, a unique or
proprietary product or service, or a favorable market position; in securities
of relatively more developed companies that the Manager believes will
experience above-average earnings growth or will receive greater market
recognition; and, in securities of mature companies that the Manager believes
to be relatively undervalued in the marketplace. The Fund's investment policy
is further based on the belief that investment opportunities change rapidly,
not only from company to company and from industry to industry, but also from
one national economy to another. Accordingly, the Fund will invest in a global
portfolio of equity securities of SmallCap Issuers located throughout the
world. However, investments in foreign markets may involve greater risks. See
"Risk Factors and Special Considerations."
Under certain adverse investment conditions, the Fund may restrict the
markets in which its assets will be invested and may increase the proportion of
assets invested in equity securities of LargeCap Issuers and in debt
securities. Investments made for defensive purposes will be maintained only
during periods in which the Manager determines that economic or financial
conditions are adverse for holding or being invested to a greater degree in
equity securities of SmallCap Issuers. The Fund, however, will make such
temporary
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<PAGE>
defensive investments only to the extent management of the Fund believes
temporary defensive investments present less risk than the types of investments
in which the Fund normally invests.
Under normal conditions, at least 66% of the Fund's total assets will be
invested in the securities of issuers from at least three different countries.
While there are no prescribed limits on the geographic allocation of the Fund's
investments, management of the Fund anticipates that a substantial portion of
its assets will be invested in the developed countries of Europe and the Far
East. However, for the reasons stated below, management of the Fund will give
special attention to investment opportunities in the developing countries of
the world, including, but not limited to, Eastern Europe, Latin America and the
Far East. It is presently anticipated that a significant portion of the Fund's
assets may be invested in such developing countries.
For purposes of the Fund's investment policies, an issuer ordinarily will be
considered to be located in the country under the laws of which it is organized
or where the primary trading market of its securities is located. The Fund,
however, may consider a company to be located in a country, without reference
to its domicile or to the primary trading market of its securities, when at
least 50% of its 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 country.
The Fund also may consider closed-end investment companies to be located in the
country or countries in which they primarily make their portfolio investments.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Manager based primarily on an assessment of
the relative condition and growth potential of the various economies and
securities markets, currency and taxation considerations and other pertinent
financial, social, national and political factors. Within such allocations, the
Manager will seek to identify equity investments in each market which are
expected to provide a total return which equals or exceeds the return of such
market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such
countries. Certain such countries, particularly so-called "emerging" countries,
developing more market-oriented economies may experience relatively high rates
of economic growth.
In accordance with the foregoing, the Fund may purchase securities issued by
United States or foreign corporations or financial institutions. The Fund also
may purchase securities issued or guaranteed by United States or foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities") or issued or
guaranteed by international organizations designated or supported by multiple
governmental entities to promote economic reconstruction or development
("supranational entities").
As a result of its global investment focus, the Fund may invest in securities
denominated in any currency or multinational currency unit. An illustration of
a multinational currency unit is the European Currency Unit ("ECU") which is a
"basket" consisting of specified amounts of the currencies of certain of the
twelve
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member states of the European Community, a Western European economic
cooperative association including France, Germany, the Netherlands and the
United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Manager does not
believe that such adjustments will adversely affect holders of ECU-denominated
obligations or the marketability of such securities. European supranational
entities (described further below), in particular, issue ECU-denominated
obligations. The Fund may invest in securities denominated in the currency of
one nation although issued by a governmental entity, corporation or financial
institution of another nation. For example, the Fund may invest in a British
pound sterling-denominated security issued by a United States corporation. Such
investments involve risks associated with the issuer and currency risks
associated with the currency in which the obligation is denominated.
While the Fund intends to invest primarily in equity securities of domestic
and foreign SmallCap Issuers, the Fund also may invest up to 34% of its total
assets in debt securities, including high yield/high risk securities, foreign
sovereign debt obligations, U.S. Government Obligations and short-term
securities including money market securities or commercial paper. The Fund has
established no rating criteria for the debt securities in which it may invest,
and such securities may not be rated at all for creditworthiness. See
"Characteristics of Certain Debt Securities" below.
The Fund may invest in the securities of foreign issuers in the form of
Depositary Receipts or other securities convertible into securities of foreign
issuers. The Depositary Receipts may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world. The Fund may invest in unsponsored
Depositary Receipts. The issuers of unsponsored Depositary Receipts 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 securities.
DESCRIPTION OF CERTAIN INVESTMENTS
Illiquid Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933, as amended (the
"Securities Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under that Act. However, the Fund will not invest more
than 15% of its net assets in securities subject to contractual restrictions on
resale, or otherwise restricted securities, unless the Fund's Board of
Directors determines, based on the trading markets for the specific restricted
security, that it is liquid. (However, under the law of certain states, the
Fund presently is limited with respect to such investments to 10% of its net
assets.) The Board of Directors has determined to treat as liquid Rule 144A
securities which are freely tradeable in their primary markets offshore. The
Board of Directors may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of restricted securities. The
Board of Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
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<PAGE>
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
Indexed and Inverse Securities. The Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an "index"). As an illustration, the Fund may invest in a security that
pays interest and returns principal based on the change in an index of interest
rates or of the value on a precious or industrial metal. Interest and principal
payable on a security may also be based on relative changes among particular
indices. In addition, the Fund may invest in securities whose potential
investment return is inversely based on the change in particular indices. For
example, the Fund may invest in securities that pay a higher rate of interest
and principal when a particular index decreases and pay a lower rate of
interest and principal when the value of the index increases. To the extent
that the Fund invests in such types of securities, it will be subject to the
risks associated with changes in the particular indices, which may include
reduced or eliminated interest payments and losses of invested principal.
Examples of such types of securities are indexed or inverse securities issued
with respect to a stock market index in a particular foreign country.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities.
Management of the Fund believes that indexed securities, including inverse
securities, represent flexible portfolio management instruments that may allow
the Fund to hedge other portfolio positions, including serving as an
anticipatory hedge in markets in which the Fund is seeking a higher degree of
exposure, or vary the degree of portfolio leverage relatively efficiently under
different market conditions.
CHARACTERISTICS OF CERTAIN DEBT SECURITIES
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest and such securities may
not be rated at all for creditworthiness. Securities rated in the medium to low
rating categories of nationally recognized statistical rating organizations
such as Standard & Poor's Corporation ("S&P") and Moody's Investors Service,
Inc. ("Moody's") and unrated securities of comparable quality (referred to
herein as "high yield/high risk securities") are predominantly speculative with
respect to the capacity to pay interest and to repay principal in accordance
with the terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. See "Statement of Additional
Information--Appendix". These securities are commonly referred to as "junk"
bonds. In purchasing such securities, the Fund will rely on the Manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. The Manager will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The Fund is not authorized to purchase debt
securities that are in default, except for sovereign debt obligations
(discussed below). The Fund may invest no more than 5% of its total assets in
sovereign debt obligations which are in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of
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<PAGE>
such issuers generally is greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of high yield/high risk securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During such periods, such issuers may not have sufficient revenues
to meet their interest payment obligations. The issuer's ability to service its
debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holders of high
yield/high risk securities because such securities may be unsecured and may be
subordinated to other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers
or prices for actual sales. The Fund's Directors, or the Manager, will
carefully consider the factors affecting the market for high yield, high risk,
lower rated securities in determining whether any particular security is liquid
or illiquid and whether current market quotations are readily available.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Fund's net asset value. In addition, the Fund
may incur additional expenses to the extent it is required to seek recovery
upon a default on a portfolio holding or to participate in the restructuring of
the obligation.
Foreign Sovereign Debt. Certain developing countries owe significant amounts
of debt to commercial banks and foreign governments. Investment in sovereign
debt obligations of such countries, in particular, involves a high degree of
risk. The governmental entity that controls the repayment of sovereign debt
obligations may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental entity's
willingness or ability to repay principal and interest due in a timely manner
may be affected by, among other factors, its cash flow situation, the extent of
its foreign reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden to the
economy as a whole, the governmental entity's policy towards the International
Monetary Fund and the political constraints to which a governmental entity may
be subject. Governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearages on their debt. The commitment on
the part of these governments, agencies and others to make such disbursements
may be conditioned on a governmental
17
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entity's implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to timely service its debts. Consequently, governmental
entities may default on their sovereign debt obligations.
Holders of sovereign debt obligations, including the Fund, may be requested
to participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign
debt obligations on which a governmental entity has defaulted may be collected
in whole or in part.
Certain of the sovereign debt obligations in which the Fund may invest
involve great risk and are deemed to be the equivalent in terms of quality to
high yield/high risk securities discussed above and are subject to many of the
same risks as such securities. Similarly, the Fund may have difficulty
disposing of such sovereign debt obligations because there may be a thin
trading market for such securities. The Fund will not invest more than 5% of
its total assets in sovereign debt obligations which are in default.
Supranational Entities. The Fund also may invest in debt securities of
supranational entities. These entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and
related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The government 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.
United States Government Obligations. United States Government Obligations in
which the Fund may invest include: (i) U.S. Treasury obligations (bills, notes
and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the United
States; and (ii) obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, including government guaranteed mortgage-related or
asset-backed securities, some of which are backed by the full faith and credit
of the U.S. Treasury (e.g., direct pass-through certificates of the Government
National Mortgage Association), some of which are supported by the right of the
issuer to borrow from the U.S. Government (e.g., obligations of Federal Home
Loan Banks) and some of which are backed only by the credit of the issuer
itself (e.g., obligations of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the holder
of an individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, a mortgage-related security is often
subject to more rapid prepayment of principal than its stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of the mortgage-related securities. (Asset-backed
securities, other than those backed by home equity loans, generally do not
prepay in response to changes in interest rates but may be subject to
prepayment in response to other factors.) Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments adversely impact yields for securities purchased at a premium
(i.e., a price in excess of principal amount) and may involve additional risk
of loss of principal because the premium may not have been fully amortized at
the time the obligation is repaid. The
18
<PAGE>
opposite is true for securities purchased at a discount. The Fund may purchase
mortgage-related (and asset-backed) securities at a premium or at a discount.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Options, Futures and Forward Foreign Exchange
Transactions. The Fund is authorized to engage in various portfolio strategies
to hedge its portfolio against adverse movements in the equity, debt and
currency markets.
The Fund has authority to write (i.e., sell) covered put and call options on
its portfolio securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund may also
engage in forward foreign exchange transactions and enter into foreign currency
options and futures, and related options on such futures. Each of these
portfolio strategies is described in more detail in Appendix A attached to this
Prospectus. Although certain risks are involved in options and futures
transactions (as discussed in "Risk Factors in Options, Futures and Currency
Transactions" in Appendix A to this Prospectus), the Manager believes that,
because the Fund will engage in such transactions only for hedging (including
anticipatory hedging) purposes, the options, futures and currency portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options, futures and currency
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of
Fund shares will fluctuate. Reference is made to the Appendix to this
Prospectus and to the Statement of Additional Information for further
information concerning these strategies.
There can be no assurance that the Fund's hedging transactions will be
effective. Suitable hedging instruments may not be available with respect to
securities of developing countries on a timely basis and on acceptable terms.
Furthermore, the Fund may only engage in hedging activities from time to time
and may not necessarily engage in hedging transactions when movements in the
equity, debt or currency markets occur.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Risk Factors and Special Considerations". In executing
portfolio transactions, the Manager seeks to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. The Fund may invest in certain securities
traded in the OTC market and, where possible, will deal directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve either
brokerage commissions or transfer taxes. Securities firms may receive brokerage
commissions on certain portfolio transactions, including options, futures and
options on futures transactions and the purchase and sale of underlying
securities upon exercise of options. The Fund has no obligation to deal with
any broker or group of brokers in the execution of transactions in portfolio
securities. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Affiliated persons of the Fund, and affiliated
persons of such affiliated persons, may serve as the Fund's broker in
transactions conducted on an exchange and in OTC transactions conducted on an
agency basis and may receive brokerage commissions from the Fund. In addition,
consistent with the Rules of Fair Practice of the National
19
<PAGE>
Association of Securities Dealers, Inc., the Fund may consider sales of shares
of the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund. It is expected that the majority of the
shares of the Fund will be sold by Merrill Lynch. Costs associated with
transactions in foreign securities are generally higher than in the U.S.,
although the Fund will endeavor to achieve the best net results in effecting
its portfolio transactions.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined
in the Investment Company Act. During the period of such a loan, the Fund
typically receives the income on both the loaned securities and the collateral
and thereby increases its yield. In certain circumstances, the Fund may receive
a flat fee. Such loans are terminable at any time, and the borrower, after
notice, will be required to return borrowed securities within five business
days. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Portfolio Turnover. The Manager, will effect portfolio transactions without
regard to holding period, if, in its judgment, such transactions are advisable
in light of a change in circumstance in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 100%
under normal conditions, it is impossible to predict portfolio turnover rates.
The portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. A high portfolio turnover rate involves certain tax consequences and
correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions, which are borne directly by the Fund.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of its commitments in
connection with such purchase transactions.
There can be no assurance that the securities purchased on a when-issued
basis or purchased or sold for delayed delivery will be issued, and the value
of the security, if issued, on the delivery date may be more or less than its
purchase price. 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.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the agreement
the Fund is paid a commitment fee, regardless of whether or not
20
<PAGE>
the security is ultimately issued, which is typically approximately 0.50% of
the aggregate purchase price of the security which the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price which
is considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and presently will limit
its investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its assets taken at the time of
acquisition of such a commitment. The Fund will at all times maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying a commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities.
Purchase and sale contracts may be entered into only with financial
institutions which have capital of at least $50 million or whose obligations
are guaranteed by an entity having capital of at least $50 million. Under such
agreements, the other party agrees, upon entering into the contract with the
Fund, to repurchase the security at a mutually agreed upon time and price in a
specified currency, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by currency
fluctuations. In the case of repurchase agreements, the price at which the
trades are conducted do not reflect accrued interest on the underlying
obligation; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short
periods, such as under 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
only constitute 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, the rate of return to the Fund
would be dependent upon intervening fluctuations of the market values of such
securities and the accrued interest on the securities. In such event,
21
<PAGE>
the Fund would have rights against the seller for breach of contract with
respect to any losses arising from market fluctuations following the failure of
the seller to perform. Repurchase agreements and purchase and sale contracts
maturing in more than seven days are deemed illiquid by the Commission and are
therefore subject to the Fund's investment restriction limiting investments in
securities that are not readily marketable to 15% of the Fund's total assets.
(However, under the law of certain states, the Fund presently is limited with
respect to such investments to 10% of its net assets.) See "Investment
Restrictions" below.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies which are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not (i)
invest more than 25% of its total assets, taken at market value at the time of
each investment, in the securities of issuers of any particular industry
(excluding the U.S. Government and its agencies or instrumentalities); (ii)
with respect to 75% of its total assets, invest in the securities of any one
issuer if, immediately after and as a result of such investment, the value of
the holdings of the Fund in the securities of such issuer exceeds 5% of the
Fund's total assets, taken at market value; and (iii) with respect to 75% of
its total assets, invest in the securities of any one issuer if, immediately
after and as a result of such investment, the Fund owns more than 10% of the
outstanding voting securities of such issuer. As a non-fundamental policy, the
Fund will, for purposes of the 25%, 5% and 10% restrictions set forth above and
to the extent required by the Commission, consider securities issued or
guaranteed by the government of any one foreign country as the obligations of a
single issuer. Other fundamental policies include policies which restrict the
issuance of senior securities and limit borrowings, except that the Fund may
borrow from banks in amounts of up to 33 1/3% of its assets for temporary
purposes such as to meet redemption requests or settle investment transactions
or for extraordinary or emergency purposes. 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 for other securities
transactions. The purchase of securities while borrowings are outstanding will
have the effect of leveraging the Fund. Such leveraging or borrowing increases
the Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income.
As another non-fundamental policy, the Fund will not invest in securities
which are (a) subject to material legal restrictions on repatriation of assets
or (b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its net assets, taken at market value would
be invested in such securities.
Nothing in the foregoing investment restrictions shall be deemed to prohibit
the Fund from purchasing the securities of any issuer pursuant to the exercise
of subsicription rights distributed to the Fund by the issuer, except that no
such purchase may be made if as a result the Fund will no longer be a
diversified investment company as defined in the Investment Company Act or fail
to meet the diversification requirements of the Internal Revenue Code of 1986,
as amended (the "Code").
22
<PAGE>
While the Fund may not purchase illiquid securities in an amount exceeding
15% of its net assets (or 10%, to the extent presently required by state law),
the Fund may purchase without regard to that limitation securities that are not
registered under the Securities Act, but that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act,
provided that the Fund's Board of Directors continuously determines, based on
the trading markets for the specific Rule 144A security, that it is liquid. The
Board of Directors may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of restricted securities. The
Board has determined that securities which are freely tradeable in their
primary market offshore should be deemed liquid. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how the market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President and Chief Investment Officer of the Manager;
President and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch & Co., Inc.; Executive Vice President of Merrill Lynch; Director
of the Distributor.
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive Officer
of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.; Adjunct Professor, Columbia University
Graduate School of Business.
Richard R. West--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
- --------
*Interested person, as defined in the Investment Company Act, of the Fund.
23
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Merrill Lynch Asset Management, L.P. (the "Manager") acts as the manager of
the Fund and provides the Fund with management and investment advisory
services. The Manager is owned and controlled by Merrill Lynch & Co., Inc., a
financial services holding company and the parent of Merrill Lynch. The
Manager, or an affiliate of the Manager, Fund Asset Management, L.P. ("FAM"),
acts as the investment adviser to more than 90 other registered investment
companies and provides investment advisory services to individual and
institutional accounts. As of May 31, 1994, the Manager and FAM had a total of
approximately $163.3 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The Fund has entered into a management agreement (the "Management Agreement")
with the Manager. As described in the Management Agreement, the Manager
receives for its services to the Fund monthly compensation at the rate of 0.85%
of the average daily net assets of the Fund.
The Management Agreement provides that, subject to the direction of the Board
of Directors of the Fund, the Manager is responsible for the actual management
of the Fund's portfolio and constantly reviews the Fund's holdings in light of
its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Manager, subject to review by the Board of Directors. The
Manager is also obligated to perform certain administrative and management
services for the Fund and is obligated to provide all of the office space,
facilities, equipment and personnel necessary to perform its duties under the
Management Agreement.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an
indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. and an affiliate
of the Manager, pursuant to which the Manager pays MLAM U.K. a fee for
providing investment advisory services to the Manager with respect to the Fund
in an amount to be determined from time to time by the Manager and MLAM U.K.
but in no event in excess of the amount that the Manager actually receives for
providing services to the Fund pursuant to the Management Agreement. MLAM U.K.
has offices at Ropemaker Place, 25 Ropermaker Street, 1st Floor, London EC24
9LY, England.
The Fund pays certain expenses incurred in its operations, including, among
other things, the management fees; legal and audit fees; unaffiliated
Directors' fees and expenses; registration fees; custodian and transfer agency
fees; accounting and pricing costs; and certain of the costs of printing
proxies, shareholder reports, prospectuses and statements of additional
information. Also, accounting services are provided to the Fund by the Manager,
and the Fund reimburses the Manager for its costs in connection with such
services on a semi-annual basis.
Decisions concerning the allocation of the Fund's assets among the three
prime regions outside the United States (i.e., Europe, Latin America and the
Pacific Basin) will be centralized in London, with country and individual
security decisions made in both London and Princeton, New Jersey. The names of
the persons associated with the Manager who are primarily responsible for the
day-to-day management of the Fund's portfolio and their titles and business
experience during the past five years are as follows:
Andrew John Bascand--Director of MLAM U.K. and Vice President of Merrill
Lynch Global Asset Management Limited ("MLGAM") since 1993. Most recently, Mr.
Bascand was with A.M.P. Asset Management plc in London and had previously
served as Chief Economist with A.M.P. Investments (NZ) in New Zealand. He has
served as Economic Adviser to the Chief Economist of the Reserve Bank of New
Zealand and as Senior Research Officer of the Bank of England's International
Department. Mr. Bascand is
24
<PAGE>
the Asset Allocator for the Fund and, as such, is primarily responsible for
determining the allocation of the Fund's assets among world markets.
Adrian Holmes--Managing Director of MLAM U.K. since 1993, Vice President from
1990 to 1993 and an employee thereof since 1987; Director of MLGAM since 1993.
Mr. Holmes is primarily responsible for European investments.
Grace Pineda--Vice President of the Manager since 1989. Prior to joining the
Manager, Ms. Pineda was a portfolio manager with Clemente Capital, Inc. Ms.
Pineda is primarily responsible for investments in Latin America.
Dennis W. Stattman--Vice President of the Manager since 1989; Vice President
of Meridian Management Company from 1984 to 1989. Mr. Stattman is primarily
responsible for investments in North America.
James Russell--Vice President of the Manager since 1992. Manager, Foreign
Investments, Taylor & Co. from 1990 to 1992; Vice President, Merrill Lynch
Japan, Inc., 1989-90. Mr. Russell is primarily responsible for investments in
Japan.
Ken Chiang--Employee of the Manager since 1991. Prior to joining the Manager,
Mr. Chiang was employed with Prudential Insurance Company from 1990 to 1991,
and was an employee of Boston Consulting Group in 1989. Mr. Chiang is primarily
responsible for Asian investments outside of Japan.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's transfer agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $7.00 per Class A shareholder account and $9.00
per Class B shareholder account, nominal miscellaneous fees (e.g., account
closing fees) and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement.
PURCHASE OF SHARES
SUBSCRIPTION OFFERING
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary of
the Manager and an affiliate of Merrill Lynch, acts as the distributor of Class
A and Class B shares of the Fund.
The Distributor, Merrill Lynch and other securities dealers which have
entered into selected dealer agreements with the Distributor will solicit
subscriptions for shares of the Fund during a period expected to end on ,
1994. The subscription period may be extended for up to an additional 30 days
upon agreement between the Fund and the Distributor. On the fifth business day
after the conclusion of the subscription period, the subscriptions will be
payable, the Class A and Class B shares will be issued and the Fund will
commence operations. The subscription offering may be terminated by the Fund or
the Distributor at any time, in which event no Class A and Class B shares will
be issued (and, therefore, the Fund will not commence operations and no amounts
will be payable by subscribers, and no sales charges will be assessed) or a
limited number of shares will be issued.
25
<PAGE>
The public offering price of the Class A shares during the subscription
offering is set forth in the table below:
<TABLE>
<CAPTION>
SUBSCRIPTION PERIOD
---------------------------------------------
SECURITIES DEALERS'
SALES CHARGE CONCESSION
---------------------- ----------------------
PUBLIC PERCENTAGE* OF PERCENTAGE* OF
OFFERING DOLLAR PUBLIC OFFERING DOLLAR PUBLIC OFFERING
PRICE AMOUNT PRICE AMOUNT PRICE
-------- ------ --------------- ------ ---------------
<S> <C> <C> <C> <C> <C>
Less than $10,000....... $10.695 $.695 6.50% $.695 6.50%
$10,000 but less than
$25,000................ 10.638 .638 6.00 .638 6.00
$25,000 but less than
$50,000................ 10.526 .526 5.00 .526 5.00
$50,000 but less than
$100,000............... 10.417 .417 4.00 .417 4.00
$100,000 but less than
$250,000............... 10.309 .309 3.00 .309 3.00
$250,000 but less than
$1,000,000............. 10.204 .204 2.00 .204 2.00
$1,000,000 and over..... 10.076 .076 0.75 .076 0.75
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
Initial sales charges may be waived for shareholders purchasing $1 million or
more in a single transaction (other than a tax qualified retirement plan under
Section 401 of the Code or a deferred compensation plan under Section 403(b)
and Section 457 of the Code), or a purchase by TMA SM Managed Trust, of Class A
shares of the Fund. In addition, purchases of Class A shares of the Fund made
in connection with a single investment of $1 million or more under the Merrill
Lynch Mutual Fund Adviser Program will not be subject to an initial sales
charge. Purchases described in this paragraph will be subject to a contingent
deferred sales charge if the shares are redeemed within one year after purchase
at the following rates:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
- ------------------ -------------------------
<S> <C>
$1 million up to $2.5 million......................... 1.00%
Over $2.5 million up to $3.5 million.................. 0.60
Over $3.5 million up to $5 million.................... 0.40
Over $5 million....................................... 0.25
</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 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.
The proceeds per share to the Fund from the sale of all Class A shares sold
during the subscription period will be $10.00.
The public offering price of the Class B shares during the subscription
offering will be $10.00 per share. However, the Class B shares may be subject
to a contingent deferred sales charge described below under "Deferred Sales
Charge Alternative--Class B Shares--Contingent Deferred Sales Charge" if
redeemed within four years of purchase and are subject to ongoing account
maintenance and distribution fees as described below.
The minimum initial purchase for both Class A and Class B shares during the
subscription period is $1,000.
26
<PAGE>
CONTINUOUS OFFERING
Commencing immediately after completion of the subscription offering, Class A
and Class B shares of the Fund will be offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
During the continuous offering, shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase during the continuous offering is $1,000.
The minimum subsequent purchase is $50.
The Fund will offer its shares during the continuous offering at a public
offering price equal to the next determined net asset value per share plus
sales charges which, at the option of the purchaser, may be imposed either at
the time of purchase (the "initial sales charge alternative") or on a deferred
basis (the "deferred sales charge alternative"), as described below. The
applicable offering price for purchase orders is based upon the net asset value
of the Fund next determined after receipt of the purchase orders by the
Distributor. As to purchase orders received by securities dealers prior to 4:15
p.m., New York time, which includes orders received after the determination of
the net asset value on the previous day, the applicable offering price will be
based on the net asset value determined as of 4:15 p.m., New York time, on the
day the orders are placed with the Distributor, provided the orders are
received by the Distributor prior to 4:30 p.m., New York time, on that day. If
the purchase orders are not received by the Distributor prior to 4:30 p.m., New
York time, such orders shall be deemed received on the next business day. Any
order may be rejected by the Distributor or the Fund. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares at any
time in response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may be rejected by
the Distributor or the Fund. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a sale of shares to such customers. Purchases directly through the
Transfer Agent are not subject to the processing fee.
----------------
The Fund presently issues two classes of shares: Class A shares are sold to
investors choosing the initial sales charge alternative, and Class B shares are
sold to investors choosing the deferred sales charge alternative. The two
classes of shares each represent interests in the same portfolio of investments
of the Fund, have the same rights and are identical in all respects, except
that (i) Class B shares bear the expenses of the deferred sales arrangements,
any expenses (including incremental transfer agency costs) resulting from such
sales arrangements and the expenses paid by the Class B account maintenance
fee, (ii) Class A shares bear the expenses of the Class A account maintenance
fee, and (iii) each class has exclusive voting rights with respect to the Rule
12b-1 distribution plan pursuant to which the account maintenance and
distribution fees, in the case of the Class B shares, and the account
maintenance fee, in the case of the Class A shares, is paid. The two classes
also have different exchange privileges. See "Shareholder Services--Exchange
Privilege". The net income attributable to Class B shares and the dividends
payable on Class B shares will be reduced by the amount by which the sum of the
account maintenance and distribution fees and incremental expenses associated
with such account maintenance and distribution fees exceeds the account
maintenance fee attributable to the Class A shares; likewise the net asset
value of the Class B shares will be reduced by such amount to the extent the
Fund has undistributed net income. Sales personnel may receive different
compensation for selling Class A or Class B shares. Investors are advised that
only Class A shares may be available for purchase through securities dealers,
other than Merrill Lynch, which are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial given the amount of their
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Investors should determine whether under their
particular
27
<PAGE>
circumstances it is more advantageous to incur an initial sales charge and an
ongoing account maintenance fee, as discussed below, or to have the entire
initial purchase price invested in the Fund with the investment thereafter
being subject to ongoing account maintenance and distribution fees.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to both an ongoing
account maintenance fee and a distribution fee, as described below, although
the shares are subject to an ongoing account maintenance fee, as discussed
below. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees related to Class B shares may exceed
the initial sales charge and ongoing account maintenance fee related to Class A
shares. Again, however, such investors must weigh this consideration against
the fact that not all their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution fees will be offset to the extent
any return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge is subject to certain limits as set forth
below under "Deferred Sales Charge Alternative--Class B Shares".
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continuing
account maintenance and distribution fees and, for a four-year period of time,
a contingent deferred sales charge as described below. For example, an investor
subject to the 6.50% initial sales charge will have to hold his investment for
more than 6 1/2 years for the ongoing 0.25% account maintenance fee and 0.75%
distribution fee of Class B shares to exceed the initial sales charge plus the
accumulated account maintenance fee of Class A shares. This example does not
take into account the time value of money which further reduces the impact of
the ongoing 0.25% account maintenance fee and 0.75% distribution fee of Class B
shares on the investment, fluctuations in net asset value, the effect of the
return on the investment over this period of time or the effect of any limits
that may be imposed upon the payment of the distribution fee and the contingent
deferred sales charge.
Distribution Plans. Pursuant to separate distribution plans adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act (each, a
"Distribution Plan"), the Fund pays the Distributor (a) an account maintenance
fee relating to Class A shares, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to Class
A shares in order to compensate the Distributor and Merrill Lynch (pursuant to
a sub-agreement) in connection with account maintenance activities and (b) an
account maintenance fee and a distribution fee relating to Class B shares,
accrued daily and paid monthly, at the annual rates of 0.25% and 0.75%,
respectively, of the average daily net assets of the Fund attributable to Class
B shares in order to compensate the Distributor and Merrill Lynch (pursuant to
a sub-agreement) for providing account maintenance and distribution services to
the Fund, with the ongoing account maintenance fee compensating the Distributor
and Merrill Lynch for providing account maintenance services to Class B
shareholders and the ongoing distribution fee compensating the Distributor and
Merrill Lynch for providing shareholder and distribution services, and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B shares of the Fund. See "Additional
Information--Organization of the Fund". The Distribution Plan related to Class
B shares is designed to permit an investor to purchase Class B shares through
dealers without the
28
<PAGE>
assessment of a front-end sales charge and at the same time permit the dealer
to compensate its financial consultants in connection with the sale of the
Class B shares. In this regard, the purpose and function of the ongoing account
maintenance and distribution fees and the contingent deferred sales charge are
the same as those of the initial sales charge and account maintenance fee with
respect to the Class A shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B shares.
The payments under the Class B Distribution Plan are based on a percentage of
average daily net assets attributable to Class B shares regardless of the
amount of expenses incurred, and accordingly, distribution-related revenues 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 Distribution Plan. This information is presented annually as
of December 31 of each year on a "fully allocated accrual" basis and quarterly
on a "direct expenses and revenue/cash" basis. On the fully allocated accrual
basis, revenues consist of the account maintenance fees, distribution fees, the
contingent deferred sales charges 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 contingent
deferred sales charges, and the expenses consist of financial consultant
compensation.
The Fund has no obligation with respect to distribution and account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B and Class A shares, and there is no assurance that
the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The account maintenance fee, the distribution fee and the
contingent deferred sales charges in the case of Class B shares will not be
used to subsidize the sale of Class A shares. Similarly, the initial sales
charges and account maintenance fee in the case of Class A shares will not be
used to subsidize the sale of Class B shares. Payment of the distribution fee
on Class B shares is subject to certain limits as set forth under "Deferred
Sales Charge Alternative--Class B Shares".
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads) as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SELECTED
PERCENTAGE * DEALERS
SALES CHARGE AS OF THE NET AS PERCENTAGE
PERCENTAGE OF AMOUNT OF THE
AMOUNT OF PURCHASE THE OFFERING PRICE INVESTED OFFERING PRICE
- ------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
Less than $10,000............ 6.50% 6.95% 6.25%
$10,000 but less than
$25,000..................... 6.00 6.38 5.75
$25,000 but less than
$50,000..................... 5.00 5.26 4.75
$50,000 but less than
$100,000.................... 4.00 4.17 3.75
$100,000 but less than
$250,000.................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000.................. 2.00 2.04 1.80
$1,000,000 and over.......... .75 .76 .65
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent
29
<PAGE>
Initial sales charges may be waived for shareholders purchasing $1 million
or more in a single transaction (other than a tax qualified retirement plan
under Section 401 of the Code or a deferred compensation plan under Section
403(b) and Section 457 of the Code), or a purchase by TMA SM Managed Trust, of
Class A shares of the Fund. In addition, purchases of Class A shares of the
Fund made in connection with a single investment of $1 million or more under
the Merrill Lynch Mutual Fund Adviser Program will not be subject to an
initial sales charge. Purchases described in this paragraph will be subject to
a contingent deferred sales charge if the shares are redeemed within one year
after purchase at the following rates:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
AMOUNT OF PURCHASE SUBJECT TO CHARGE
- ------------------ -------------------
<S> <C>
$1 million up to $2.5 million............................... 1.00%
Over $2.5 million up to $3.5 million........................ 0.60
Over $3.5 million up to $5 million.......................... 0.40
Over $5 million............................................. 0.25
</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 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. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors of Merrill Lynch &
Co., Inc., to participants in certain benefit plans, to directors and trustees
of certain other Merrill Lynch sponsored investment companies, to an investor
who has a business relationship with a financial consultant who joined Merrill
Lynch from another investment firm within six months prior to the date of
purchase if certain conditions set forth in the Statement of Additional
Information are met and to employees of Merrill Lynch & Co., Inc. and its
subsidiaries. Class A shares are offered at net asset value to certain
retirement plans, including eligible 401(k) plans, provided such plans meet
the required minimum number of eligible employees or required amount of assets
advised by the Manager or its affiliate, FAM. Also, Class A shares may be
offered at net asset value in connection with the acquisition of assets of
other investment companies. No initial sales charges are imposed upon Class A
shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions. Class A shares of the Fund are also offered at
net asset value, without sales charge, to an investor who has a business
relationship with a Merrill Lynch financial consultant and who has invested in
a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch
has served as a selected dealer and where Merrill Lynch has either received or
given notice that such arrangement will be terminated, if the following
conditions are satisfied: first, the investor must purchase Class A shares of
the Fund with proceeds from a redemption of shares of such other mutual fund
and such fund imposed a sales charge either at the time of purchase or on a
deferred basis; second, such purchase of Class A shares must be made within 90
days after such notice of termination. Class A shares of the Fund are also
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager or FAM who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund, provided
certain conditions are met. For example, Class A shares of the Fund and
certain other mutual funds advised by the Manager or FAM are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
(formerly known as Merrill Lynch Prime Fund, Inc.) ("Senior
30
<PAGE>
Floating Rate Fund") who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of Senior Floating Rate Fund in shares
of such funds.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold without an initial
sales charge so that the Fund will receive the full amount of the investor's
purchase payment. Merrill Lynch compensates its financial consultants for
selling Class B shares at the time of purchase from its own funds. The proceeds
of the contingent deferred sales charge and the ongoing distribution fee
discussed below are used to defray Merrill Lynch's expenses, including
compensating its financial consultants. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
Proceeds from the contingent deferred sales charge 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 shares such as the payment of compensation to financial consultants for
selling Class B shares. Payments by the Fund to the Distributor of the
distribution fee under the Distribution Plan relating to Class B shares also
may be used in whole or in part by the Distributor for this purpose. The
combination of the contingent deferred sales charge and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of purchase. 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 contingent deferred sales charge schedule if such schedule is higher
than the deferred sales charge schedule relating to the Class B shares acquired
as a result of the exchange.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
four years of purchase may be subject to a contingent deferred sales charge at
the rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
current market value or the cost of the shares being redeemed. Accordingly, no
sales charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
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>
31
<PAGE>
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation will be determined in the manner that results in
the lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor 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 through dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the charge 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 contingent deferred sales charge is waived on redemptions of shares in
connection with certain post-retirement withdrawals from Individual Retirement
Accounts ("IRAs") or other retirement plans or following the death or
disability (as defined in the Code) of a shareholder.
The contingent deferred sales charge also is waived on redemptions of shares
by certain eligible 401(a) and eligible 401(k) plans. The contingent deferred
sales charge is also waived for any Class B shares which are purchased by an
eligible 401(k) or eligible 401(a) plan and which are rolled over into a
Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. Additional information concerning the waiver
of the contingent deferred sales charge is set forth in the Statement of
Additional Information.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based
sales charges, such as the Fund's distribution fee, and on the contingent
deferred sales charge, but not on the account maintenance fees. As applicable
to the Fund, the maximum sales charge rule limits the aggregate of distribution
fee payments and contingent deferred sales charges payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares (defined to exclude shares
issued pursuant to dividend reinvestments and exchanges) plus (2) interest on
the unpaid balance 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 contingent deferred sales charge). 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") 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, and any contingent
deferred sales charges will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fees. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances, payment in excess of the amount payable under the NASD formula
will not be made.
32
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of the
Fund on 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 contingent deferred sales charge
which may be applicable to Class B shares, there will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending
on the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper
notice of redemption in the case of shares deposited with the Transfer Agent
may be accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures
of all persons in whose names the shares are registered, signed exactly as
their names appear on the Transfer Agent's register or on the certificate, as
the case may be. The signature(s) on the redemption request must be guaranteed
by an "eligible guarantor institution" (including, for example, Merrill Lynch
branches and certain other financial institutions) as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence
and validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents, such as, but
not limited to, trust instruments, death certificates, appointments as executor
or administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
New York Stock Exchange on the day received and that such request is received
by the Fund from such dealer not later than 4:30 p.m., New York time, on the
same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 4:30 p.m., New York time, in order to
obtain that day's closing price.
33
<PAGE>
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable contingent
deferred sales charge in the case of Class B shares). Securities firms which do
not have selected dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice of repurchase
to the Fund. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a repurchase of shares to such customers. Redemptions
directly through the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. A shareholder whose order for repurchase is rejected by
the Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A SHARES
Shareholders who have redeemed their Class A shares have a one-time privilege
to reinstate their accounts by purchasing Class A shares of the Fund at net
asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised by the Class A
shareholder only the first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in its shares. Full details as to each of
such services, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or 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 quarterly statements
from the Transfer Agent. These quarterly statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of income
dividends and long-term capital gain distributions. The quarterly statements
will also show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of income dividends and long-term capital gain distributions. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Transfer Agent. Shareholders may also maintain their
accounts through Merrill Lynch. Upon the transfer of shares out of a Merrill
Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically without charge, at the Transfer
Agent. Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A shares. Shareholders interested in
transferring their Class B shares from Merrill Lynch and who do not wish to
have an Investment Account maintained for such shares at the Transfer Agent may
request their
34
<PAGE>
new brokerage firm to maintain such shares in an account registered in the name
of the brokerage firm for the benefit of the shareholder. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he be issued certificates for his shares and then must turn
the certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax deferred
retirement account such as an IRA from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of the
Fund, a shareholder must either redeem the shares (paying any applicable
contingent deferred sales charge) so that the cash proceeds can be transferred
to the account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Systematic Withdrawals and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment Account
in the form of payments by check or through automatic payment by direct deposit
to his bank account on either a monthly or quarterly basis. A Class A
shareholder whose shares are held within a CMA (R), CBA (R) or Retirement
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject
to certain conditions. Regular additions of Class A shares may be made to an
investor's Investment Account by pre-arranged charges of $50 or more to his
regular bank account. Investors who maintain CMA accounts may arrange to have
periodic investments made in the Fund in their CMA account or in certain
related accounts in amounts of $250 or more through the CMA Automatic
Investment Program. The Automatic Investment Program is not available to
shareholders whose shares are held in a brokerage account with Merrill Lynch
(other than a CMA account).
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are automatically reinvested in full and fractional
shares of the Fund, without sales charge, at the net asset value per share next
determined after the close of the New York Stock Exchange on the ex-dividend
date of such dividend or distribution. A shareholder may at any time, by
written notification to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or telephone call (1-
800-MER-FUND) to the Transfer Agent if the shareholder's account is maintained
with the Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date. No deferred sales charge
will be imposed on redemptions of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
Exchange Privilege. U.S. Class A and Class B shareholders of the Fund each
have an exchange privilege with certain other mutual funds sponsored by Merrill
Lynch. There is currently no limitation on the number of times a shareholder
may exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Commission. Class A shareholders
of the Fund may exchange their shares ("outstanding Class A shares") for Class
A shares of another fund ("new Class A shares") on the basis of relative net
asset value per Class A share, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding Class A shares and
the sales charge payable at the time of the exchange on the new Class A shares.
The Fund's exchange privilege is modified with respect to purchases of Class A
shares under the Merrill Lynch Mutual Fund Adviser program. First, the initial
allocation of assets is made under the program. Then, any subsequent exchange
under the program of Class A shares of a fund for Class A shares of the Fund
will be made solely on the basis of the relative net asset
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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 fund and the sales charge payable on the shares of the Fund being
acquired in the exchange under this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share without the payment of any
contingent deferred sales charge that might otherwise be due upon redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's contingent deferred sales charge schedule if such
schedule is higher than the deferred sales charge schedule relating to the
Class B shares of the fund from which the exchange has been made. For purposes
of computing the contingent deferred sales charge that may be payable upon a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares.
Class A and Class B shareholders of the Fund may also exchange their shares for
shares of certain money market funds, but in the case of an exchange from Class
B shares, the period of time that shares are held in a money market fund will
not count toward satisfaction of the holding period requirement for purposes of
reducing the contingent deferred sales charge. Exercise of the exchange
privilege is treated as a sale for Federal income tax purposes. For further
information, see "Shareholder Services--Exchange Privileges" in the Statement
of Additional Information.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A and Class B shares in accordance with a formula
specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A shares and the
contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares. Dividends paid by the Fund with respect to Class A and Class B
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution fees and any incremental transfer
agency costs relating to Class B shares will be borne exclusively by Class B
shares and the account maintenance fee relating to Class A shares will be borne
exclusively by Class A shares. The Fund will include performance data for both
Class A and Class B shares of the Fund in any advertisement or information
including performance data of the Fund.
The Fund may also quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
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calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements directed to investors whose purchases are
subject to reduced sales charges in the case of Class A shares or waiver of the
contingent deferred sales charge in the case of Class B shares (such as
investors in certain retirement plans), performance data may take into account
the reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the contingent deferred
sales charge, a lower amount of expenses may be deducted. See "Purchase of
Shares". The Fund's total return may be expressed either as a percentage or as
a dollar amount in order to illustrate the effect of such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered representative of the
Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income will be paid at least annually.
All net realized long- or short-term capital gains, if any, will be distributed
to the Fund's shareholders at least annually. See "Additional Information--
Determination of Net Asset Value". Dividends and distributions may be
reinvested automatically in shares of the Fund at net asset value without a
sales charge. Shareholders may elect in writing to receive any such dividends
or distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year.
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The per share dividends and distributions on Class B shares will be lower
than the per share dividends and distributions on Class A shares as a result of
the effect of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B shares, as compared with the
account maintenance fee applicable to the Class A shares.
Certain gains or losses attributable to foreign currency gains or losses from
certain forward contracts may increase or decrease the amount of the Fund's
income available for distribution to shareholders. If such losses exceed other
ordinary income during a taxable year, (a) the Fund would not be able to make
any ordinary dividend distributions and (b) distributions made before the
losses were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend,
reducing each shareholder's tax basis in his Fund shares for Federal income tax
purposes, and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (provided
such shares were held as a capital asset). See "Additional Information--Taxes".
TAXES
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to Class A and Class B shareholders (together the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes.
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Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value
of the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible, and intends, to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of 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 proposed
regulations the Fund would be able to elect to "mark to market" at the end of
each taxable year all shares that it holds in PFICs. If it made this election,
the Fund would recognize as ordinary income any increase in the value of such
shares. Unrealized losses, however, would not be recognized. By making the
mark-to-market election, the Fund could avoid imposition of the interest charge
with respect to its distributions from PFICs, but in any particular year might
be required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary dividend distributions, and any distributions made before the losses
were realized but in the same taxable year would
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be recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (provided the shares were held as a capital asset).
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether under the Automatic
Dividend Reinvestment Plan or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively .
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
DETERMINATION OF NET ASSET VALUE
Net asset value per share is determined once daily at 4:15 p.m., New York
time, on each day during which the New York Stock Exchange is open for trading
and, under certain circumstances, on other days. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value is computed by dividing
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the Manager
and the Distributor, are accrued daily.
The per share net asset value of the Class B shares generally will be lower
than the per share net asset value of the Class A shares, reflecting the daily
expense accruals of the higher sum of account maintenance, distribution and
transfer agency fees applicable with respect to the Class B shares, as compared
with the account maintenance fee applicable to the Class A shares. It is
expected, however, that the per share net asset value of the two classes will
tend to converge immediately after the payment of dividends or distributions
which will differ by approximately the amount of the expense accrual
differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are
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being valued or, lacking any sales, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are
valued on the exchange designated by or under the authority of the Board of
Directors as the primary market. Securities traded in the OTC market are valued
at the last available bid price in the OTC market prior to the time of
valuation. Other investments, including futures contracts and related options,
are stated at market value. Securities and assets for which market quotations
are not readily available are valued at fair market value as determined in good
faith by or under the direction of the Board of Directors of the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 12, 1994. It has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A Common Stock and Class B
Common Stock, each of which consists of 100,000,000 shares. Both Class A shares
and Class B shares represent interests in the assets of the Fund and are
identical in all respects except that the expenses of the account maintenance
fee related to the Class A shares are borne solely by the Class A shares, and
the expenses of the account maintenance fee and distribution fee related to the
Class B shares are borne solely by the Class B shares, and Class A and Class B
shareholders have exclusive voting rights with respect to matters relating to
their respective account maintenance fees and, in the case of Class B shares,
distribution expenditures. See "Purchase of Shares". The Fund has received an
order (the "Multi-Class System Order") from the Commission permitting the
issuance and sale of multiple classes of shares. The Multi-Class System Order
permits the Fund to issue additional classes of shares if the Board of
Directors deems such issuance to be in the best interest of the Fund. Shares
issued are fully paid, non-assessable and have no preemptive or conversion
rights.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold an annual meeting of shareholders in any year in which the Investment
Company Act does not require shareholders to elect Directors. Also, the by-laws
of the Fund require that a special meeting of shareholders be held upon the
written request of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting, if they comply with applicable Maryland law. The Fund
will assist in shareholder communications in the manner described in Section
16(c) of the Investment Company Act. Voting rights for Directors are not
cumulative. Shares issued are fully paid and non-assessable and have no
preemptive or conversion rights. Each share of Class A Common Stock and Class B
Common Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities, except that, as
noted above, expenses related to the distribution of the shares of a class will
be borne solely by such class.
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SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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APPENDIX A
OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund is authorized to engage in various portfolio hedging strategies.
These strategies are described in more detail below:
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency and stock index options and futures,
options on such futures and forward foreign exchange transactions. The Fund may
enter into such transactions only in connection with its hedging strategies.
While the Fund's use of hedging strategies is intended to reduce the volatility
of the net asset value of Fund shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund may not necessarily be engaging in
hedging activities when movements in the equity markets or currency exchange
rates occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Manager believes that, because the Fund will only engage in
these transactions for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions. Tax
requirements may limit the Fund's ability to engage in the hedging transactions
and strategies discussed below. See "Additional Information--Taxes".
Set forth below are descriptions of certain hedging strategies in which the
Fund is authorized to engage.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified future
date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security
at a price that may be higher than the market value of that security at the
time of exercise
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for as long as the option is outstanding. The Fund may engage in closing
transactions in order to terminate put options that it has written. The Fund
will not write put options if the aggregate value of the obligations underlying
the put options shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the exercise price,
thus limiting the Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any profit on the sale
in the value of the underlying security will be partially offset by the amount
of the premium paid for the put option and any related transaction costs. Prior
to its expiration, a put option may be sold in a closing sale transaction and
profit or loss from the sale will depend on whether the amount received is more
or less than the premium paid for the put option plus the related transaction
costs. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of any offsetting sale of an identical option
prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if, as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is authorized
to engage in transactions in stock index options and futures and financial
futures, and related options on such futures. The Fund may purchase or write
put and call options on stock indices to hedge against the risks of marketwide
stock price movements in the securities in which the Fund invests. Options on
indices are similar to options on securities except that on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Fund may invest in stock index
options based on a broad market index or based on a narrow index representing
an industry, country or market segment.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions".
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market
advance, it may purchase futures in order to gain rapid market exposure. This
technique generally will allow the Fund to gain exposure to a market in a
manner which is more efficient than purchasing individual securities, and may
in part or entirely offset increases in the cost of securities in such market
that the Fund ultimately purchases. As such
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purchases are made, an equivalent amount of futures contracts will be
terminated by offsetting sales. The Manager does not consider purchases of
futures contracts to be a speculative practice under these circumstances. It is
anticipated that, in a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the long futures position,
whether the long position is the purchase of a futures contract or the purchase
of a call option or the writing of a put option on a future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging (including
anticipatory hedging) activities. Generally, these strategies are utilized
under the same market and market sector conditions (i.e., conditions relating
to specific types of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call options on
futures contracts and stock indices rather than selling the underlying futures
contract in anticipation of a decrease in the market value of its securities.
Similarly, the Fund may purchase call options, or write put options on futures
contracts and stock indices, as a substitute for the purchase of such futures
to hedge against the increased cost resulting from an increase in the market
value of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated
by the buyer and seller. The Fund may engage in OTC options to effect the same
strategies as it would through exchange-traded options. See "Restrictions on
OTC Options" below for information as to restrictions on the use of OTC
options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest
and multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price set at the time of the contract. The
Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of
shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Fund has no limitation on transaction hedging. The Fund will not speculate
in forward foreign exchange. If the Fund enters into a position hedging
transaction, the Fund's custodian will place cash or liquid debt securities in
a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account so that the value of the
account will equal the amount of the Fund's commitment with respect to such
contracts. Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. Investors
should be aware that U.S. dollar-denominated securities may not be available in
some or all developing countries, that the forward currency market for the
purchase for U.S.
45
<PAGE>
dollars in most, if not all, developing countries is not highly developed and
that in certain developing countries no forward market for foreign currencies
currently exists or such market may be closed to investment by the Fund.
The Fund also is authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures, for example, as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar-denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund. As an illustration, the Fund may use such techniques to
hedge the stated value in U.S. dollars of an investment in a pound sterling
denominated security. In such circumstances, for example, the Fund may purchase
a foreign currency put option enabling it to sell a specified amount of pounds
for dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the pound relative to the dollar will tend
to be offset by an increase in the value of the put option. To offset, in whole
or in part, the cost of acquiring such a put option, the Fund may also sell a
call option which, if exercised, requires it to sell a specified amount of
pounds for dollars at a specified price by a future date (a technique called a
"straddle"). By selling such a call option in this illustration, the Fund gives
up the opportunity to profit without limit from increases in the relative value
of the pound to the dollar. The Manager believes that "straddles" of the type
which may be utilized by the Fund constitute hedging transactions and are
consistent with the policies described above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. Listed options are third-party
contracts (i.e., performance of the parties' obligations is guaranteed by an
exchange or clearing corporation) which are issued by a clearing corporation,
traded on an exchange and have standardized strike prices and expiration dates.
OTC options are two-party contracts and have negotiated strike prices and
expiration dates. A futures contract on a foreign currency is an agreement
between two parties to buy and sell a specified amount of a currency for a set
price on a future date. Futures contracts and options on futures contracts are
traded on boards of trade or futures exchanges. The Fund will not speculate in
foreign currency options, futures or related options. Accordingly, the Fund
will not hedge a currency substantially in excess of the market value of
securities which it has committed or anticipates to purchase which are
denominated in such currency and, in the case of securities which have been
sold by the Fund but not yet delivered, the proceeds thereof in its denominated
currency. Further, the Fund will segregate at its custodian cash, liquid equity
or debt securities having a market value substantially representing any
subsequent decrease in the market value of such hedged security, less any
initial or variation margin held in the account of its broker. The Fund may not
incur potential net liabilities of more than 33 1/3% of its total assets from
foreign currency options, futures or related options.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Fund provide that the futures
trading activities described herein will not result in the Fund being deemed a
"commodity pool" under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell futures contracts
and options thereon (i) for bona fide hedging purposes, and (ii) for non-
hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts and options.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian
46
<PAGE>
so that the amount so segregated, plus the amount of initial and variation
margin held in the account of its broker, equals the market value of the
futures contract, thereby ensuring that the use of such futures contract is
unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
OTC stock index options, OTC foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million or any other
bank or dealer having capital of at least $150 million or whose obligations are
guaranteed by an entity having capital of at least $150 million.
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 15% of the net assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is "in-the-
money" (i.e., current market value of the underlying security minus the
option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the premium
received for the option, plus the amount by which the option is "in-the-money".
This policy as to OTC options is not a fundamental policy of the Fund and may
be amended by the Directors of the Fund without the approval of the Fund's
shareholders. However, the Fund will not change or modify this policy prior to
the change or modification by the commission staff of its position.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
options and futures transactions to hedge the portfolio, including to affect
the Fund's exposure in various markets, involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction. In addition, options and futures
transactions in foreign markets are subject to the risk factors associated with
foreign investments generally. See "Risk Factors and Special Considerations".
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. There can be
no assurance, however, that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions also could have
an
47
<PAGE>
adverse impact on the Fund's ability to hedge effectively its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of the bankruptcy of a broker with whom the Fund has an open position in
an option, a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts that any person may trade on a particular trading day. The
Manager does not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
48
<PAGE>
APPENDIX B
WHY GLOBAL INVESTING?
[_] INCREASED INVESTMENT OPPORTUNITY -- Capital markets outside the United
States have grown rapidly in size and importance. In 1970, non-U.S. stocks
accounted for 32% of the world's $935 billion in total stock market
capitalization. By the end of 1993, foreign stocks represented 62% of total
world stock market capitalization of $11,638 billion.
[_] POTENTIAL TO REDUCE INVESTMENT RISK -- Economies and financial markets
around the world do not all move in the same direction at the same time
because, among other reasons, governments pursue different economic and
monetary policies. Diversifying among different countries can help reduce the
risk related to a downturn in any one market. (However, investing on an
international basis also involves certain risks not typically present in
investing solely within the United States, such as currency fluctuations,
limited liquidity, the potential for unfavorable political developments, and
substantial volatility.)
[_] FASTER ECONOMIC GROWTH ABROAD -- The U.S. economy remains one of the
most productive and strongest in the world. However, a number of trends
suggest that other economies and other regions have the potential to grow
faster over the coming years. The trends include the economic boom in a number
of countries along the Pacific Rim, the greater integration of European
economies, rapid advances in telecommunications technology, and the emergence
of market economies in nations that, until recently, were controlled by the
state.
49
<PAGE>
START A PROGRAM OF
SYSTEMATIC INVESTING TODAY!
Timing the market is virtually impossible even for the most sophisticated
investor. But time -- not timing -- is the key to producing long-term total
return. One of the best ways to build assets for tomorrow is through a long-
term program of regular investing -- one such strategy is known as dollar cost
averaging.
With dollar cost averaging, you let the market's ups and downs work for you.
Here's how: You invest the same dollar amount -- for example, $100, $300, or
$1,000 -- on a regularly scheduled basis, whether the market is steady,
rising, or falling. And by systematically investing through market ups and
downs every month or quarter, you buy more shares when the price is low and
fewer shares when the price is high. Consistency, whether it is monthly or
quarterly, is the key to the success of dollar cost averaging.
As the examples to the right illustrate, if you had invested through three
market cycles -- fluctuating, rising, and declining -- over the long term the
average cost to you would generally be less than the average per share price
over the same investment period. Throughout the years, the benefits of dollar
cost averaging can really add up. (Of course, dollar cost averaging does not
assure a profit and does not protect against loss in declining markets.)
(Investors should carefully consider their ability to continue purchasing
during periods of price declines. These examples are for illustrative purposes
only and cannot be taken as an indication of Fund performance.)
<TABLE>
<CAPTION>
FLUCTUATING MARKET
--------------------------
REGULAR SHARE SHARES
INVESTMENT PRICE ACQUIRED
---------- ----- ---------
<S> <C> <C> <C>
$ 300 $10 30
$ 300 $ 5 60
$ 300 $10 30
Total.......... $ 900 $25 120
</TABLE>
Average share cost: $7.50 ($900/120)
Average share price: $8.33 ($25/3)
<TABLE>
<CAPTION>
RISING MARKET
--------------------------
REGULAR SHARE SHARES
INVESTMENT PRICE ACQUIRED
---------- ----- ---------
<S> <C> <C> <C>
$ 300 $ 5 60
$ 300 $15 20
$ 300 $10 30
$ 300 $15 20
$ 300 $25 12
Total.......... $1,500 $70 142
</TABLE>
Average share cost: $10.57 ($1,500/142)
Average share price: $11.00 ($70/5)
<TABLE>
<CAPTION>
DECLINING MARKET
--------------------------
REGULAR SHARE SHARES
INVESTMENT PRICE ACQUIRED
---------- ----- ---------
<S> <C> <C> <C>
$ 300 $25 12
$ 300 $15 20
$ 300 $20 15
$ 300 $10 30
$ 300 $ 5 60
Total.......... $1,500 $75 137
</TABLE>
Average share cost: $10.95 ($1,500/137)
Average share price: $15.00 ($75/5)
50
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
1.SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase . . . . Class A shares or . . . .
Class B shares (choose one) of Merrill Lynch Global SmallCap Fund, Inc. and
establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000) (subsequent investments $50
or more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
1. ................................ 4. ...................................
2. ................................ 5. ...................................
3. ................................ 6. ...................................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:
Distribution
Elect [_] reinvest dividends Elect [_] reinvest capital gains
Options
One [_] pay dividends in cash One [_] pay capital gains in cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
----------------
(Please Print)
Name.............................................. [_][_][_][_][_][_][_][_]
First Name Initial Last Name Social Security No.
Name of Co-Owner (if any)......................... or Taxpayer
First Name Initial Last Name Identification No.
Address...........................................
.................................................. .....................,
(Zip Code) Date 19..
Occupation................... Name and Address of Employer ...................
.........................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information--Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
Signature of Owner............... Signature of Co-Owner (if any)...............
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2.LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global SmallCap Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $10,000 [_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000
[_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Global SmallCap
Fund prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global SmallCap Fund, Inc. held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
- -------------------------------------------------------------------------------
51
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS
IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly,
of shares in Merrill Lynch Global SmallCap Fund, Inc., at cost or current
offering price. Begin systematic withdrawal on [Date]. . . ., 19. .
Withdrawals to be made either (check one) [_] Monthly [_] Quarterly*
*Quarterly withdrawals are made on the 24th day of March, June, September and
December.
Specify withdrawal amount (check one): [_] $. . . . . . . . . or [_] . . . . .
% of the current value of Class A shares in the account.
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
- -------------------------------------------------------------------------------
(b) I HEREBY AUTHORIZE PAYMENT BY
(A)I HEREBY AUTHORIZE PAYMENT BY CHECK DIRECT DEPOSIT TO BANK ACCOUNT AND
Draw checks payable (IF NECESSARY) DEBIT ENTRIES AND
(check one) ADJUSTMENTS FOR ANY CREDIT ENTRIES
MADE IN ERROR TO MY ACCOUNT.
Specify type of account (check one):
[_] as indicated in Item 1. [_] checking [_] savings
I agree that this authorization will
[_] to the order of................. remain in effect until I provide
written notification to Financial
Mail to (check one) Data Services, Inc. amending or
terminating this service.
Name on your Account..................
[_] the address indicated in Item 1. Bank..................................
Bank #........ Account #...............
[_] Name (Please Print)............. Bank Address..........................
Signature of Depositor.... Date........
Address............................... Signature of Depositor (if joint
account)..............................
Signature of Owner.................... NOTE: IF AUTOMATIC DIRECT DEPOSIT IS
ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM
YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY
THIS APPLICATION.
Signature of Co-Owner (if any)........
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4.APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase ........ Class A shares or ........ Class B
shares (choose one) of Merrill Lynch Global SmallCap Fund, Inc., subject to
the terms set forth below.
- -------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR
ACH
You are hereby authorized to draw DEBITS DRAWN BY FINANCIAL DATA
checks or an ACH debit each month on SERVICES, INC.
my bank account for investment in To...............................Bank
Merrill Lynch Global SmallCap Fund, (Investor's Bank)
Inc. as indicated below:
Amount of each check or ACH debit Bank Address.........................
$..................................... City...... State...... Zip Code......
Account No.......................... As a convenience to me, I hereby
Please date and invest checks or request and authorize you to pay and
draw ACH debits on the 20th day of charge to my account checks or ACH
each month beginning.................. debits drawn on my account by and
(Month) payable to Financial Data Services,
or as soon thereafter as possible. Inc., Transfer Agency Mutual Fund
Operations, Jacksonville, Florida
I agree that you are preparing 32232-5289. I agree that your rights
these checks or drawing these debits in respect to each such check or
voluntarily at my request and that debit shall be the same as if it
you shall not be liable for any loss were a check drawn on you and signed
arising from any delay in preparing personally by me. This authority is
or failure to prepare any such check to remain in effect until revoked
or debit. If I change banks or desire personally by me in writing. Until
to terminate or suspend this program, you receive such notice, you shall
I agree to notify you promptly in be fully protected in honoring any
writing. such check or debit. I further agree
I further agree that if a check or that if any such check or debit be
debit is not honored upon dishonored, whether with or without
presentation, Financial Data cause and whether intentionally or
Services, Inc. is authorized to inadvertently, you shall be under no
discontinue immediately the Automatic liability.
Investment Plan and to liquidate ......... .....................
sufficient shares held in my account Date Signature of
to offset the purchase made with the ......... Depositor
returned check or dishonored debit. .....................
Bank Signature of Depositor
............ ..................... Account (If joint account,
Date Signature of Number both must sign)
Depositor
.....................
Signature of Depositor
(If joint account, NOTE: IF AUTOMATIC INVESTMENT PLAN
both must sign) IS ELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" SHOULD ACCOMPANY
THIS APPLICATION.
- -------------------------------------------------------------------------------
5.FOR DEALER ONLY
Branch Office, Address, Stamp. We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
- - transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
plan. We guarantee the shareholder's
signature.
- - .....................................
Dealer Name and Address
This form when completed should be
mailed to: By ..................................
Authorized Signature of Dealer
Merrill Lynch Global SmallCap [_][_][_] [_][_][_][_]
Fund, Inc. Branch-Code F/C No. .............
c/o Financial Data Services, Inc. [_][_][_] [_][_][_][_][_] F/C Last Name
Transfer Agency Mutual Fund Dealer's Customer A/C No.
Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
52
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
53
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
54
<PAGE>
Manager
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Independent Auditors
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0057
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAW-
FULLY BE MADE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Fee Table.................................................................. 5
Alternative Sales Arrangements............................................. 6
Risk Factors and Special Considerations.................................... 9
Investment Objective and Policies.......................................... 13
Description of Certain Investments........................................ 15
Characteristics of Certain Debt
Securities............................................................... 16
Other Investment Policies and Practices................................... 19
Investment Restrictions................................................... 22
Management of the Fund..................................................... 23
Board of Directors........................................................ 23
Management and Advisory Arrangements...................................... 24
Transfer Agency Services.................................................. 25
Purchase of Shares......................................................... 25
Subscription Offering..................................................... 25
Continuous Offering....................................................... 27
Alternative Sales Arrangements............................................ 27
Initial Sales Charge Alternative--Class A Shares.......................... 29
Deferred Sales Charge Alternative--
Class B Shares........................................................... 31
Redemption of Shares....................................................... 33
Redemption................................................................ 33
Repurchase................................................................ 33
Reinstatement Privilege--Class A Shares................................... 34
Shareholder Services....................................................... 34
Performance Data........................................................... 36
Additional Information..................................................... 37
Dividends and Distributions............................................... 37
Taxes..................................................................... 38
Determination of Net Asset Value.......................................... 40
Organization of the Fund.................................................. 41
Shareholder Reports....................................................... 42
Shareholder Inquiries..................................................... 42
Appendix A................................................................. 43
Appendix B................................................................. 49
Authorization Form......................................................... 51
</TABLE>
Code #18187-0694
Prospectus
[PICTURE]
- -------------------------------------------------------------------------------
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 23, 1994
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. THIS STATEMENT OF ADDITIONAL +
+INFORMATION DOES NOT CONSTITUTE A PROSPECTUS. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
-------------
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified, open-
end management investment company seeking long-term growth of capital by
investing primarily in a portfolio of equity securities of issuers with
relatively small market capitalizations ("SmallCap Issuers") located in various
countries and in the United States. Under normal market conditions, the Fund
expects to invest at least 66% of its total assets in equity securities of
SmallCap Issuers. While the Fund expects to invest primarily in equity
securities of SmallCap Issuers, the Fund reserves the right to invest up to 34%
of its total assets, under normal market conditions, in equity securities of
issuers having larger individual market capitalizations and in debt securities.
It is anticipated that a substantial portion of the Fund's assets will be
invested in the developed countries of Europe and the Far East and that a
significant portion of its assets also may be invested in developing countries.
The Fund may employ a variety of investments and techniques to hedge against
market and currency risk. There can be no assurance that the Fund's investment
objective will be achieved.
The Fund offers two classes of shares which may be purchased during the
subscription offering at $10.00 per share and during the continuous offering at
a price equal to the next determined net asset value per share, plus, in both
cases, a sales charge which, at the election of the purchaser, may be imposed
(i) at the time of purchase (the "Class A shares") or (ii) on a deferred basis
(the "Class B shares"). These alternatives permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
circumstances. Investors should understand that the purpose and function of the
deferred sales charges and ongoing account maintenance fee with respect to the
Class B shares are the same as those of the initial sales charge and ongoing
account maintenance fee with respect to the Class A shares. Each Class A and
Class B share represents identical interests in the investment portfolio of the
Fund and has the same rights, except that Class B shares bear the expenses of
the account maintenance and distribution fees and certain other costs resulting
from the deferred sales charge arrangement and have exclusive voting rights
with respect to the account maintenance and distribution fees. The two classes
also have different exchange privileges.
-------------
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 ,
1994 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by calling or writing the Fund
at the above telephone number or address. This Statement of Additional
Information has been incorporated by reference into the Prospectus. Capitalized
terms used but not defined herein have the same meanings as in the Prospectus.
-------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
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The date of this Statement of Additional Information is , 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of capital
by investing primarily in a portfolio of equity securities of issuers with
relatively small market capitalizations located in various foreign countries
and in the United States. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce
risk for the Fund's portfolio as a whole. This negative correlation also may
offset unrealized gains the Fund has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility is reduced when the various markets are combined into a single
portfolio. Of course, movements in the various securities markets may be offset
by changes in foreign currency exchange rates. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. (the "Manager"), will
effect portfolio transactions without regard to holding period if, in their
judgment, such transactions are advisable in light of a change in circumstances
of a particular company or within a particular industry or in general market,
economic or financial conditions. As a result of the investment policies
described in the Prospectus, the Fund's portfolio turnover rate may be higher
than that of other investment companies. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 100%
under normal conditions, it is impossible to predict portfolio turnover rates.
The portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. The Fund is subject to the Federal income tax requirement that less
than 30% of the Fund's gross income must be derived from gains from the sale or
other disposition of securities held for less than three months.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") (collectively, the "Depositary Receipts")
or other securities convertible into securities of foreign issuers. The
Depositary Receipts may not necessarily be denominated in the same currency as
the securities into which they may be converted. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts issued
in Europe which evidence a similar ownership arrangement. GDRs are receipts
issued throughout the world which evidence a similar ownership arrangement.
Generally, ADRs, in registered form, are designed for use in the U.S.
securities markets, and EDRs, in bearer form, are designed for use in European
securities markets. GDRs are tradeable both in the U.S. and Europe and are
designed for use throughout the world. The Fund may invest in unsponsored
Depositary Receipts. The issuers of unsponsored Depositary Receipts 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 securities.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are
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redeemable on a daily basis on each day the Fund determines its net asset value
in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. See "Redemption of Shares". Under
present conditions, the Manager does not believe that these considerations will
have any significant effect on its portfolio strategy, although there can be no
assurance in this regard.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Investment Objective and Policies--Other Investment Policies and
Practices--Portfolio Strategies Involving Options, Futures and Forward Foreign
Exchange Transactions" and in the Appendix to the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency options and futures, stock index
options and futures, and options on such futures and forward foreign currency
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of the
Fund's shares will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed in the Prospectus and below), the Manager believes that, because the
Fund will only engage in these transactions for hedging purposes, the options
and futures portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of options and futures
transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against a decline in the price of
the underlying security.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer would realize a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer would realize a gain or loss from the sale of the
underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option
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<PAGE>
which increases the Fund's return. The Fund writes only covered put options
which means that so long as the Fund is obligated as the writer of the option,
it will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid debt
securities denominated in U.S. dollars or non-U.S. currencies with a securities
depository with a value equal to or greater than the exercise price of the
underlying securities. By writing a put, the Fund will be obligated to purchase
the underlying security at a price that may be higher than the market value of
that security at the time of exercise for as long as the option is outstanding.
The Fund may engage in closing transactions in order to terminate put options
that it has written. The Fund will not write a put option if the aggregate
value of the obligations underlying the put shall exceed 50% of the Fund's net
assets.
Options referred to herein and in the Fund's Prospectus may be options traded
on foreign securities exchanges. An option position may be closed only on an
exchange which provides a secondary market for an option of the same series. If
a secondary market does not exist, it might not be possible to effect closing
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange
or the Options Clearing Corporation (the "Clearing Corporation") may not, at
all times, be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The Fund may also enter into over-the-counter options transactions ("OTC
options"), which are two party contracts with prices and terms negotiated
between the buyer and seller. The Fund will only enter into OTC options
transactions with respect to portfolio securities for which management believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option).
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that OTC options and the assets used as cover for written
OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
4
<PAGE>
written call options or on securities which it intends to purchase. The Fund
may purchase either exchange-traded options or OTC options. The Fund will not
purchase options on securities (including stock index options discussed below)
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the
Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "mark to the market". At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or
gain. In addition, a nominal commission is paid on each completed sale
transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a futures contract may
be a "senior security" under the Investment Company Act.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures contracts and movements in the prices of the
securities and currencies which are the subject of the hedge. If the prices of
the options and futures contract move more or less than the prices of the
hedged securities and currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the securities and
currencies which are the subject of the hedge. The successful use of options
and futures also depends on the Manager's ability to predict correctly price
movements in the market involved in a particular options or futures
transaction.
Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put
5
<PAGE>
options of the same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid secondary
market for such option or future. However, there can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only over-the-counter options
for which management believes the Fund can receive on each business day at
least two independent bids or offers (one of which will be from an entity other
than a party to the option) unless there is only one dealer, in which case such
dealer's price will be used [or which can be sold at a formula price provided
for in the over-the-counter option agreement]. In the case of a futures
position or an option on a futures position written by the Fund, in the event
of adverse price movements, the Fund would continue to be required to make
daily cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to take or make delivery of the
security or currency underlying the futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to hedge effectively its portfolio. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option. The
risk of loss from investing in futures transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these
limits, and it may impose other sanctions or restrictions. The Manager does not
believe that these trading and position limits will have any adverse impact on
the portfolio strategies for hedging the Fund's portfolio.
Forward Foreign Exchange Transactions. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e., cash, basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 1/10 of 1% due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange between currencies of the different countries
in whose securities it will invest as a hedge against possible variations in
the foreign exchange rates between these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date and price set at the time of the contract. The Fund's
dealings in forward foreign exchange will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with the purchase
and sale of its portfolio securities, the sale and redemption of shares of the
Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency. The Fund
will not speculate in forward foreign exchange. The Fund may not position hedge
with respect to the currency of a particular country to an extent greater than
the aggregate market value (at the time of making such sale) of the securities
held in its portfolio denominated or quoted in that particular foreign
currency. If the Fund enters into a position hedging transaction, its custodian
will place cash or liquid debt securities in a separate account of the Fund in
an amount equal to the value of the
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Fund's total assets committed to the consummation of such forward contract. If
the value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account so that the value of the
account will equal the amount of the Fund's commitment with respect to such
contracts. The Fund will not enter into a position hedging commitment if, as a
result thereof, the Fund would have more than 15% of the value of its assets
committed to such contracts. The Fund will not enter into a forward contract
with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a pound denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of pounds for dollars at a specified
price by a future date. To the extent the hedge is successful, a loss in the
value of the relative to the dollar will tend to be offset by an increase in
the value of the put option. To offset, in whole or part, the cost of acquiring
such a put option, the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of pounds for dollars a specified price
by a future date (a technique called a "straddle"). By selling such call option
in this illustration, the Fund gives up the opportunity to profit without limit
from increases in the relative value of the pound to the dollar. The Manager
believes that "straddles" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Diversified Status. The Fund is classified as diversified within the meaning
of the Investment Company Act, which means that the Fund is limited by such Act
in the proportion of its assets that it may invest in securities of a single
issuer. See "Investment Objectives and Policies--Investment Restrictions." The
Fund's investment also will be limited in order to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"). See "Dividends, Distributions and Taxes--Taxes". To
qualify under both the Investment Company Act and the Code, the Fund will
comply with certain requirements, including limiting its investments so that at
the time of investment and 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 75% 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.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when
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securities are purchased or sold by the fund with payment and delivery taking
place in the future to secure what is considered an advantageous yield and
price to the Fund at the time of entering into the transaction. Although the
Fund has not established any limit on the percentage of its assets that may be
committed in connection with such transactions, the Fund will maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies in an aggregate amount equal to the amount
of its commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the agreement
the fund is paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.50% of the aggregate
purchase price of the security that the fund has committed to purchase. The
Fund will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price that is considered
advantageous to the Fund. The Fund will not enter into a standby commitment
with a remaining term in excess of 45 days and presently will limit its
investment in such commitment so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% (which presently is further limited by state
law to 10%) of its net assets taken at the time of acquisition of such
commitment or security. The Fund will at all times maintain a segregated
account with its custodian of cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies in an aggregate amount equal to the purchase
price of the securities underlying the commitment.
There can be no assurance that the 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. Because the issuance of the
security underlying the commitment is at the option of the issuer, the Fund may
bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby agreement and the related
commitment fee will be recorded on the date which the security can reasonably
be expected to be issued, and the value of the security will thereafter be
reflected in the calculation of the Fund's net asset value. The cost basis of
the security will be adjusted by the amount of the commitment fee. In the event
the security is not issued, the commitment fee will be recorded as income on
the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities.
Purchase and sale contracts may be entered into only with financial
institutions which have capital of at least $50 million or whose obligations
are guaranteed by an entity having capital of at least $50 million. Under such
agreements, the other party agrees, upon entering into the contract with the
Fund, to repurchase the security at a mutually agreed upon time and price in a
specified currency, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by currency
fluctuations. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations;
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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 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
arising from market fluctuations following the failure of the seller to
perform. The Fund may not invest more than 15% (which presently is further
limited to 10% by applicable state law) of its net assets in repurchase
agreements or purchase and sale contracts maturing in more than seven days.
While the substance of purchase and sale contracts is similar to repurchase
agreements, because of the different treatment with respect to accrued interest
and additional collateral, management believes that purchase and sale contracts
are not repurchase agreements as such term is understood in the banking and
brokerage community.
Lending of Portfolio Securities. Subject to investment restriction (3) below,
the Fund may lend securities from its portfolio to approved borrowers and
receive collateral in cash or securities issued or guaranteed by the U.S.
Government which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The purpose of such
loans is to permit the borrowers to use such securities for delivery to
purchasers when such borrowers have sold short. If cash collateral is received
by the Fund, it is invested in short-term money market securities, and a
portion of the yield received in respect of such investment is retained by the
Fund. Alternatively, if securities are delivered to the Fund as collateral, the
Fund and the borrower negotiate a rate for the loan premium to be received by
the Fund for lending its portfolio securities. In either event, the total
return on the Fund's portfolio is increased by loans of its portfolio
securities. The Fund will have the right to regain record ownership of loaned
securities to exercise beneficial rights such as voting rights, subscription
rights and rights to dividends, interest or other distributions. Such loans are
terminable at any time, and the borrower, after notice, will be required to
return borrowed securities within five business days. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans. With respect to the lending of portfolio securities, there is the risk
of failure by the borrower to return the securities involved in such
transactions.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act, means the lesser of (i) 67% of the shares represented
at a meeting at which more than 50% of the outstanding shares are represented
or (ii) more than 50% of the outstanding shares). The Fund may not:
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1. Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
2. Purchase or sell real estate or real estate mortgage loans, except
that 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.
3. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and 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 such loans may be made only in
accordance with applicable law and guidelines set forth in the Fund's
Prospectus and this Statement of Additional Information.
4. Issue senior securities to the extent such issuance would violate
applicable law.
5. Borrow money or pledge its assets, except that the Fund (a) may borrow
from a bank as a temporary measure for extraordinary or emergency purposes
or to meet redemptions in amounts not exceeding 33 1/3% (taken at market
value) of its total assets and pledge its assets to secure such borrowings,
(b) may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities and (c) may purchase
securities on margin to the extent permitted by applicable law. (However,
at the present time, applicable law prohibits the Fund from purchasing
securities on margin.) (The deposit or payment by the Fund of initial or
variation margin in connection with futures contracts or options
transactions is not considered the purchase of a security on margin.)
6. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act in
purchasing and selling portfolio securities.
7. Purchase or sell commodities or contracts on commodities, except to
the extent the Fund may do so in accordance with applicable law and the
Fund's Prospectus and this Statement of Additional Information, and without
registering as a commodity pool operator under the Commodities Exchange
Act.
8. With respect to 75% of its total assets, (a) invest in the securities
of any one issuer if, immediately after and as a result of such investment,
the value of the holdings of the Fund in the securities of such issuer
exceeds 5% of the Fund's total assets, taken at market value; and (b)
invest in the securities of any one issuer if, immediately after and as a
result of such investment, the Fund owns more than 10% of the outstanding
voting securities of such issuer.
Additional investment restrictions adopted by the Fund, which may be changed
by the Directors, provide that the Fund may not:
a. Purchase securities of other investment companies except to the extent
that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies, except in connection with a plan of merger,
consolidation, reorganization, or acquisition, or by purchase in the open
market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than the customary
broker's commission, is involved and only if immediately thereafter not
more than (i) 3% of the total outstanding voting stock of such company is
owned by the Fund, (ii) 5% of the Fund's total assets, taken at market
value, would be invested in any one such company, (iii) 10% of the Fund's
total assets, taken at market
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value, would be invested in such securities, and (iv) the Fund, together
with other investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10% of the total
outstanding stock of any one closed-end investment company. Investments by
the Fund in wholly-owned investment entities created under the laws of
certain countries will not be deemed an investment in other investment
companies.
b. Make short sales of securities or maintain a short position except to
the extent permitted by applicable law. The Fund does not, however,
currently intend to engage in short sales.
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions, or which cannot otherwise be marketed,
redeemed, put to the issuer or to a third party, or which do not mature
within seven days, or which the Board of Directors of the Fund have not
determined to be liquid pursuant to applicable law, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities. Notwithstanding the fact that the Board may determine that a
Rule 144A security is liquid and not subject to the 15% restriction on
illiquid securities, the State of Ohio does not recognize Rule 144A
securities as securities which are free of restrictions as to resale. To
the extent required by Ohio law, the Fund will not invest more than 50% of
its total assets in securities of issuers which are restricted as to
disposition, including Rule 144A securities.
d. Make investments for the purpose of exercising control or management.
e. Invest in warrants if at the time of acquisition its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
f. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of its total assets would be invested in such securities. This
restriction shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
g. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the Manager or any subsidiary thereof
each owning more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
h. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
i. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and this Statement of Additional Information, as amended from
time to time.
j. Purchase securities while borrowings exceed 5% (taken at market value)
of its total assets.
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, officers or
employees, acting as principal, unless pursuant to a rule or exemptive order
under the Investment Company Act.
The staff of the Securities and Exchange Commission (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
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<PAGE>
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 any such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceeds 15% of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are illiquid or are not otherwise
readily marketable. (Under the law of certain states, the Fund presently is
limited with respect to such investments to 10% of its net assets.) However, if
the OTC option is sold by the Fund to a primary U.S. Government securities
dealer recognized by the Federal Reserve Bank of New York and if the Fund has
the unconditional contractual right to repurchase such OTC option from the
dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less
the amount by which the option is "in-the-money" (i.e., current market value of
the underlying 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 Board of 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
guarantee by the government of any one foreign country as the obligations of a
single issuer.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage". Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with the Manager or its
affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firms
or any of their affiliates participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Director(1)(2)--President of the Manager and its
predecessor since 1977 and Chief Investment Officer since 1976; President of
Fund Asset Management, L.P. ("FAM") and its predecessor since 1977 and Chief
Investment Officer since 1976; President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill
Lynch since 1990 and a Senior Vice President thereof from 1985 to 1990;
Executive Vice President of Merrill Lynch & Co., Inc. since 1990; Director of
the Distributor.
Donald Cecil--Director(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland) Partners (investment partnership)
since 1982; Member of Institute of Chartered Financial Analysts; Member and
Chairman of Westchester County (N.Y.) Board of Transportation.
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<PAGE>
Edward H. Meyer--Director(2)--777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Executive Officer since
1970 and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan Allen
Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly--Director(2)--9 Hampton Harbor Road, Hampton Bays, N.Y.
11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association.
Richard R. West--Director(2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance since 1984, and Dean from 1984 to 1993, of New York
University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's Inc.
Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Manager and FAM and their predecessors since 1983; Executive Vice President
and Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
Norman R. Harvey--Senior Vice President(1)(2)--Senior Vice President of the
Manager and FAM and their predecessors since 1982; Senior Vice President of
Princeton Services since 1993.
Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager and its predecessor since 1990; employee of Deloitte &
Touche from 1982 to 1990.
Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and FAM and their predecessors since 1974; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
Robert Harris--Secretary(1)(2)--Vice President of the Manager and its
predecessors since 1984; Secretary of MLFD since 1982.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Manager, or its subsidiary FAM, acts as
investment adviser or manager.
At June 20, 1994, the officers and Directors of the Fund as a group (10
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund, owned less than 1% of the outstanding shares of common stock of
Merrill Lynch & Co., Inc.
The Fund pays each Director not affiliated with the Manager a fee of $3,500
per year plus $500 per Board meeting attended, together with such Director's
actual out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit Committee, which consists of all of the non-
affiliated Directors, at a rate of $500 per meeting attended. The Chairman of
the Audit Committee receives an additional fee of $250 per meeting attended.
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<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager or MLAM U.K. for the Fund or other funds for which
they act as investment adviser or for other advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Manager or its affiliates during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
The Fund has entered into a management agreement (the "Management Agreement")
with the Manager. As described in the Prospectus, the Manager receives for its
services to the Fund monthly compensation at the rate of 0.85% of the average
daily net assets of the Fund.
The Manager has also entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K."), a wholly-owned, indirect
subsidiary of Merrill Lynch & Co., Inc. and an affiliate of the Manager,
pursuant to which the Manager pays MLAM U.K. a fee in an amount to be
determined from time to time by the Manager and MLAM U.K. but in no event in
excess of the amount that the Manager actually receives for providing services
to the Fund pursuant to the Management Agreement.
The State of California imposes limitations on the expenses of the Fund.
These expense limitations require that the Manager reimburse the Fund in an
amount necessary to prevent the ordinary operating expenses of the Fund
(excluding interest, taxes, distribution fees, brokerage fees and commissions
and extraordinary charges such as litigation costs) from exceeding in any
fiscal year 2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets and 1.5% of the
remaining average daily net assets. The Manager's obligation to reimburse the
Fund is limited to the amount of the management fee. No fee payment will be
made to the Manager during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the time of such
payment.
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Fund connected with investment and economic research,
trading and investment management of the Fund, as well as the fees of all
Directors of the Fund who are affiliated persons of the Manager or its
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
and prospectuses and statements of additional information (except to the extent
paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. The Distributor will pay
certain promotional expenses
14
<PAGE>
of the Fund incurred in connection with the offering of its shares. Certain
expenses will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares--Alternative Sales Arrangements--Distribution Plans".
The Manager is a limited partnership, the partners of which are Merrill Lynch
& Co., Inc., Merrill Lynch Investment Management, Inc. and Princeton Services,
Inc.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will continue in effect for a period of two years from the
date of execution and will remain in effect from year to year thereafter 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 contracts or interested persons (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable
and may be terminated without penalty on 60 days' written notice at the option
of either party thereto or by the vote of a majority of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that (i)
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such
sales arrangements and the expenses of the account maintenance fee and (ii)
that Class A shares bear the expenses of the account maintenance fee, and (iii)
each class has exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the account maintenance and distribution
fees, in the case of the Class B shares, and the account maintenance fee, in
the case of the Class A shares, is paid. The two classes also have different
exchange privileges. See "Shareholder Services--Exchange Privilege".
The Fund has entered into separate distribution agreements with Merrill Lynch
Funds Distributor, Inc. (the "Distributor") in connection with the continuous
offering of Class A and Class B shares of the Fund (the "Distribution
Agreements"). The Distribution Agreements obligate the Distributor to pay
certain expenses in connection with the offering of the Class A and Class B
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 under
"Management of the Fund--Management and Advisory Arrangements".
Distribution Plans. Reference is made to "Purchase of Shares--Alternative
Sales Arrangements--Distribution Plans" in the Prospectus for certain
information with respect to the distribution plans of the Fund (each a
"Distribution Plan").
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<PAGE>
The payment of the account maintenance fee and distribution fee with respect
to Class B shares and the account maintenance fee with respect to Class A
shares is subject to the provisions of Rule 12b-1 under the Investment Company
Act. See "General Information--Description of Shares". 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 distribution fees paid to the Distributor. In their consideration of the
Distribution Plans, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plans to the Fund
and its shareholders. Each Distribution Plan further provides that, so long as
such Distribution Plan remains in effect, the selection and nomination of
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that such Distribution Plan
will benefit the Fund and its respective 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 Class A or Class B voting securities of the Fund voting separately
by class. Neither Distribution Plan can be amended to increase materially the
amount to be spent by the Fund without approval by 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 such 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 Plans and any reports made
pursuant to such plans for a period of not less than six years from the date of
the Distribution Plans or such reports, the first two years in an easily
accessible place.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and 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 which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; 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.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
Class A shares of the Fund at the offering price applicable to the total of (a)
the dollar amount 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 the Class A and Class B shares of the Fund and of any
other investment company with a sales charge for which the Distributor acts as
the distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or the
purchaser's securities dealer, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time.
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<PAGE>
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $10,000 or more of Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to a Letter of Intention in
the form provided in the Prospectus. The Letter of Intention is available only
to investors whose accounts are maintained at the Fund's transfer agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan-participant record-keeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A 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 Intention may be included under a subsequent Letter of
Intention 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 shares of the Fund and of other investment companies with an initial
sales charge or a deferred sales charge for which the Distributor acts as the
distributor presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intention, may
be included as a credit toward completion of such Letter, but the reduced sales
charge applicable to the amount covered by such Letter will be applied only to
new purchases. If the total amount of shares does not equal the amount stated
in the Letter of Intention (minimum of $10,000), 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 shares purchased at the reduced rate
and the sales charge applicable to the shares actually purchased through the
Letter. Class A shares equal to five percent of the intended amount will be
held in escrow during the thirteen-month period (while registered in the name
of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge which would be applicable to a single purchase equal to
the total dollar value of the Class A shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charges on any
previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund or Merrill Lynch U.S.A. Government Reserves into
the Fund that creates a sales charge will count toward completing a new or
existing Letter of Intention from the Fund.
Retirement Plans. Class A shares are offered at net asset value to tax
qualified retirement plans within the meaning of Section 401(a) of the Code and
deferred compensation plans within the meaning of Sections 403(b) and 457 of
the Code ("Retirement Plans"), provided the plan has $5 million or more in
existing plan assets initially invested in portfolios, mutual funds or trusts
advised either directly or through a subsidiary by the Manager or FAM. Class A
shares may also be offered at net asset value to Retirement Plans, provided the
plan has accumulated $5 million or more in existing plan assets invested in
mutual funds advised by the Manager or FAM charging a front-end sales charge or
a contingent deferred sales charge. Assets of Retirement Plans with the same
sponsor or an affiliated sponsor may be aggregated. Retirement Plans that are
also qualified under Section 401(k) of the Code with a salary reduction feature
offering a menu of investments to plan participants ("Eligible 401(k) Plans")
are also offered Class A shares at net asset value, provided such a plan
initially has 1,000 or more employees eligible to participate in the plan.
Employees eligible to participate in Retirement Plans of the same sponsoring
employer or its affiliates may be aggregated. Any Retirement Plan which does
not meet the above described qualifications to purchase Class A shares at
17
<PAGE>
net asset value has the option of purchasing Class A shares at the sales charge
schedule disclosed in the Prospectus, or if the Retirement Plan meets the
specified requirements, then it may purchase Class B shares with a waiver of
the contingent deferred sales charge upon redemption. The minimum initial and
subsequent purchase requirements are waived in connection with all the above
referenced Retirement Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries and any trust, pension, profit-sharing or other benefit
plan for such persons may purchase Class A shares of the Fund at net asset
value.
Class A shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must purchase Class A 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 imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.
Class A shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. (formerly known as Merrill Lynch
Prime Fund, Inc.) ("Senior Floating Rate Fund") who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Senior
Floating Rate Fund in shares of the Fund. In order to exercise this investment
option, Senior Floating Rate Fund shareholders must sell their Senior Floating
Rate Fund shares to Senior Floating Rate Fund in connection with a tender offer
conducted by Senior Floating Rate Fund and reinvest the proceeds immediately in
the Fund. This investment option is available only with respect to the proceeds
of Senior Floating Rate Fund shares as to which no Early Withdrawal Charge (as
defined in the Senior Floating Rate Fund prospectus) is applicable. Purchase
orders from Senior Floating Rate Fund shareholders wishing to exercise this
investment option will be accepted only on the day that the related Senior
Floating Rate Fund tender offer terminates and will be effected at the net
asset value of the Fund at such day.
Closed-End Fund Option. Class A shares of the Fund are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in shares of the Fund. In order to exercise this
investment option, closed-end fund shareholders must (i) sell their closed-end
fund shares through Merrill Lynch and reinvest the proceeds immediately in the
Fund, (ii) have acquired the shares in the closed-end fund's initial public
offering or through reinvestment of dividends earned on shares purchased in
such offering, (iii) have maintained their closed-end fund shares continuously
in a Merrill Lynch account, and (iv) purchase a minimum of $250 worth of Fund
shares.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund.
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.
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<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by the
Commission or such Exchange is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists, as defined by the
Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably practicable,
and for such other periods as the Commission may by order permit for the
protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares", while Class B shares redeemed within four
years of purchase are subject to a contingent deferred sales charge under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a tax-free
distribution following retirement under a tax-deferred retirement plan or
attaining age 59 1/2 in the case of an IRA or other retirement plan, or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one who
owns the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination
of disability. [Any such redemptions during the first year after purchase,
however, will be subject to the redemption fee described under "Redemption of
Shares" in the Prospectus.]
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A shares at net asset value has the option of purchasing
Class A shares at the sales charge schedule disclosed in the Prospectus, or if
the Retirement Plan meets the following requirements, then it may purchase
Class B shares with a waiver of the contingent deferred sales charge upon
redemption. The contingent deferred sales charge is waived for any Eligible
401(k) Plan redeeming Class B shares. The contingent deferred sales charge is
also waived for redemptions from a 401(a) plan qualified under the Code,
provided, however, that such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing Manager or FAM advised mutual
fund Class B shares ("Eligible 401(a) Plan"). The contingent deferred sales
charge is waived for any Class B shares which are purchased by an Eligible
401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Retirement Plans.
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<PAGE>
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 and the allocation of brokerage. 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. While the Manager generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available. The Fund has no obligation to deal with any broker or group of
brokers in execution of transactions in portfolio securities. Subject to
obtaining the best price and execution, brokers who provide supplemental
investment research to the Manager may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Manager under the Management Agreement
and the expenses of the Manager will not necessarily be reduced as a result of
the receipt of such supplemental information. It is possible that certain
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. In addition,
consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and policies established by the Board of 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.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States 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 government supervision and regulation of foreign stock
exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of ADRs, EDRs,
GDRs or other securities convertible into foreign equity securities. ADRs, EDRs
and GDRs may be listed on stock exchanges or traded in over-the-counter markets
in the United States or Europe, as the case may be. ADRs, like other securities
traded in the United States, as well as GDRs traded in the United States, will
be subject to negotiated commission rates.
The Fund may invest in securities traded in the OTC markets and intends to
deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated 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 OTC market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions. However, affiliated persons of the Fund may
serve as its broker in OTC 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. See
"Investment Objective and Policies--Investment Restrictions".
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<PAGE>
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. Dollars to the
extent necessary to meet anticipated redemptions. Under present conditions, it
is not believed that these considerations will have any significant effect on
its portfolio strategy.
The Board of Directors has considered the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for their affiliates
and institutional accounts which they manage unless the member (i) has obtained
prior express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with 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.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily Monday
through Friday at 4:15 p.m., New York time, on each day during which the New
York Stock Exchange is open for trading. The New York Stock Exchange is not
open on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. The Fund also will determine its
net asset value on any day in which there is sufficient trading in its
portfolio securities that the net asset value might be affected materially, but
only if on any such day the Fund is required to sell or redeem shares. Net
asset value is computed by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time. Expenses, including the fee
payable to the Manager and the distribution and account maintenance fees
payable to the Distributor, are accrued daily. The per share net asset value of
the Class B shares generally will be lower than the per share net asset value
of the Class A shares, reflecting the daily expense accruals of the higher sum
of account maintenance, distribution and transfer agency fees applicable with
respect to the Class B shares, as compared with the account maintenance fee
applicable to the Class A shares. It is expected, however, that the per share
net asset value of the two classes will tend to converge immediately after the
payment of dividends or distributions, which will differ by approximately the
amount of the expense accrual differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are
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<PAGE>
being valued or, lacking any sales, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are
valued on the exchange designated by or under the authority of the Board of
Directors as the primary market. Securities traded in the OTC market are valued
at the last available bid price in the OTC market prior to the time of
valuation. When the Fund writes a call option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last asked price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the average of the last asked price as obtained from one or more
dealers. Options purchased by the Fund are valued at their last bid price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the average of the last bid price as obtained from two or more
dealers unless there is only one dealer, in which case that dealer's price is
used. Other investments, including futures contracts and related options, are
stated at market value.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Directors.
Generally, trading in foreign 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 the New York Stock Exchange. 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 the New York Stock Exchange. 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 the New
York Stock Exchange which will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive quarterly statements from the transfer
agent. These quarterly statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gain distributions. The quarterly statements will also show
any other activity in the account since the preceding statement. Shareholders
will receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
income dividends and long-term capital gain distributions.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
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<PAGE>
Shareholders considering transferring their Class A shares from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A shares so
that the cash proceeds can be transferred to the account at the new firm or
such shareholder must continue to maintain an Investment Account at the
transfer agent for those Class A shares. Shareholders interested in
transferring their Class B shares from Merrill Lynch and who do not wish to
have an Investment Account maintained for such shares at the transfer agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. A shareholder
may make additions to his Investment Account at any time by mailing a check
directly to the transfer agent.
AUTOMATIC INVESTMENT PLAN
A U.S. shareholder may make additions to an Investment Account at any time by
purchasing shares at the applicable public offering price either through the
shareholder's securities dealer or by mail directly to the transfer agent,
acting as agent for such securities dealer. Voluntary accumulation also can be
made through a service known as the Automatic Investment Plan whereby the Fund
is authorized through pre-authorized checks or automated clearing house debits
of $50 or more to charge the regular bank account of the shareholder on a
regular basis to provide systematic additions to the Investment Account of such
shareholder. An investor whose shares of the Fund are held within a CMA(R)
account may arrange to have periodic investments made in the Fund in amounts of
$250 or more through the CMA(R) Automatic Investment Program. The Automatic
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch other than a CMA(R) account.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of the shares of the
Fund, without sales charge, as of the close of business on the ex-dividend date
of the dividend or distribution. Shareholders may elect in writing to receive
either their dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make systematic withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
shares of the Fund having a value, based upon cost or the current offering
price, of $5,000 or more, and monthly withdrawals for shareholders with Class A
shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder
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<PAGE>
may specify either a dollar amount or a percentage of the value of his Class A
shares. Redemptions will be made at net asset value as determined at the close
of business of the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed or the direct deposit of the withdrawal
payment will be made on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all Class A shares in the Investment Account are automatically reinvested in
Fund Class A 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.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for Class A shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month;
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month; and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of the funds that issue
Class A and Class B shares listed below. In addition, Class A shareholders of
the Fund may exchange their Class A shares of the Fund for shares of the "Class
A money market funds" and Class B shareholders of the Fund may exchange their
shares for shares of the "Class B money market funds", on the basis described
below. 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. Certain funds into which
exchanges may be made may impose a redemption fee (not in excess of 2.00% of
the amount redeemed) on shares purchased through the exchange privilege when
such shares are subsequently redeemed, including redemption through subsequent
exchanges. Such redemption fee would be in addition to any contingent deferred
sales charge otherwise applicable to a redemption of Class B shares. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
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<PAGE>
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A 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 shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A 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 shares on which the dividend was paid. Based on
this formula, Class A shares of the Fund generally may be exchanged into the
Class A shares of the other funds or into shares of a money market fund advised
by the Manager or its affiliates with a reduced or without a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge schedule relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the sales charge that may be
payable on a disposition of the new Class B shares, the holding period for the
outstanding Class B shares is "tacked" to the holding period of the new Class B
shares. For example, an investor may exchange Class B shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund Class B shares for two and a half years. The 1.0% sales
charge that generally would apply to a redemption would not apply to the
exchange. Three years later the investor may decide to redeem the Class B
shares of Special Value Fund and receive cash. There will be no contingent
deferred sales charge due on this redemption, since by "tacking" the two and a
half year holding period of Fund Class B shares to the three year holding
period for the Special Value Fund Class B shares, the investor will be deemed
to have held the new Class B shares for more than five years.
Shareholders also may exchange Class A shares and Class B shares of the Fund
into shares of a money market fund advised by the Manager or its affiliates,
but the period of time that Class B shares are held in a money market fund will
not count towards satisfaction of the holding period requirement for purposes
of reducing the contingent deferred sales charge. However, shares of a money
market fund which were acquired as a result of an exchange for Class B shares
of the Fund may, in turn, be exchanged back into Class B shares of any fund
offering such shares, in which event the holding period for Class B shares of
the Fund will be aggregated with previous holding periods for purposes of
reducing the contingent deferred sales charge. Thus, for example, an investor
may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund after having held the Fund Class B shares for two and a half
years and three years later decide to redeem the shares of Merrill Lynch
Institutional Fund for cash. At the time of this redemption, the 1.0%
contingent deferred sales charge that would have been due had the Class B
shares of the Fund been redeemed for cash rather than exchanged for shares of
Merrill Lynch Institutional Fund will be payable. If instead of
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<PAGE>
such redemption the shareholder exchanged such shares for Class B shares of a
fund which the shareholder continues to hold for an additional two and a half
years, any subsequent redemption will not incur a contingent deferred sales
charge.
Below is a description of the investment objectives of the other funds into
which exchanges can be made:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ........ High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
Merrill Lynch Americas Income
Fund, Inc. ................... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the West-
ern Hemisphere (i.e., North and South Amer-
ica and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide as
high a level of income exempt from Federal
and Arizona income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of in-
termediate-term investment grade Arizona Mu-
nicipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from Federal
and Arizona income taxes as is consistent
with prudent investment management.
Merrill Lynch Balanced Fund
for Investment and As high a level of total investment return as
Retirement.................... is consistent with reasonable risk by in-
vesting in common stocks and other types of
securities, including fixed income securi-
ties and convertible securities.
Merrill Lynch Basic Value
Fund, Inc. ................... Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
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<PAGE>
Merrill Lynch California
Insured Municipal Bond Fund... A portfolio of Merrill Lynch California Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management through
investment in a portfolio consisting primar-
ily of insured California Municipal Bonds.
Merrill Lynch California
Limited Maturity Municipal A portfolio of Merrill Lynch Multi-State Lim-
Bond Fund..................... ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and California income
taxes as is consistent with prudent invest-
ment management through investment in a
portfolio primarily of intermediate-term in-
vestment grade California Municipal Bonds.
Merrill Lynch California
Municipal Bond Fund........... A portfolio of Merrill Lynch California Mu-
nicipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management.
Merrill Lynch Capital Fund, The highest total investment return consis-
Inc. ......................... tent with prudent risk through a fully man-
aged investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Colorado income taxes
as is consistent with prudent investment
management.
Merrill Lynch Corporate Bond
Fund, Inc..................... Current income from three separate diversi-
fied portfolios of fixed income securities.
Merrill Lynch Developing
Capital Markets Fund, Inc..... Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital markets.
Merrill Lynch Dragon Fund, Capital appreciation primarily through in-
Inc........................... vestment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin, other
than Japan, Australia and New Zealand.
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<PAGE>
Merrill Lynch EuroFund.... Capital appreciation primarily through in-
vestment in equity securities of corpora-
tions domiciled in Europe.
Merrill Lynch Federal
Securities Trust.............. High current return through investments in
U.S. Government and Government agency secu-
rities, including GNMA mortgage-backed cer-
tificates and other mortgage-backed Govern-
ment securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal income
taxes as is consistent with prudent invest-
ment management while serving to offer
shareholders the opportunity to own securi-
ties exempt from Florida intangible personal
property taxes through investment in a port-
folio primarily of intermediate-term invest-
ment grade Florida Municipal Bonds.
Merrill Lynch Florida
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal income taxes as is consis-
tent with prudent investment management
while seeking to offer shareholders the op-
portunity to own securities exempt from
Florida intangible personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc.................
Long-term growth through investment in a
quality-oriented portfolio of securities,
primarily common stocks, of issuers, poten-
tially positioned to benefit from demo-
graphic and cultural changes as they affect
consumer markets.
Merrill Lynch Fundamental
Growth Fund, Inc.............. Long-term growth through investment in a di-
versified portfolio of equity securities
placing particular emphasis on companies
that have exhibited above-average growth
rate in earnings.
Merrill Lynch Global
Allocation Fund, Inc.......... High total return consistent with prudent
risk, through a fully managed investment
policy utilizing U.S. and foreign equity,
debt and money market securities, the combi-
nation of which will be varied from time to
time both with respect to the types of secu-
rities and markets in response to changing
market and economic trends.
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Merrill Lynch Global Bond Fund
For Investment And High total investment return from investment
Retirement.................... in a global portfolio of debt investments
denominated in various currencies and multi-
national currency units.
Merrill Lynch Global
Convertible Fund, Inc......... High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and war-
rants or options.
Merrill Lynch Global Holdings
(residents of Arizona must
meet investor suitability
standards).................... The highest total investment return consis-
tent with prudent risk through worldwide in-
vestment in an internationally diversified
portfolio of securities.
Merrill Lynch Global Resources
Trust......................... Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess substan-
tial natural resource assets.
Merrill Lynch Global Utility
Fund, Inc. ................... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the ownership
or operation of facilities used to generate,
transmit or distribute electricity, telecom-
munications, gas or water.
Merrill Lynch Government Fund.. A portfolio of Merrill Lynch Funds for Insti-
tutions Series, a series fund, whose objec-
tive is to provide current income consistent
with liquidity and security of principal
from investment in securities issued or
guaranteed by the U.S. Government, its agen-
cies and instrumentalities and in repurchase
agreements secured by such obligations.
Merrill Lynch Growth Fund for
Investment and Retirement..... Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal em-
phasis on those securities which management
of the fund believes to be undervalued.
Merrill Lynch Healthcare Fund,
Inc. (residents of Wisconsin
must meet investor Capital appreciation through worldwide in-
suitability standards)... vestment in equity securities of companies
that derive or are expected to derive a sub-
stantial portion of their sales from prod-
ucts and services in healthcare.
29
<PAGE>
Merrill Lynch International
Equity Fund................... Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
Merrill Lynch Latin America
Fund, Inc. ................... Capital appreciation by investing primarily
in Latin American equity and debt securi-
ties.
Merrill Lynch Maryland
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Maryland income taxes
as is consistent with prudent investment
management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal and Mas-
sachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of in-
termediate-term investment grade Massachu-
setts Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Massachusetts income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management through in-
vestment in a portfolio primarily of inter-
mediate-term investment grade Michigan Mu-
nicipal Bonds.
Merrill Lynch Michigan
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Michigan income taxes
as is consistent with prudent investment
management.
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Merrill Lynch Minnesota
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Minnesota income taxes
as is consistent with prudent investment
management.
Merrill Lynch Municipal Bond
Fund, Inc. ................... Tax-exempt income from three separate diver-
sified portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund........ Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal in-
come taxes by investing in investment grade
obligations with a dollar weighted average
maturity of five to twelve years.
Merrill Lynch New Jersey
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal and New
Jersey income taxes as is consistent with
prudent investment management through a
portfolio primarily of intermediate-term in-
vestment grade New Jersey Municipal Bonds.
Merrill Lynch New Jersey
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and New Jersey income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch New Mexico
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and New Mexico income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal, New
York State and New York City income taxes as
is consistent with prudent investment man-
agement through investment in a portfolio
primarily of intermediate-term investment
grade New York Municipal Bonds.
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<PAGE>
Merrill Lynch New York
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal, New York State and New
York City income taxes as is consistent with
prudent investment management.
Merrill Lynch North Carolina
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and North Carolina income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Ohio Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Ohio income taxes as
is consistent with prudent investment man-
agement.
Merrill Lynch Oregon Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Oregon income taxes as
is consistent with prudent investment man-
agement.
Merrill Lynch Pacific Fund, Capital appreciation by investing in equity
Inc. ......................... securities of corporations domiciled in Far
Eastern and Western Pacific countries, in-
cluding Japan, Australia, Hong Kong, Singa-
pore and the Philippines.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide as
high a level of income exempt from Federal
and Pennsylvania income taxes as is consis-
tent with prudent investment management
through investment in a portfolio of inter-
mediate-term investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Pennsylvania income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Phoenix Fund, Long-term growth of capital by investing in
Inc. ......................... equity and fixed income securities, includ-
ing tax-exempt securities, of issuers in
weak financial condition or experiencing
poor operating results believed to be under-
valued relative to the current or prospec-
tive condition of such issuer.
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Merrill Lynch Short-Term
Global Income Fund, Inc....... As high a level of current income as is con-
sistent with prudent investment management
from a global portfolio of high quality debt
securities denominated in various currencies
and multinational currency units and having
remaining maturities not exceeding three
years.
Merrill Lynch Special Value
Fund, Inc..................... Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic
Dividend Fund................. Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology Fund,
Inc........................... Capital appreciation through worldwide in-
vestment in equity securities of companies
that derive or are expected to derive a sub-
stantial portion of their sales from prod-
ucts and services in technology.
Merrill Lynch Texas Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal income taxes as is consis-
tent with prudent investment management by
investing primarily in a portfolio of long-
term, investment grade obligations issued by
the State of Texas, its political subdivi-
sions, agencies and instrumentalities.
Merrill Lynch Utility Income
Fund, Inc. ................... High current income through investment in eq-
uity and debt securities issued by companies
which are primarily engaged in the ownership
or operation of facilities used to generate,
transmit or distribute electricity, telecom-
munications, gas or water.
Merrill Lynch World Income
Fund, Inc..................... High current income by investing in a global
portfolio of fixed income securities denomi-
nated in various currencies, including mul-
tinational currencies.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds
33
<PAGE>
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealers. The
Fund reserves the right to require a properly completed Exchange Application.
This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares 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.
TAXES
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to Class A and Class B shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
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.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect
34
<PAGE>
number. When establishing an account, an investor must certify under penalty of
perjury that such number is correct and that such investor is not otherwise
subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes. For this purpose, the Fund will
allocate foreign taxes and foreign source income between the Class A and Class
B shareholders according to a method (which it believes is consistent with the
Securities and Exchange Commission exemptive order permitting the issuance and
sale of two classes of stock) that is based on the gross income allocable to
Class A and Class B shareholders during the taxable year, or such other method
as the Internal Revenue Service may prescribe.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether under the Automatic
Dividend Reinvestment Plan or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income determined on a calendar year basis and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
The Fund may invest 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.
35
<PAGE>
Federal income tax purposes. The Fund may be subject to U.S. Federal income
tax, and an additional tax in the nature of interest (the "interest charge"),
on a portion of the distributions from such a company and on gain from the
disposition of the shares of such a company (collectively referred to as
"excess distributions"), even if such excess distributions are paid by the Fund
as a dividend to its shareholders. The Fund may be eligible to make an election
with respect to certain PFICs in which it owns shares that will allow it to
avoid the taxes on excess distributions. However, such election may cause the
Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, under proposed regulations the Fund
would be able to elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares.
Unrealized losses, however, would not be recognized. By making the mark-to-
market election, the Fund could avoid imposition of the interest charge with
respect to its distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield/high risk securities may be purchased at a discount
and may therefore cause the Fund to accrue income before amounts due under the
obligations are paid. In addition, a portion of the interest payments on such
high yield/high risk securities may be treated as dividends for federal income
tax purposes; in such case, if the issuer of such high yield/high risk
securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest or
currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options and futures contracts.
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<PAGE>
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options or futures contract.
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.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares, and resulting in a capital gain for
any shareholder who received a distribution greater than the shareholder's tax
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 foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
37
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A shares and
Class B shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (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 shares,
or the waiver of the contingent deferred sales charge, in the case of Class B
shares, applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares", respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses may be deducted.
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GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on April 12, 1994. It has an
authorized capital of 200,000,000 shares of common stock, par value $0.10 per
share. At the date of this Statement of Additional Information, the shares of
the Fund are divided into Class A shares and Class B shares. Under the Articles
of Incorporation of the Fund, the Directors have the authority to issue
separate classes of shares which would represent interests in the assets of the
Fund and have identical voting, dividend, liquidation and other rights and the
same terms and conditions except that expenses related to the distribution
and/or account maintenance of the shares of a class may be borne solely by such
class, and a class may have exclusive voting rights with respect to matters
relating to the expenses being borne only by such class. The Fund has received
an order (the "Multi-Class System Order") from the Commission permitting the
issuance and sale of multiple classes of shares. The Multi-Class System Order
permits the Fund to issue additional classes of shares if the Board of
Directors deems such reissuance to be in the best interest of the Trust. Upon
liquidation of the Fund, shareholders of each class are entitled to share pro
rata in the net assets of the Fund available for distribution to shareholders,
except for any expenses which may be attributable only to one class. Shares
have no preemptive or conversion rights. The rights of redemption and exchange
are described elsewhere herein and in the Prospectus. Shares are fully paid and
nonassessable by the Fund.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held in the election of Directors (to the extent
hereafter provided) and on other matters submitted to a vote of shareholders,
except that shareholders of a class bearing distribution and/or account
maintenance expenses as provided above shall have exclusive voting rights with
respect to matters relating to such distribution and/or account maintenance
expenditures. 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 or
conversion rights. Redemption rights are discussed elsewhere herein and in the
Prospectus. Each share of Class A or Class B Common Stock is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction
of outstanding liabilities, except that expenses related to the account
maintenance and/or distribution of the shares within a class will be borne
solely by such class. Stock certificates are issued by the transfer agent only
on specific request. Certificates for fractional shares are not issued in any
case.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of common stock of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (estimated at approximately $88,100) will be paid by the
Fund and will be amortized over a period not exceeding five years. The proceeds
realized by the Manager upon the redemption of any of the shares initially
purchased by it will be reduced by the proportional amount of the unamortized
organizational expenses which the number of such initial shares being redeemed
bears to the number of shares initially purchased.
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<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the projected value of the Fund's estimated
net assets and projected number of shares outstanding on the date its shares
are first offered for sale to public investors is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Net Assets...................................................... $50,000 $50,000
Number of Shares Outstanding.................................... 5,000 5,000
Net Asset Value Per Share (net assets divided by number of
shares
outstanding)................................................... $ 10.00 $ 10.00
Sales Charge (for Class A Shares:
6.50% of offering price (6.95% of net amount invested*))....... $ .70 $ -- **
------- -------
Offering Price.................................................. $ 10.70 $ 10.00
======= =======
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge on redemption of shares within four
years of purchase. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares" in the Prospectus and "Redemption of Shares--
Contingent Deferred Sales Charge--Class B Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has been
selected as the independent auditors of the Fund. The selection of independent
auditors is subject to ratification by the shareholders 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 the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized, among other things, to
establish separate accounts in foreign currencies and to cause foreign
securities owned by the Fund to be 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., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's
transfer agent (the "Transfer Agent"). The Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts. See "Management of the Fund--Transfer
Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
40
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on June 30 of each year. The Fund sends to
its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act, and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
41
<PAGE>
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visu-
alized 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 stan-
dards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds be-
cause margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future. Uncer-
tainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investments. Assurance of interest and principal payments or of mainte-
nance of other terms of the contract over any long period of time may
be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher
42
<PAGE>
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. PRIME-1 repayment ability
will often be evidenced by many of the following characteristics:
--Leading market positions in well established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable ability
for repayment of short-term promissory obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, in assigning ratings to
such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
43
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols presented below are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
"aaa"
An issue which is rated "aaa" is considered to be a top-quality pre-
ferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
"aa"An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
"baa"
An issue which is rated "baa" is considered to be a medium grade pre-
ferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable
over any great length of time.
"ba"An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
"b" An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
"caa"
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the fu-
ture status of payments.
"ca"An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
"c" This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever at-
taining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
44
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay in-
terest and repay principal and differs from the high-
est rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest
and repay principal although it is somewhat more sus-
ceptible to the adverse effects of changes in circum-
stances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate ca-
pacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this cate-
gory than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with re-
spect to capacity to pay interest and repay princi-
pal. BB indicates the least degree of speculation and
C the highest. While such debt will likely have some
quality and protective characteristics, these are
outweighed by large uncertainties or major exposures
to adverse conditions.
BB Debt rated BB has less near-term vulnerability to de-
fault than other speculative issues. However, it
faces major ongoing uncertainties or exposure to ad-
verse business, financial, or economic conditions
which could lead to
45
<PAGE>
inadequate capacity to meet timely interest and prin-
cipal payments. The BB rating category is also used
for debt subordinated to senior debt that is assigned
an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default
but currently has the capacity to meet interest pay-
ments and principal repayments. Adverse business, fi-
nancial, or economic conditions will likely impair
capacity or willingness to pay interest and repay
principal. The B rating category is also used for
debt subordinated to senior debt that is assigned an
actual or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnera-
bility to default, and is dependent upon favorable
business, financial, and economic conditions to meet
timely payment of interest and repayment of princi-
pal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the ca-
pacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied B
or B- rating.
CC The rating CC is typically applied to debt subordi-
nated to senior debt that is assigned an actual or
implied CCC rating.
C The rating C typically is applied to debt subordi-
nated to senior debt which is assigned an actual or
implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI The rating CI is reserved for income bonds on which
no interest is being paid.
D Debt rated D is in payment default. The D rating cat-
egory is used when interest payments or principal
payments are not made on the date due even if the ap-
plicable grace period has not expired, unless Stan-
dard & Poor's believes that such payments will be
made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the ad-
dition of a plus or minus sign to show relative
standing within the major rating categories.
c The letter c indicates that the holder's option to
tender the security for purchase may be canceled un-
der certain prestated conditions enumerated in the
tender option documents.
L The letter L indicates that the rating pertains to
the principal amount of those bonds to the extent
that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In
the case of certificates
46
<PAGE>
of deposit, the letter L indicates that the deposit,
combined with other deposits being held in the same
right and capacity, will be honored for principal and
accrued pre-default interest up to the federal insur-
ance limits within 30 days after closing of the in-
sured institution or, in the event that the deposit
is assumed by a successor insured institution, upon
maturity.
p The letter p indicates that the rating is provision-
al. A provisional rating assumes the successful com-
pletion of the project being financed by the debt be-
ing rated and indicates that payment of debt service
requirements is largely or entirely dependent upon
the successful and timely completion of the project.
This rating, however, while addressing credit quality
subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should
exercise his own judgment with respect to such like-
lihood and risk.
* Continuance of the rating is contingent upon Standard
& Poor's receipt of an executed copy of the escrow
agreement or closing documentation confirming invest-
ments and cash flows.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-l" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designa-
tion.
A-2
Capacity for timely payment on issues with this designation is satis-
factory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely pay-
ment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designa-
tions.
47
<PAGE>
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Stan-
dard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to Standard & Poor's by the issuer or obtained by Standard & Poor's
from other sources it considers reliable. Standard & Poor's does not perform an
audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the debt rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of
the issuer to meet the timely payment of preferred
stock dividends and any applicable sinking fund re-
quirements in accordance with the terms of the obli-
gation.
II.
Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bank-
ruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting cred-
itors' rights.
AAA
This is the highest rating that may be assigned by
Standard & Poor's to a preferred stock issue and in-
dicates an extremely strong capacity to pay the pre-
ferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as
a high-quality filed income security. The capacity to
pay preferred stock obligations is very strong, al-
though 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.
48
<PAGE>
BBB
An issue rated "BBB" is regarded as backed by an ade-
quate capacity to pay the preferred stock obliga-
tions. Whereas it normally exhibits adequate protec-
tion parameters, adverse economic conditions or
changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred
stock in this category than for issues in the "A"
category.
BB B CCC Preferred stock rated "BB", "B", and "CCC" are re-
garded, on balance, as predominately speculative with
respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree
of speculation and "CCC" the highest degree of specu-
lation. While such issues will likely have some qual-
ity and protective characteristics, these are out-
weighed by large uncertainties or major risk expo-
sures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock is-
sue in arrears on dividends or sinking fund payments
but that is currently paying.
C
A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue
with the issuer in default on debt instruments.
NR
Indicates that no rating has been requested, that
there is insufficient information on which to base a
rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to
show relative standing within the major rating cate-
gories.
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.
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.:
We have audited the accompanying statement of assets and liabilities of
Merrill Lynch Global SmallCap Fund, Inc. as of June 14, 1994. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets and liabilities presents fairly, in
all material respects, the financial position of Merrill Lynch Global SmallCap
Fund, Inc. as of June 14, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Princeton, New Jersey
June 15, 1994
50
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 14, 1994
<TABLE>
<S> <C>
Assets:
Cash in Bank........................................................ $100,000
Prepaid registration fees (Note 3).................................. 109,700
Deferred organization expenses (Note 4)............................. 88,100
--------
Total Assets.......................................................... 297,800
Liabilities--accrued expenses......................................... 197,800
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares of
common stock (par value $0.10) and 5,000 Class B shares of common
stock (par value $0.10) outstanding with 200,000,000 shares autho-
rized) (Note 1)...................................................... $100,000
========
</TABLE>
- --------
Notes to Statement of Assets and Liabilities.
(1) Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") was organized as a
Maryland corporation on April 12, 1994. The Fund is registered under the
Investment Company Act of 1940 as an open-end management investment
company.
(2) The Fund intends to enter into a Management Agreement (the "Management
Agreement") with Merrill Lynch Asset Management (the "Manager"), and
distribution agreements (the "Distribution Agreements") with Merrill Lynch
Funds Distributor, Inc. (the "Distributor"). (See "Management of the Fund--
Management and Advisory Arrangements" in the Statement of Additional
Information.) Certain officers and/or directors of the Fund are officers
and/or directors of the Manager and the Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
51
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Hedging Techniques....................................................... 3
Other Investment Policies and Practices.................................. 7
Investment Restrictions.................................................. 9
Management of the Fund.................................................... 12
Management and Advisory Arrangements..................................... 14
Purchase of Shares........................................................ 15
Alternative Sales Arrangements........................................... 15
Initial Sales Charge Alternative--Class A Shares......................... 16
Reduced Initial Sales Charge--Class A Shares............................. 16
Redemption of Shares...................................................... 19
Contingent Deferred Sales Charge--Class B Shares......................... 19
Portfolio Transactions and Brokerage...................................... 20
Determination of Net Asset Value.......................................... 21
Shareholder Services...................................................... 22
Investment Account....................................................... 22
Automatic Investment Plan................................................ 23
Reinvestment of Dividends and Capital Gains Distributions................ 23
Systematic Withdrawal Plans--Class A Shares.............................. 23
Exchange Privilege....................................................... 24
Taxes..................................................................... 34
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 36
Special Rules for Certain Foreign Currency Transactions.................. 37
Performance Data.......................................................... 38
General Information....................................................... 39
Description of Shares.................................................... 39
Computation of Offering Price Per Share.................................. 40
Independent Auditors..................................................... 40
Custodian................................................................ 40
Transfer Agent........................................................... 40
Legal Counsel............................................................ 40
Reports to Shareholders.................................................. 41
Additional Information................................................... 41
Appendix.................................................................. 42
Independent Auditors' Report.............................................. 50
</TABLE>
Code #18186-0694
Statement of
Additional Information
[PICTURE]
- -------------------------------------------------------------------------------
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Contained in Part B:
Independent Auditors' Report
Statement of Assets and Liabilities as of June 14, 1994.
(B) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1(a) --Articles of Incorporation of the Registrant.(a)
(b) --Articles of Amendment to the Articles of Incorporation of the
Registrant.
2 --By-Laws of the Registrant.(a)
3 --None.
4(a) --Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of shareholders.(b)
(b) --Specimen Share Certificates for Class A Shares and Class B Shares.
5(a) --Form of Management Agreement between the Registrant and Merrill Lynch
Asset Management, L.P.
(b) --Form of Sub-Advisory Agreement between Merrill Lynch Asset Management,
L.P. and Merrill Lynch Asset Management U.K. Limited.
6(a) --Form of Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.
(b) --Form of Class B Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.
7 --None.
8
--Form of Custody Agreement between the Registrant and Brown Brothers
Harriman & Co.
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Financial Data
Services, Inc.
(b) --Form of License Agreement between Merrill Lynch & Co., Inc. and the
Registrant relating to the Registrant's use of the "Merrill Lynch"
name.
10 --Opinion of Brown & Wood, counsel for the Registrant.(c)
11 --Consent of Deloitte & Touche, independent auditors for the Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, L.P.
14 --None.
C-1
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
15(a) --Form of Class A Shares Distribution Plan and Class A Shares
Distribution Plan Sub-Agreement of the Registrant.
(b)
--Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.
16 --None.
- --------
(a) Previously filed.
(b) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7) and
Articles VI, VII and IX of the Registrant's Articles of Incorporation,
filed herewith as Exhibit 1 to the Registration Statement on Form N-1A and
to Article II, Article III (Sections 1, 3, 5 and 6) and Articles VI, VII,
XIII and XIV of the Registrant's By-Laws, filed herewith as Exhibit 2 to
the Registration Statement on Form N-1A.
(c) To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
The Fund has sold 5,000 Class A shares and 5,000 Class B shares of its common
stock to Merrill Lynch Asset Management, L.P. for an aggregate of $100,000.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS JUNE 20, 1994
-------------- ----------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share.................. 1
Class B Shares of Common Stock, par value $0.10 per share.................. 1
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A and Class B
Shares Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only on receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assumes that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance and (b) a
majority of a quorum of the Registrant's disinterested non-party Directors, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
In Section 9 of the Class A and Class B 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 the Prospectus and Statement of Additional
Information.
C-2
<PAGE>
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE MANAGER
(a) Merrill Lynch Asset Management, L.P. (the "Manager") acts as the
investment adviser for the following registered investment companies:
Convertible Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global
Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth
Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc.,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as the
investment adviser for the following investment companies: Apex Municipal Fund,
Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial
Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State 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., MuniAssets
Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation
Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II Inc., MuniVest California Insured Fund, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest New York
C-3
<PAGE>
Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund,
Inc., MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York
Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New
York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., Senior High Income Portfolio II, Inc., Senior Strategic Income Fund,
Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc.
and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is Box 9011, Princeton, New
Jersey 08543-9011, except that the address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, FAM, Merrill Lynch Funds Distributor, Inc. ("MLFD") and Princeton
Administrators, Inc. is also Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North
Tower, 250 Vesey Street, New York, New York 10281. The address of Financial
Data Services, Inc. ("FDS") is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
April 1, 1992, for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph, and Messrs.
Durnin, Giordano, Harvey, Hewitt and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME MANAGER VOCATION OR EMPLOYMENT
---- -------------------- ---------------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding
Company
Merrill Lynch Investment
Management, Inc........ Limited Partner Investment Advisory Services;
Limited
Partner of FAM
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President and
Director of Princeton Services
Director of MLFD; Executive Vice
President of ML & Co.; Executive
Vice President of Merrill Lynch
Terry K. Glenn.......... Executive Vice President Executive Vice President and
Director of FAM; Executive Vice
President and Director of
Princeton Services; President
and Director of MLFD; Director
of FDS; President of Princeton
Administrators, L.P.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION(S) WITH THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------------------- ---------------------------------------
<S> <C> <C>
Bernard J. Durnin....... 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 Griffin....... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General
General Counsel and Secretary Counsel and Secretary of FAM;
Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services; Director
of MLFD
Ronald M. Kloss......... Senior Vice President and Senior Vice President and
Controller Controller of FAM; Senior Vice
President of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of
Princeton Administrators, L.P.
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Gerald M. Richard....... Senior Vice President and Senior Vice President and
Treasurer Treasurer of FAM; Senior Vice
President and Treasurer of
Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener...... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services; Vice
President of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
International Equity Fund and Merrill Lynch Short-Term Global Income Fund, Inc.
The address of each of these investment companies is Box 9011, Princeton, New
Jersey 08543-9011. The address of MLAM U.K. is Ropemaker Place, 25 Ropemaker
Street, 1st Floor, London EC24 9LY, England.
C-5
<PAGE>
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 April 1, 1992, for his
own account or in the capacity of director, officer, partner or trustee. In
addition, Messrs. Zeikel, Albert, Glenn, Harvey, Richard and Yardley are
officers of one or more of the registered investment companies listed in the
preceding paragraph:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION WITH MLAM U.K. VOCATION OR EMPLOYMENT
---- ----------------------- ---------------------------------------
<S> <C> <C>
Arthur Zeikel........... Chairman President of the Manager and FAM;
President and Director of
Princeton Services; Director of
MLFD; Executive Vice President
of ML & Co.; Executive Vice
President of Merrill Lynch
Alan J. Albert.......... Managing Director Vice President of the Manager
Terry K. Glenn.......... Managing Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of
Princeton Services; President
and Director of MLFD; Director
of FDS; President of Princeton
Administrators
Paul J. Sarosy.......... Managing Director None
Andrew John Bascand..... Director None
Norman R. Harvey........ Senior Vice President Senior Vice President of the
Manager and FAM; Senior Vice
President of Princeton Services
Gerard M. Richard....... Senior Vice President Senior Vice President and
Treasurer of the Manager and
FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Jeffrey Lawrence........ Vice President None
Adrian Holmes........... Vice President None
Steven J. Yardley....... Vice President None
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
C-6
<PAGE>
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II,
Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH THE REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn........... President and Director Executive Vice President
Arthur Zeikel............ Director President and Director
Philip L. Kirstein....... Director None
William E. Aldrich....... Senior Vice President None
Robert W. Crook.......... Senior Vice President None
Michael J. Brady......... Vice President None
William M. Breen......... Vice President None
Sharon Creveling......... Vice President and Assistant None
Treasurer
Mark A. Desario.......... Vice President None
James T. Fatseas......... Vice President None
Stanley Graczyk.......... Vice President None
Michelle T. Lau.......... Vice President None
Gerald M. Richard........ Vice President and Treasurer Treasurer
Richard L. Rufener....... Vice President None
Salvatore Venezia........ Vice President None
William Wasel............ Vice President None
Robert Harris............ Secretary Secretary
</TABLE>
C-7
<PAGE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the rules thereunder are maintained at the offices of
the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and its
transfer agent, Financial Data Services, Inc. (4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484).
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
arrangement-related service contract.
ITEM 32. UNDERTAKINGS
(a) The Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months
from the effective date of the Registrant's registration statement under the
1933 Act.
(b) The Fund, if requested to do so by the holders of at least 10% of the
Fund's outstanding shares, will call a meeting of shareholders for the purpose
of voting upon the question of removal of a director or directors and will
assist communications with other shareholders as required by Section 16(c) of
the 1940 Act.
C-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE TOWNSHIP OF PLAINSBORO AND THE STATE OF NEW JERSEY, ON THE 21ST DAY OF
JUNE, 1994.
Merrill Lynch Global Smallcap Fund,
Inc.
(Registrant)
/s/ Arthur Zeikel
By __________________________________
(ARTHUR ZEIKEL, PRESIDENT)
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES ARTHUR ZEIKEL,
GERALD M. RICHARD AND TERRY K. GLENN, OR ANY OF THEM, AS ATTORNEY-IN-FACT, TO
SIGN ON HIS BEHALF, INDIVIDUALLY AND IN EACH CAPACITY STATED BELOW, ANY
AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT
AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, WITH THE SECURITIES AND
EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
President (Principal June 21, 1994
/s/ Arthur Zeikel Executive Officer)
- ------------------------------------- and Director
(ARTHUR ZEIKEL)
Treasurer (Principal June 21, 1994
/s/ Gerald M. Richard Financial and
- ------------------------------------- Accounting Officer)
(GERALD M. RICHARD) and Director
/s/ Donald Cecil Director June 21, 1994
- -------------------------------------
(DONALD CECIL)
/s/ Edward H. Meyer Director June 21, 1994
- -------------------------------------
(EDWARD H. MEYER)
/s/ Charles C. Reilly Director June 21, 1994
- -------------------------------------
(CHARLES C. REILLY)
/s/ Richard R. West Director June 21, 1994
- -------------------------------------
(RICHARD R. WEST)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
Articles of Amendment to the Articles of Incorporation
1(b) of the Registrant.
Specimen Share Certificates for Class A Shares and
4(b) Class B Shares.
5(a) Form of Management Agreement between the Registrant and
Merrill Lynch Asset Management, L.P.
(b) Form of Sub-Advisory Agreement between Merrill Lynch
Asset Management, L.P. and Merrill Lynch Asset
Management U.K. Limited.
6(a) Form of Class A Shares Distribution Agreement between
the Registrant and Merrill Lynch Funds Distributor,
Inc.
(b) Form of Class B Shares Distribution Agreement between
the Registrant and Merrill Lynch Funds Distributor,
Inc.
8 Form of Custody Agreement between the Registrant and
Brown Brothers Harriman & Co.
9(a) Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the
Registrant and Financial Data Services, Inc.
(b) Form of License Agreement between Merrill Lynch & Co.,
Inc. and the Registrant relating to the Registrant's
use of the "Merrill Lynch" name.
Consent of Deloitte & Touche, independent auditors for
11 the Registrant.
13 Certificate of Merrill Lynch Asset Management, L.P.
15(a) Form of Class A Shares Distribution Plan and Class A
Shares Distribution Plan Sub-Agreement of the
Registrant.
(b) Form of Class B Shares Distribution Plan and Class B
Shares Distribution Plan Sub-Agreement of the
Registrant.
</TABLE>
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
- --------------------------------------------------------------------------------
PRO BC PICTURE OF COMPASS, MICROSCOPE, GEAR ON TOP OF GLOBE
- --------------------------------------------------------------------------------
SAI BC PICTURE OF COMPASS, MICROSCOPE, GEAR ON TOP OF GLOBE
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 99.1(B)
MERRILL LYNCH SMALLCAP WORLD FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
Merrill Lynch SmallCap World Fund, Inc. (the "Corporation"), a Maryland
corporation having its principal office c/o The Corporation Trust Incorporated,
32 South Street, Baltimore, Maryland 21202, does hereby certify to the State
Department of Assessments and Taxation of Maryland as follows:
FIRST: The charter of the Corporation is hereby amended by striking out
the entire Article I of the Articles of Incorporation and inserting in lieu
thereof the following:
"Article I
NAME
----
The name of the Corporation is MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
(the "Corporation")."
SECOND: The Board of Directors of the Corporation, at a meeting held on
April 28, 1994, duly adopted a resolution in which was set forth the foregoing
amendment to the charter of the Corporation.
THIRD: The amendment of the charter of the Corporation as set forth
hereinabove has been duly advised, approved and adopted by the Board of
Directors of the Corporation, there being no stock outstanding or subscribed for
at the time of approval.
<PAGE>
FOURTH: The remaining Articles of the charter of the Corporation shall
remain in full force and effect.
FIFTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.
SIXTH: These Articles of Amendment shall be effective on the date of
acceptance for record by the State Department of Assessments and Taxation of
Maryland.
IN WITNESS WHEREOF, the officers of the Corporation who hereby execute on
behalf of the Corporation these Articles of Amendment hereby acknowledge, in the
name and on behalf of the Corporation, these Articles of Amendment to be the
corporate act of the Corporation and further certify, under the penalties of
perjury, that, to the best of their knowledge, information and belief, the
matters and facts set forth therein with respect to the approval thereof are
true in all material respects, all on this 18th day of April, 1994.
MERRILL LYNCH SMALLCAP WORLD FUND, INC.
/s/ Philip L. Kirstein
---------------------------------------
Philip L. Kirstein
President
Attest:
/s/ Robert Harris
- ------------------------
Robert Harris
Secretary
2
<PAGE>
EXHIBIT 99.4(B)
NUMBER SHARES
MERRILL LYNCH
GLOBAL SMALLCAP FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
CLASS A COMMON STOCK
THIS CERTIFIES THAT CUSIP
SEE REVERSE FOR CERTAIN DEFINITIONS
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE TEN CENTS ($0.10) PER SHARE,
OF CLASS A COMMON STOCK OF
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of the Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall
be held subject to all the provisions of the Articles of Incorporation and of
the By-Laws of the Corporation, and of all the amendments from time to time made
thereto.
This Certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
CORPORATE SEAL
1994
MARYLAND
Dated: Countersigned:
FINANCIAL DATA SERVICES, INC.
By Transfer Agent
/s/ Arthur Zeikel /s/ Robert Harris
President Secretary Authorized Signature
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
A full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class of stock
thereof which the Corporation is authorized to issue and the differences in the
relative rights and preferences between the shares of each class thereof to the
extent that they have been set, and the authority of the Board of Directors to
set the relative rights and preferences of subsequent classes thereof, will be
furnished by the Corporation to any shareholder, without charge, upon request to
the Secretary of the Corporation at its principal office.
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN CON - as tenants in common UNIF GIFT MIN ACT - .........Custodian........
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act..........................
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received,............... hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
+ +
+ + .........................................
................................................................................
Please print or typewrite name and address including postal zip code of assignee
................................................................................
................................................................................
......................................................................... Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
................................................................................
................................................................................
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated: ........................
...............................................
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Signatures must be guaranteed by an "eligible guarantor institution" as +
+ such term is defined in Rule 17Ad-15 under the Securities Exchange Act +
+ of 1934. +
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.
<PAGE>
NUMBER SHARES
MERRILL LYNCH
GLOBAL SMALLCAP FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
CLASS B COMMON STOCK
THIS CERTIFIES THAT CUSIP
SEE REVERSE FOR CERTAIN DEFINITIONS
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE TEN CENTS ($0.10) PER SHARE,
OF CLASS B COMMON STOCK OF
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of the Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall
be held subject to all the provisions of the Articles of Incorporation and of
the By-Laws of the Corporation, and of all the amendments from time to time made
thereto.
This Certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
CORPORATE SEAL
1994
MARYLAND
Dated: Countersigned:
FINANCIAL DATA SERVICES, INC.
By Transfer Agent
/s/ Arthur Zeikel /s/ Robert Harris Authorized Signature
President Secretary
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
A full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class of stock
thereof which the Corporation is authorized to issue and the differences in the
relative rights and preferences between the shares of each class thereof to the
extent that they have been set, and the authority of the Board of Directors to
set the relative rights and preferences of subsequent classes thereof, will be
furnished by the Corporation to any shareholder, without charge, upon request to
the Secretary of the Corporation at its principal office.
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN CON - as tenants in common UNIF GIFT MIN ACT - .........Custodian........
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act..........................
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received,............... hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
+ +
+ + .........................................
................................................................................
Please print or typewrite name and address including postal zip code of assignee
................................................................................
................................................................................
......................................................................... Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
................................................................................
................................................................................
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated: ........................
...............................................
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Signatures must be guaranteed by an "eligible guarantor institution" as +
+ such term is defined in Rule 17Ad-15 under the Securities Exchange Act +
+ of 1934. +
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.
<PAGE>
EXHIBIT 99.5(A)
MANAGEMENT AGREEMENT
AGREEMENT made this 16th day of June, 1994, by and between MERRILL LYNCH
GLOBAL SMALLCAP FUND, INC., a Maryland corporation (hereinafter referred to as
the "Fund"), and MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited
partnership (hereinafter referred to as the "Manager").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Fund is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (hereinafter
referred to as the "Investment Company Act"); and
WHEREAS, the Manager is engaged principally in rendering management and
investment advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Fund desires to retain the Manager to render management and
investment advisory services to the Fund in the manner and on the terms
hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and investment
advisory services to the Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and the covenants
hereinafter contained, the Fund and the Manager hereby agree as follows:
<PAGE>
ARTICLE I
---------
Duties of the Manager
---------------------
The Fund hereby employs the Manager to act as a manager and investment
adviser of the Fund and to furnish or arrange for affiliates to furnish, the
management and investment advisory services described below, subject to policies
of, review by and overall control of the Board of Directors of the Fund (the
"Directors"), for the period and on the terms and conditions set forth in this
Agreement. The Manager hereby accepts such employment and agrees during such
period, at its own expense, to render, or arrange for the rendering of, such
services and to assume the obligations herein set forth for the compensation
provided for herein. The Manager and its affiliates shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for or represent the
Fund in any way or otherwise be deemed an agent of the Fund.
(a) Management and Administrative Services. The Manager shall
--------------------------------------
perform (or arrange for the performance by affiliates of) the management and
administrative services necessary for the operation of the Fund including
administering shareholder accounts and handling shareholder relations. The
Manager shall provide the Fund with office space, equipment and facilities and
such other services as the Manager, subject to review by the Directors, shall
from time to time determine to be necessary or useful to perform its obligations
under this Agreement. The
2
<PAGE>
Manager shall also, on behalf of the Fund, conduct relations with custodians,
depositories, transfer agents, dividend disbursing agents, other shareholder
service agents, accountants, attorneys, underwriters, brokers and dealers,
corporate fiduciaries, insurers, banks and such other persons in any such other
capacity deemed to be necessary or desirable. The Manager shall generally
monitor the Fund's compliance with investment policies and restrictions as set
forth in the currently effective prospectus and statement of additional
information relating to the shares of the Fund under the Securities Act of 1933,
as amended (the "Prospectus" and "Statement of Additional Information",
respectively). The Manager shall make reports to the Directors of its
performance of obligations hereunder and furnish advice and recommendations with
respect to such other aspects of the business and affairs of the Fund as it
shall determine to be desirable.
(b) Investment Advisory Services. The Manager shall provide (or
----------------------------
arrange for affiliates to provide) the Fund with such investment research,
advice and supervision as the latter may from time to time consider necessary
for the proper supervision of the assets of the Fund, shall furnish continuously
an investment program for the Fund and shall determine from time to time which
securities shall be purchased, sold or exchanged and what portion of the assets
of the Fund shall be held in the various securities in which the Fund invests,
options, futures, options on futures or cash, subject always to the restrictions
3
<PAGE>
set forth in the Articles of Incorporation and By-Laws of the Fund, as amended
from time to time, the provisions of the Investment Company Act and the
statements relating to the Fund's investment objectives, investment policies and
investment restrictions as the same are set forth in the Prospectus and
Statement of Additional Information. The Manager shall also make decisions for
the Fund as to the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the Fund's portfolio securities shall
be exercised. Should the Directors at any time, however, make any definite
determination as to investment policy and notify the Manager thereof in writing,
the Manager shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked. The Manager shall take, on behalf of the Fund, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
portfolio securities for the Fund's account with brokers or dealers selected by
it, and to that end, the Manager is authorized as the agent of the Fund to give
instructions to the Custodian of the Fund as to deliveries of securities and
payments of cash for the account of the Fund. In connection with the selection
of such brokers or dealers and the placing of such orders with respect to assets
of the Fund, the Manager is directed at all times to seek to obtain execution
and price within the policy guidelines determined by the
4
<PAGE>
Directors as set forth in the Prospectus and Statement of Additional
Information. Subject to this requirement and the provisions of the Investment
Company Act, the Securities Exchange Act of 1934, as amended, and other
applicable provisions of law, the Manager may select brokers or dealers with
which it or the Fund is affiliated.
(c) Notice Upon Change in Partners of Manager. The Manager is a
-----------------------------------------
limited partnership and its limited partners are Merrill Lynch & Co., Inc.,
Merrill Lynch Investment Management, Inc. and Princeton Services, Inc. The
Manager will notify the Fund of any change in the membership of the partnership
within a reasonable time after such change.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Manager. The Manager assumes and shall pay for maintaining
-----------
the staff and personnel necessary to perform its obligations under this
Agreement, and shall at its own expense, provide the office space, equipment and
facilities which it is obligated to provide under Article I hereof, and shall
pay all compensation of officers of the Fund and all Directors who are
affiliated persons of the Manager.
(b) The Fund. The Fund assumes and shall pay or cause to be paid all
--------
other expenses of the Fund (except for the expenses paid by the Distributor),
including, without limitation: redemption expenses, expenses of portfolio
transactions, expenses of registering shares under federal and state securities
laws,
5
<PAGE>
pricing costs (including the daily calculation of net asset value), expenses of
printing shareholder reports, stock certificates, prospectuses and statements of
additional information, Securities and Exchange Commission fees, interest,
taxes, custodian and transfer agency fees, fees and actual out-of-pocket
expenses of Directors who are not affiliated persons of the Manager, fees for
legal and auditing services, litigation expenses, costs of printing proxies and
other expenses related to shareholder meetings, and other expenses properly
payable by the Fund. It is also understood that the Fund will reimburse the
Manager for its costs in providing accounting services to the Fund. The
Distributor will pay certain of the expenses of the Fund incurred in connection
with the continuous offering of Fund shares.
ARTICLE III
-----------
Compensation of the Manager
---------------------------
(a) Management Fee. For the services rendered, the facilities
--------------
furnished and expenses assumed by the Manager, the Fund shall pay to the Manager
at the end of each calendar month a fee based upon the average daily value of
the net assets of the Fund, as determined and computed in accordance with the
description of the determination of net asset value contained in the Prospectus
and Statement of Additional Information, at the annual rate of 0.85% of the
average daily net assets of the Fund, commencing on the day following
effectiveness hereof. If this Agreement becomes effective subsequent to the
first day of a
6
<PAGE>
month or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fee as set forth above. Subject to the
provisions of subsection (b) hereof, payment of the Manager's compensation for
the preceding month shall be made as promptly as possible after completion of
the computations contemplated by subsection (b) hereof. During any period when
the determination of net asset value is suspended by the Directors, the net
asset value of a share as of the last business day prior to such suspension
shall for this purpose be deemed to be the net asset value at the close of each
succeeding business day until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the
-------------------
Fund, including amounts payable to the Manager pursuant to subsection (a)
hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Manager shall reduce its
management fee by the extent of such excess and, if required pursuant to any
such laws or regulations, will reimburse the Fund in the amount of such excess;
provided, however, to the extent permitted by law, there shall be excluded from
such expenses the amount of any interest, taxes, brokerage commissions,
distribution fees and extraordinary expenses (including but not limited to legal
claims and liabilities and
7
<PAGE>
litigation costs and any indemnification related thereto) paid or payable by the
Fund. Whenever the expenses of the Fund exceed a pro rata portion of the
applicable annual expense limitations, the estimated amount of reimbursement
under such limitations shall be applicable as an offset against the monthly
payment of the management fee due to the Manager. Should two or more such
expense limitations be applicable as at the end of the last business day of the
month, that expense limitation which results in the largest reduction in the
Manager's fee shall be applicable.
ARTICLE IV
----------
Limitation of Liability of the Manager
--------------------------------------
The Manager shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Article IV, the term
"Manager" shall include any affiliates of the Manager performing services for
the Fund contemplated hereby and directors, officers and employees of the
Manager and such affiliates.
8
<PAGE>
ARTICLE V
---------
Activities of the Manager
-------------------------
The services of the Manager to the Fund are not to be deemed to be
exclusive, and the Manager and any person controlled by or under common control
with the Manager (for purposes of Article V referred to as "affiliates") is free
to render services to others. It is understood that Directors, officers,
employees and shareholders of the Fund are or may become interested in the
Manager and its affiliates, as directors, officers, employees and shareholders
or otherwise and that directors, officers, employees and shareholders of the
Manager and its affiliates are or may become similarly interested in the Fund,
and that the Manager and directors, officers, employees, partners and
shareholders of its affiliates may become interested in the Fund as shareholder
or otherwise.
ARTICLE VI
----------
Duration and Termination of this Contract
-----------------------------------------
This Agreement shall become effective as of the date of the commencement of
operations of the Fund and shall remain in force until May 31, 1996, and
thereafter, but only so long as such continuance is specifically approved at
least annually by (i) the Directors, or by the vote of a majority of the
outstanding voting securities of the Fund, and (ii) a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
9
<PAGE>
This Agreement may be terminated at any time, without the payment of any
penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Manager, on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment.
ARTICLE VII
-----------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the vote of a majority of outstanding voting
securities of the Fund, and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the Rules and Regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under the
Investment Company Act.
10
<PAGE>
ARTICLE IX
----------
Governing Law
-------------
This Agreement shall be construed in accordance with laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By_____________________________________
Title:
11
<PAGE>
EXHIBIT 99.5(B)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 16th day of June, 1994, by and between MERRILL
LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership (hereinafter
referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a
corporation organized under the laws of England and Wales (hereinafter referred
to as "MLAM U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as a diversified, open-end investment
company registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended;
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
<PAGE>
WHEREAS, MLAM has entered into a management agreement with the Fund (the
"Management Agreement"), dated June 16, 1994, pursuant to which MLAM provides
management and investment advisory services to the Fund; and
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
---------
DUTIES OF MLAM U.K.
-------------------
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of MLAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no
2
<PAGE>
authority to act for or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and shall
provide MLAM with such investment research, advice and supervision as the latter
may from time to time consider necessary for the proper supervision of the
assets of the Fund; shall furnish continuously an investment program for the
Fund and shall make recommendations from time to time as to which securities
shall be purchased, sold or exchanged and what portion of the assets of the Fund
shall be held in the various securities in which the Fund invests, options,
futures, options on futures or cash; and shall effect transactions in the
various securities in which the Fund invests, options, futures, options on
futures or cash; all of the foregoing subject always to the restrictions of the
Articles of Incorporation and By-Laws of the Fund, each as amended from time to
time, the provisions of the Investment Company Act and the statements relating
to the Fund's investment objective, investment policies and investment
restrictions as the same are set forth in the currently effective prospectus and
statement of additional information relating to the shares of the Fund under the
Securities Act of 1933, as amended (the "Prospectus" and "Statement of
Additional Information", respectively). MLAM U.K. shall make recommendations
and effect transactions with respect to foreign currency matters, including
foreign exchange contracts, foreign currency options, foreign currency futures
and related options on foreign currency futures
3
<PAGE>
and forward foreign currency transactions. MLAM U.K. shall also make
recommendations or take action as to the manner in which voting rights, rights
to consent to corporate action and any other rights pertaining to the Fund's
portfolio securities shall be exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will MLAM
U.K. be the registered holder of MLAM's or the Fund's registered investments or
the custodian of documents or other evidence of title.
ARTICLE II
----------
ALLOCATION OF CHARGES AND EXPENSES
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
-----------
COMPENSATION OF MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by MLAM and MLAM U.K. but in no event in excess of the amount that
MLAM actually receives for providing services to the Fund pursuant to the
Management Agreement.
4
<PAGE>
ARTICLE IV
----------
LIMITATION OF LIABILITY OF MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act of omission in the
performance of sub-advisory services rendered with respect to the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates
of MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
---------
ACTIVITIES OF MLAM U.K.
-----------------------
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM U.K.
(for purpose of this Article V referred to as "affiliates") being free to render
services to others. It is understood that Directors, officers, employees and
shareholders of the Fund are or may become interested in MLAM U.K. and its
affiliates, as directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of MLAM U.K. and its
affiliates are or may become similarly interested in the Fund, and that MLAM
U.K. and directors, officers, employees, partners and shareholders of its
5
<PAGE>
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
MLAM U.K. STATEMENTS PURSUANT TO IMRO RULES
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K. MLAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO
directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
6
<PAGE>
ARTICLE VII
-----------
DURATION AND TERMINATION OF THIS AGREEMENT
------------------------------------------
This Agreement shall become effective as of the date first above
written and shall remain in force until May 31, 1996, and thereafter, but only
so long as such continuance is specifically approved at least annually by (i)
the Directors of the Fund or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Management Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
------------
AMENDMENTS OF THIS AGREEMENT
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any
7
<PAGE>
such party cast in person at a meeting called for the purpose of voting on such
approval.
ARTICLE IX
----------
DEFINITIONS OF CERTAIN TERMS
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
---------
GOVERNING LAW
-------------
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By__________________________________
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By_________________________________________
Title:
9
<PAGE>
EXHIBIT 99.6(A)
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 16th day of June, 1994 between MERRILL LYNCH
GLOBAL SMALLCAP FUND, INC., a Maryland corporation (the "Fund"), and MERRILL
LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company and it is affirmatively in the interest of the Fund to offer its shares
for sale continuously;
and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the subscription offering and the continuous
offering of the Class A shares of common stock of the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints
------------------------------
the Distributor as the principal underwriter and distributor of the Fund to
sell Class A shares of common stock of the Fund (sometimes herein referred to as
"Class A shares") to the public and hereby agrees during the term of this
Agreement to
<PAGE>
sell Class A shares of the Fund to the Distributor upon the terms and conditions
herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
--------------------------
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time
to time designate other principal underwriters and distributors of Class A
shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such. If
such designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive rights granted to the Distributor to purchase
Class A shares from the Fund shall not apply to Class A shares issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class A
shares of any such company by the Fund.
(c) Such exclusive rights also shall not apply to Class A shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive rights also shall not apply to Class A
2
<PAGE>
shares issued by the Fund pursuant to any reinstatement privilege afforded
redeeming Class A shareholders.
Section 3. Purchase of Class A Shares from the Fund.
----------------------------------------
(a) Prior to the continuous offering of the Class A shares,
commencing on a date agreed upon by the Fund and the Distributor, it is
contemplated that the Distributor will solicit subscriptions for Class A shares
during a subscription period which shall last for such period as may be agreed
upon by the parties hereto. The subscriptions will be payable within five
business days after the termination of the subscription period, at which time
the Fund will commence operations.
(b) After the Fund commences operations, the Fund will commence an
offering of its Class A shares and thereafter the Distributor shall have the
right to buy from the Fund the Class A shares needed, but not more than the
Class A shares needed (except for clerical errors in transmission) to fill
unconditional orders for Class A shares of the Fund placed with the Distributor
by investors or securities dealers. The price which the Distributor shall pay
for the Class A shares so purchased from the Fund shall be the net asset value,
determined as set forth in Section 3(e) hereof, used in determining the public
offering price on which such orders were based.
(c) The Class A shares are to be resold by the Distributor to
investors at the public offering price, as set forth in Section 3(d) hereof, or
to securities dealers having agreements with the Distributor upon the terms and
conditions set forth in
3
<PAGE>
Section 7 hereof.
(d) The public offering price(s) of the Class A shares, i.e., the
price per share at which the Distributor or selected dealers may sell Class A
shares to the public, shall be the public offering price as set forth in the
currently effective prospectus and statement of additional information (the
"prospectus" and "statement of additional information," respectively) under the
Securities Act of 1933, as amended (the "Securities Act"), relating to such
Class A shares, but not to exceed the net asset value at which the Distributor
is to purchase the Class A shares, plus a sales charge not to exceed 6.50% of
the public offering price (6.95% of the net amount invested), subject to
reductions for volume purchases. Class A shares may be sold to certain
Directors, officers and employees of the Fund, and certain directors, officers
and employees of the Manager (as that term is defined in the prospectus and
statement of additional information), the Distributor and their subsidiaries and
to such other persons as are defined in the prospectus and statement of
additional information, without a sales charge or at a reduced sales charge,
upon terms and conditions set forth in the prospectus and statement of
additional information. If the public offering price does not equal an even
cent, the public offering price may be adjusted to the nearest cent. All
payments to the Fund hereunder shall be made in the manner set forth in Section
3(g).
(e) The net asset value of Class A shares shall be deter-
4
<PAGE>
mined by the Fund or any agent of the Fund in accordance with the method set
forth in the prospectus and statement of additional information of the Fund and
guidelines established by the Directors.
(f) The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class A shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
Class A shares.
(g) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class A shares pursuant to the
instructions of the Distributor. Payment shall be made to the Fund in New York
Clearing House funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the
5
<PAGE>
Fund (or its agent).
Section 4. Repurchase or Redemption of Class A Shares by the Fund.
------------------------------------------------------
(a) Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
shares so tendered in accordance with its obligations as set forth in Article VI
of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to redeem or
repurchase the Class A shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(e) hereof. All payments by the
Fund hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Fund of any of the Class A shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class A
shares are tendered for redemption or repurchase within seven business days
after the date of the confirmation of the original purchase, the right to the
sales charge shall be forfeited by the Distributor and the selected dealer which
sold such Class A shares.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor in New
York Clearing House funds on or before the seventh business day subsequent to
its having received the notice
6
<PAGE>
of redemption in proper form.
(b) Redemption of Class A shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
closed, when trading on said Exchange is restricted, when an emergency exists as
a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
------------------
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class A shares
of the Fund, and this shall include, upon request by the Distributor, one
certified copy of all financial statements prepared for the Fund by independent
public accountants. The Fund shall make available to the Distributor such
number of copies of the prospectus and statement of additional information as
the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to the
necessary approval of the Class A shareholders, all necessary action to fix the
number of authorized Class A shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class A shares as the Distributor may
reasonably be
7
<PAGE>
expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class A shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by
the Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
-------------------------
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund, but shall not be obligated to sell any
specific number of Class A shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to
8
<PAGE>
the sale of such securities. Neither the Distributor nor any selected dealer,
as defined in Section 7 hereof, nor any other person is authorized by the Fund
to give any information or to make any representations, other than those
contained in the registration statement or related prospectus and statement of
additional information and any sales literature specifically approved by the
Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealers Agreements.
---------------------------
(a) The Distributor shall have the right to enter into selected
dealers agreements with securities dealers of its choice ("selected dealers")
for the sale of Class A shares and fix therein the portion of the sales charge
which may be allocated to the selected dealers; provided that the Fund shall
approve the forms of agreements with dealers and the dealer compensation set
forth therein. Class A shares sold to selected dealers shall be for resale by
such dealers only at the public offering price(s) set forth in the prospectus
and statement of additional information. The form of agreement with selected
dealers to be
9
<PAGE>
used during the subscription period described in Section 3(a) is attached hereto
as Exhibit A and the initial form of agreement with selected dealers to be used
in the continuous offering of the Class A shares is attached hereto as Exhibit
B.
(b) Within the United States, the Distributor shall offer and sell
Class A shares only to such selected dealers as are members in good standing of
the NASD.
Section 8. Payment of Expenses.
-------------------
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class A
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments of
sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
10
<PAGE>
which are to be used in connection with the offering of Class A shares to
selected dealers or investors pursuant to this Agreement. The Distributor shall
bear the costs and expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use by selected
dealers in connection with the offering of the Class A shares for sale to the
public and any expenses of advertising incurred by the Distributor in connection
with such offering. It is understood and agreed that, so long as the Fund's
Class A Shares Distribution Plan pursuant to Rule 12b-1 under the Investment
Company Act remains in effect, any expenses incurred by the Distributor
hereunder in connection with account maintenance activities may be paid from
amounts recovered by it from the Fund under such plan.
(c) The Fund shall bear the cost and expenses of qualification of
the Class A shares for sale pursuant to this Agreement, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or
dealer, in such states of the United States or other jurisdictions as shall be
selected by the Fund and the Distributor pursuant to Section 5(c) hereof and the
cost and expenses payable to each such state for continuing qualification
therein until the Fund decides to discontinue such qualification pursuant to
Section 5(c) hereof.
11
<PAGE>
Section 9. Indemnification.
---------------
(a) The Fund shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith), as incurred, arising by reason
of any person acquiring any Class A shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the registration statement or related prospectus and statement of additional
information, as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, unless such
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i) is the indemnity of the Fund
in favor of the Distributor and any such controlling persons to be deemed to
protect such Distributor or any such controlling persons thereof against any
liability to the Fund or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties
or by reason of the reckless disregard
12
<PAGE>
of their obligations and duties under this Agreement; or (ii) is the Fund to be
liable under its indemnity agreement contained in this paragraph with respect to
any claim made against the Distributor or any such controlling persons, unless
the Distributor or such controlling persons, as the case may be, shall have
notified the Fund in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon the Distributor or such controlling persons (or after the
Distributor or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or persons, defendant
or defendants in the suit. In the event the Fund elects to assume the defense
of any such suit and retain such counsel, the Distributor or such controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Fund does
not elect to assume the defense of any such suit, it will reim-
13
<PAGE>
burse the Distributor or such controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Fund shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or Directors in connection with the issuance or sale of any of the Class A
shares.
(b) The Distributor shall indemnify and hold harmless the Fund and
each of its Directors and officers and each person, if any, who controls the
Fund against any loss, liability, claim, damage or expense described in the
foregoing indemnity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the annual or interim reports to Class A shareholders. In case any
action shall be brought against the Fund or any person so indemnified, in
respect of which indemnity may be sought against the Distributor, the
Distributor shall have the rights and duties given to the Fund, and the Fund and
each person so indemnified shall have the rights and duties given to the
Distributor by the provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In connection
-----------------------------------------
with the Merrill Lynch Mutual Fund Adviser Program,
14
<PAGE>
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are authorized to offer and sell shares of the Fund, as agent for
the Fund, to participants in such program. The terms of this Agreement shall
apply to such sales, including terms as to the offering price of shares, the
proceeds to be paid to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This
------------------------------------------
Agreement shall become effective as of the date first above written and shall
remain in force until May 31, 1996, and thereafter, but only so long as such
continuance is specifically approved at least annually by (i) the Directors, or
by the vote of a majority of the outstanding voting securities of the Fund, and
(ii) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested
15
<PAGE>
person," when used in this Agreement, shall have the respective meanings
specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement may be
----------------------------
amended by the parties only if such amendment is specifically approved by (i)
the Directors, or by the vote of a majority of outstanding voting securities of
the Fund, and (ii) by the vote of a majority of those Directors of the Fund who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
Section 13. Governing Law. The provisions of this Agreement shall be
-------------
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the day and year first above written.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
By______________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By ___________________________________
Title:
16
<PAGE>
EXHIBIT A
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
CLASS A SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
FOR SUBSCRIPTION PERIOD
-----------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Global SmallCap Fund, Inc., a Maryland corporation
(the "Fund"), pursuant to which it acts as the distributor for the sale of Class
A shares of common stock, par value $0.10 per share (herein referred to as
"Class A shares"), of the Fund, and as such has the right to distribute Class A
shares of the Fund for resale. The Fund is an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), and its Class A shares being offered to the public are registered
under the Securities Act of 1933, as amended (the "Securities Act"). Such Class
A shares and certain of the terms on which they are being offered are more fully
described in the enclosed Prospectus and Statement of Additional Information.
You have received a copy of the Class A shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Fund and reference is made
herein to certain provisions of such Distribution Agreement. This Agreement
relates solely to the subscription period described in Section 3(a) of such
Distribution Agreement. Subject to the foregoing, as principal, we offer to
sell to you, as a member of the Selected Dealers Group, Class A shares of the
Fund upon the following terms and conditions:
1. The subscription period referred to in Section 3(a) of the
Distribution Agreement will continue through ______ __, 1994. The subscription
period may be extended upon agreement between the Fund and the Distributor.
Subject to the provisions of such Section and the conditions contained herein,
we will sell to you on the fifth business day following the termination of the
subscription period, or such other date as we may advise (the "Closing Date"),
such number of Class A shares as to which you have placed orders with us not
later than 5:00 P.M. on the second full business day preceding the Closing Date.
2. In all sales of these Class A shares to the public you shall act as
dealer for your own account, and in no transaction
A-1
<PAGE>
shall you have any authority to act as agent for the Fund, for us or for any
other member of the Selected Dealers Group.
3. Except as provided in Paragraph 4, below, the public offering
prices, sales charges and the related Selected Dealers' concession are as
follows:
<TABLE>
<CAPTION>
Discount
Sales Sales Charge to Selected
Charge as as Percentage* Dealers
Percentage of of the Net of the
Amount of Purchase Offering Price Amount Invested Offering Price
- ----------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
Less than $10,000.................. 6.50% 6.95% 6.25%
$10,000 but less than $25,000...... 6.00 6.38 5.75
$25,000 but less than $50,000...... 5.00 5.26 4.75
$50,000 but less than $100,000..... 4.00 4.17 3.75
$100,000 but less than $250,000.... 3.00 3.09 2.75
$250,000 but less than $1,000,000.. 2.00 2.04 1.80
$1,000,000 and over*............... .75 .76 .65
</TABLE>
- ----------------
* Rounded to the nearest
one-hundreth percent.
4. Initial sales charges will be waived for purchases of $1 million
or more in a single transaction by an investor (other than a tax qualified
retirement plan under Section 401 of the Internal Revenue Code of 1986, as
amended, (the "Code"), or a deferred compensation plan under Section 403(b) and
Section 457 of the Code), or a purchase by a TMA/SM/ Managed Trust, of Class A
Shares of the Fund. Such purchases will be subject to a contingent deferred
sales charge if the shares are redeemed within one year after purchase at the
following rates:
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge as a
Percentage of Dollar
Amount of Purchase Amount of Purchase
- ------------------ ------------------
<S> <C>
$1 million up to $2.5 million......... 1.00%
Over $2.5 million up to $3.5 million.. 0.60
Over $3.5 million up to $5 million.... 0.40
Over $5 million....................... 0.25
</TABLE>
The proceeds per Class A share to the Fund from the sale of all shares sold
during the subscription period will be $10.00.
A-2
<PAGE>
The term "purchase" refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company" as that
term is defined in the Investment Company Act, but does not include purchases
by any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
the registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of accumulation
under which eligible investors are permitted to purchase Class A shares of the
Fund at the offering price applicable to the total of (a) the dollar amount
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 the
Class A and Class B shares of the Fund and of any other investment company with
an initial sales charge or deferred sales charge for which the Distributor acts
as the distributor. For any such right of accumulation to be made available,
the Distributor must be provided at the time of purchase, by the purchaser or
you, with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating $10,000
or more of Class A shares or of shares of any other investment company with an
initial sales charge or deferred sales charge for which the Distributor acts as
the distributor made through you within a thirteen-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent letter executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made pursuant to
the terms of the Letter of Intention.
You agree to advise us promptly at your request as to amounts of any sales
made by you to the public qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the right of
accumulation or a Letter
A-3
<PAGE>
of Intention is set forth in the Prospectus.
5. You shall not place orders for any of the Class A shares unless you
have already received purchase orders for such shares at the applicable public
offering prices and subject to the terms hereof and of the Distribution
Agreement. All orders are subject to acceptance by the Distributor or the Fund
in the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the Prospectus, as amended from time to time.
You agree that you will not offer or sell any of the Class A shares except under
circumstances that will result in compliance with the applicable Federal and
state securities laws and that in connection with sales and offers to sell Class
A shares you will furnish to each person to whom any such sale or offer is made
a copy of the Prospectus and, if requested, the Statement of Additional
Information (as then amended or supplemented) and will not furnish to any person
any information relating to the Class A shares of the Fund which is inconsistent
in any respect with the information contained in the Prospectus and Statement of
Additional Information (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
6. All Class A shares purchased by Selected Dealers will be delivered in
the first instance at a settlement price computed on the basis of all sales
having been made in a purchase (as such term is defined above) involving a
public offering price of less than $10,000. All sales to you will be deemed to
have been made in such a transaction unless within 30 days after the Closing
Date you furnish to us, on forms supplied by us for the purpose, a statement
acceptable to us setting forth sales in purchases involving a public offering
price of $10,000 or more, in which case we will compute such Selected Dealers'
concessions on the basis of the information set forth in such statement.
7. Payment for Class A shares purchased by you is to be made by certified
or official bank check at the office of Merrill Lynch Funds Distributor, Inc.,
Box 9011, Princeton, New Jersey 08543-9011, on such date as we may advise, in
New York Clearing House funds payable to the order of Merrill Lynch Funds
Distributor, Inc., or by federal funds wire transfer, against delivery by us of
non-negotiable share deposit receipts ("Receipts") issued by Financial Data
Services, Inc., as shareholder servicing agent, acknowledging the deposit with
it of the Class A shares so purchased by you. You agree that as promptly as
practicable after the delivery of such Class A shares you will issue appropriate
written transfer instructions to the Fund or to the shareholder servicing agent
as to the purchasers to whom you sold the Class A shares.
8. If any Class A shares sold to you under the terms of this
A-4
<PAGE>
Agreement are repurchased by the Fund or by us for the account of the Fund or
are tendered for redemption within seven business days after the Closing Date,
it is agreed that you shall forfeit your right to, and refund to us, any
discount received by you on such Class A shares.
9. No person is authorized to make any representations concerning Class A
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class A
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus and Statement of Additional Information, periodic reports and
proxy solicitation material are our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or responsibility to you in these respects unless expressly assumed in
connection therewith.
10. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain Proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
11. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class A shares entirely. Each party hereto
has the right to cancel this Agreement upon notice to the other party.
12. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
13. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the
A-5
<PAGE>
Rules of Fair Practice of such Association.
14. Upon application to us, we will inform you as to the states in which we
believe the Class A shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell shares in any
jurisdiction. We will file with the Department of State in New York a Further
State Notice with respect to the shares, if necessary.
15. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
16. You agree that you will not sell any Class A shares of the Fund to any
account over which you exercise discretionary authority.
17. This Agreement shall terminate at the close of business on the Closing
Date, unless earlier terminated, provided, however, this Agreement shall
continue after termination for the purpose of Section 7 hereof and for the
purpose of settlement of accounts hereunder.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By__________________________________
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:____________________________________________
By:___________________________________________________
Address:______________________________________________
______________________________________________________
Date:_________________________________________________
A-6
<PAGE>
EXHIBIT B
---------
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
CLASS A SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
--------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Global SmallCap Fund, Inc., a Maryland corporation (the
"Fund"), pursuant to which it acts as the distributor for the sale of Class A
shares of common stock, par value $0.10 per share (herein referred to as "Class
A shares"), of the Fund, and as such has the right to distribute Class A shares
of the Fund for resale. The Fund is an open-end investment company registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), and its Class A shares being offered to the public are registered under
the Securities Act of 1933, as amended (the "Securities Act"). You have
received a copy of the Distribution Agreement between ourself and the Fund and
reference is made herein to certain provisions of such Distribution Agreement.
The terms "Prospectus" and "Statement of Additional Information" used herein
refer to the prospectus and statement of additional information, respectively,
on file with the Securities and Exchange Commission (the "Commission") which is
part of the most recent effective registration statement pursuant to the
Securities Act. As principal, we offer to sell to you, as a member of the
Selected Dealers Group, Class A shares of the Fund upon the following terms and
conditions:
1. In all sales of these Class A shares to the public you shall act as
dealer for your own account, and in no transaction shall you have any authority
to act as agent for the Fund, for us or for any other member of the Selected
Dealers Group.
2. Orders received from you will be accepted through us only at the public
offering price applicable to each order, as set forth in the current Prospectus
and Statement of Additional Information of the Fund. The procedure relating to
the handling of orders shall be subject to Section 5 hereof and instructions
which we or the Fund shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Fund in the sole
discretion of either. The minimum initial and subsequent purchase requirements
are as set forth in the current Prospectus and Statement of Additional
Information of the Fund.
B-1
<PAGE>
3. Except as provided in Paragraph 4, below, the sales charges for sales
to the public, computed as percentages of the public offering price and the
amount invested, and the related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Selected
Sales Sales Charge Dealers as a
Charge as as Percentage* Percentage
Percentage of of the Net of the
Amount of Purchase Offering Price Amount Invested Offering Price
- ----------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
Less than $10,000.................. 6.50% 6.95% 6.25%
$10,000 but less than $25,000...... 6.00 6.38 5.75
$25,000 but less than $50,000...... 5.00 5.26 4.75
$50,000 but less than $100,000..... 4.00 4.17 3.75
$100,000 but less than $250,000.... 3.00 3.09 2.75
$250,000 but less than $1,000,000.. 2.00 2.04 1.80
$1,000,000 and over*............... .75 .76 .65
</TABLE>
- ---------------
* Rounded to the nearest
one-hundreth percent.
4. Initial sales charges will be waived for purchases of $1 million
or more in a single transaction by an investor (other than a tax qualified
retirement plan under Section 401 of the Internal Revenue Code of 1986, as
amended, (the "Code"), or a deferred compensation plan under Section 403(b) and
Section 457 of the Code), or a purchase by a TMA/SM/ Managed Trust, of Class A
Shares of the Fund. Such purchases will be subject to a contingent deferred
sales charge if the shares are redeemed within one year after purchase at the
following rates:
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge as a
Percentage of Dollar
Amount of Purchase Amount of Purchase
- ------------------ ------------------
<S> <C>
$1 million up to $2.5 million......... 1.00%
Over $2.5 million up to $3.5 million.. 0.60
Over $3.5 million up to $5 million.... 0.40
Over $5 million....................... 0.25
</TABLE>
B-2
<PAGE>
5. As used herein, the term "purchase" refers to a single purchase by an
individual, or to concurrent purchases, which in the aggregate are at least
equal to the prescribed amounts, by an individual, his spouse and their children
under the age of 21 years purchasing Class A shares for his or their own account
and to single purchases by a trustee or other fiduciary purchasing Class A
shares for a single trust estate or single fiduciary account although more than
one beneficiary is involved. The term "purchase" also includes purchases by any
"company" as that term is defined in the Investment Company Act of 1940, but
does not include purchases by any such company which has not been in existence
for at least six months or which has no purpose other than the purchase of Class
A shares of the Fund or Class A shares of other registered investment companies
at a discount; provided, however, that it shall not include purchases by any
group of individuals whose sole organizational nexus is that the participants
therein are credit cardholders of a company, policyholders of an insurance
company, customers of either a bank or broker-dealer or clients of an investment
adviser.
The reduced sales charges are applicable through a right of accumulation
under which eligible investors are permitted to purchase Class A shares of the
Fund at the offering price applicable to the total of (a) the dollar amount 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 the Class A
and Class B shares of the Fund and of any other investment company with an
initial sales charge or deferred sales charge for which the Distributor acts as
the distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or you,
with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating $10,000
or more of Class A shares or of shares of any other investment company with an
initial sales charge or deferred sales charge for which the Distributor acts as
the distributor made through you within a thirteen-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in
the Prospectus. A purchase not originally made pursuant to a Letter of
Intention may be included under a subsequent letter executed within 90 days of
such purchase if the Distributor is informed in writing of this intent within
such 90-day period. If the intended amount of shares is not purchased within
the thirteen-month period, an appropriate price adjustment will be made pursuant
to the terms of the Letter of Intention.
B-3
<PAGE>
You agree to advise us promptly at our request as to amounts of any sales
made by you to the public qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of Intention is set forth in the Prospectus and
Statement of Additional Information.
6. You shall not place orders for any of the Class A shares unless you
have already received purchase orders for such Class A shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class A shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class A shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class A shares of the Fund, which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
7. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class A shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof, and (ii) to tender Class A shares
directly to the Fund or its agent for redemption subject to the applicable terms
and conditions set forth in Section 4 of the Distribution Agreement.
8. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such withholding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
9. If any Class A shares sold to you under the terms of this Agreement are
repurchased by the Fund or by us for the account of the Fund or are tendered for
redemption within seven business days after the date of the confirmation of the
original purchase by you, it is agreed that you shall forfeit your right to, and
refund to us, any discount received by you on such Class A shares.
B-4
<PAGE>
10. No person is authorized to make any representations concerning Class
A shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class A
shares through us you shall rely solely on the representations obtained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material are our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or responsibility to you in these respects unless expressly assumed in
connection therewith.
11. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
12. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class A shares entirely. Each party hereto
has the right to cancel this agreement upon notice to the other party.
13. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act, or of the rules and regulations of the Commission issued
thereunder.
14. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
15. Upon application to us, we will inform you as to the states in which
we believe the Class A shares have been qualified
B-5
<PAGE>
for sale under, or are exempt from the requirements of, the respective
securities laws of such states, but we assume no responsibility or obligation as
to your right to sell Class A shares in any jurisdiction. We will file with the
Department of State in New York a Further State Notice with respect to the Class
A shares, if necessary.
16. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
17. Your first order placed pursuant to this Agreement for the purchase of
Class A shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By___________________________________
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:___________________________________________
By:__________________________________________________
Address:_____________________________________________
_____________________________________________________
Date:________________________________________________
B-6
<PAGE>
EXHIBIT 99.6(B)
CLASS B SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 16th day of June, 1994, between MERRILL LYNCH
GLOBAL SMALLCAP FUND, INC., a Maryland corporation (the "Fund"), and MERRILL
LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
-------------------
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company and it is affirmatively in the interest of the Fund to offer its shares
for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Fund's Class B
shares in order to promote the growth of the Fund and facilitate the
distribution of its Class B shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints
------------------------------
the Distributor as the principal underwriter and distributor of the Fund to sell
Class B shares of common stock of the Fund (sometimes herein referred to as
"Class B shares") to
<PAGE>
the public and hereby agrees during the term of this Agreement to sell shares of
the Fund to the Distributor upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
--------------------------
exclusive representative of the Fund to act as principal underwriter and
distributor of the Class B shares, except that:
(a) The Fund may, upon written notice to the Distributor, from time
to time designate other principal underwriters and distributors of Class B
shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such. If
such designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class B shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive rights granted to the Distributor to purchase Class
B shares from the Fund shall not apply to Class B shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class B
shares of any such company by the Fund.
2
<PAGE>
(c) Such exclusive rights also shall not apply to Class B shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive rights also shall not apply to Class B shares
issued by the Fund pursuant to any reinstatement privilege afforded redeeming
shareholders.
Section 3. Purchase of Class B Shares from the Fund.
----------------------------------------
(a) Prior to the continuous offering of the Class B shares,
commencing on a date agreed upon by the Fund and the Distributor, it is
contemplated that the Distributor will solicit subscriptions for Class B shares
during a subscription period which shall last for such period as may be agreed
upon by the parties hereto. The subscriptions will be payable within five
business days after the termination of the subscription period, at which time
the Fund will commence operations.
(b) After the Fund commences operations, the Fund will commence an
offering of its Class B shares and thereafter the Distributor shall have the
right to buy from the Fund the Class B shares needed, but not more than the
Class B shares needed (except for clerical errors in transmission) to fill
unconditional orders for Class B shares of the Fund placed with the Distributor
by investors or securities dealers. The price which the Distributor shall pay
for the Class B shares so purchased from the Fund shall be the net asset value,
determined as set forth in Section 3(d) hereof.
3
<PAGE>
(c) The Class B shares are to be resold by the Distributor to
investors at net asset value, as set forth in Section 3(d) hereof, or to
securities dealers having agreements with the Distributor upon the terms and
conditions set forth in Section 7 hereof.
(d) The net asset value of Class B shares of the Fund shall be
determined by the Fund or any agent of the Fund in accordance with the method
set forth in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information," respectively) under the Securities Act of 1933, as amended (the
"Securities Act"), and guidelines established by the Board of Directors.
(e) The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class B shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
shares.
(f) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class B shares
received by the Distributor. Any order
4
<PAGE>
may be rejected by the Fund; provided, however, that the Fund will not
arbitrarily or without reasonable cause refuse to accept or confirm orders for
the purchase of Class B shares. The Fund (or its agent) will confirm orders
upon their receipt, will make appropriate book entries and, upon receipt by the
Fund (or its agent) of payment therefor, will deliver deposit receipts or
certificates for such Class B shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class B Shares by the Fund.
------------------------------------------------------
(a) Any of the outstanding Class B shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class B
shares so tendered in accordance with its obligations as set forth in Article VI
of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information of the Fund. The price to be paid to redeem
or repurchase the Class B shares shall be equal to the net asset value
calculated in accordance with the provisions of Section 3(d) hereof, less the
redemption fee or other charges, if any, set forth in the prospectus and
statement of additional
5
<PAGE>
information of the Fund. All payments by the Fund hereunder shall be made in
the manner set forth below.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Fund as follows (i) any applicable contingent deferred sales charge
shall be paid to the Distributor and (ii) the balance charge shall be paid to or
for the account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of additional information.
(b) Redemption of Class B shares or payment may be suspended at
times when the New York Stock Exchange is closed, when trading on said Exchange
is closed, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
------------------
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the
6
<PAGE>
distribution of Class B shares of the Fund, and this shall include, upon
request by the Distributor, one certified copy of all financial statements
prepared for the Fund by independent public accountants. The Fund shall make
available to the Distributor such number of copies of its prospectus and
statement of additional information as the Distributor shall reasonably
request.
(b) The Fund shall take, from time to time, but subject to the
necessary approval of the shareholders, all necessary action to fix the number
of authorized shares and such steps as may be necessary to register the same
under the Securities Act to the end that there will be available for sale such
number of Class B shares as the Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class B shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by
the Distributor, copies of annual and interim reports of the Fund.
7
<PAGE>
Section 6. Duties of the Distributor.
-------------------------
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class B shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National Association
8
<PAGE>
of Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealer Agreements.
--------------------------
(a) The Distributor shall have the right to enter into selected
dealer agreements with securities dealers of its choice ("selected dealers") for
the sale of Class B shares; provided, that the Fund shall approve the forms of
agreements with dealers. Class B shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set forth in
Section 3(d) hereof. The form of agreement with selected dealers to be used
during the subscription period described in Section 3(a) is attached hereto as
Exhibit A and the initial form of agreement with selected dealers to be used in
the continuous offering of the shares is attached hereto as Exhibit B.
(b) Within the United States, the Distributor shall offer and sell
Class B shares only to such selected dealers that are members in good standing
of the NASD.
Section 8. Payment of Expenses.
-------------------
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
9
<PAGE>
materials to Class B shareholders (including but not limited to the expense of
setting in type any such registration statements, prospectuses, statements of
additional information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments of
sales commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class B shares to selected dealers or investors pursuant to
this Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering of
the Class B shares for sale to the public and any expenses of advertising
incurred by the Distributor in connection with such offering. It is understood
and agreed that, so long as the Fund's Class B Shares Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder may be paid from amounts recovered by it
from the Fund under such Plan.
10
<PAGE>
(c) The Fund shall bear the cost and expenses of qualification of
the Class B shares for sale pursuant to this Agreement, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or
dealer, in such states of the United States or other jurisdictions as shall be
selected by the Fund and the Distributor pursuant to Section 5(c) hereof and the
cost and expenses payable to each such state for continuing qualification
therein until the Fund decides to discontinue such qualification pursuant to
Section 5(c) hereof.
Section 9. Indemnification.
---------------
(a) The Fund shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith), as incurred, arising by reason
of any person acquiring any Class B shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that the
registration statement or related prospectus and statement of additional
information, as from time to time amended and supplemented, or an annual or
interim report to Class B shareholders of the Fund, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
unless such statement or
11
<PAGE>
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i) is the indemnity of the Fund
in favor of the Distributor and any such controlling persons to be deemed to
protect such Distributor or any such controlling persons thereof against any
liability to the Fund or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Fund in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Fund of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Fund will be entitled to participate at its
12
<PAGE>
own expense in the defense, or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but if the Fund elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or persons, defendant
or defendants in the suit. In the event the Fund elects to assume the defense
of any such suit and retain such counsel, the Distributor or such controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses, as incurred, of any additional counsel retained by them, but, in case
the Fund does not elect to assume the defense of any such suit, it will
reimburse the Distributor or such controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses, as incurred, of
any counsel retained by them. The Fund shall promptly notify the Distributor of
the commencement of any litigation or proceedings against it or any of its
officers or Directors in connection with the issuance or sale of any of the
Class B shares.
(b) The Distributor shall indemnify and hold harmless the Fund and
each of its Directors and officers and each person, if any, who controls the
Fund against any loss, liability, claim, damage or expense, as incurred,
described in the foregoing indemnity contained in subsection (a) of this
Section, but only with respect to statements or omissions made in reliance upon,
and in conformity with, information furnished to the Fund in writing by
13
<PAGE>
or on behalf of the Distributor for use in connection with the registration
statement or related prospectus and statement of additional information, as from
time to time amended, or the annual or interim reports to shareholders. In case
any action shall be brought against the Fund or any person so indemnified, in
respect of which indemnity may be sought against the Distributor, the
Distributor shall have the rights and duties given to the Fund, and the Fund and
each person so indemnified shall have the rights and duties given to the
Distributor by the provisions of subsection (a) of this Section 9.
Section 10. Duration and Termination of this Agreement. This
------------------------------------------
Agreement shall become effective as of the date first above written and shall
remain in force until May 31, 1996, and thereafter, but only so long as such
continuance is specifically approved at least annually by (i) the Directors, or
by the vote of a majority of the outstanding voting securities of the Fund, and
(ii) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor, on sixty days' written notice to
the other party.
14
<PAGE>
This Agreement shall automatically terminate in the event of its assignment.
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 11. Amendments of this Agreement. This Agreement may be
----------------------------
amended by the parties only if such amendment is specifically approved by (i)
the Directors, or by the vote of a majority of outstanding voting securities of
the Fund, and (ii) by the vote of a majority of those Directors of the Fund who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
Section 12. Governing Law. The provisions of this Agreement shall
-------------
be construed and interpreted in accordance with the laws of the State of New
York as at the time in effect and the applicable provisions of the Investment
Company Act. To the extent that the applicable law of the State of New York, or
any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
By _____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By _____________________________________
Title:
16
<PAGE>
EXHIBIT A
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
CLASS B SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
FOR SUBSCRIPTION PERIOD
-----------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Global SmallCap Fund, Inc., a Maryland corporation
(the "Fund"), pursuant to which it acts as the distributor for the sale of Class
B shares of common stock, par value $0.10 per share (herein referred to as
"Class B shares"), of the Fund, and as such has the right to distribute Class B
shares of the Fund for resale. The Fund is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and its Class B
shares being offered to the public are registered under the Securities Act of
1933, as amended (the "Securities Act"). Such Class B shares and certain of the
terms on which they are being offered are more fully described in the enclosed
Prospectus and Statement of Additional Information. You have received a copy of
the Class B shares Distribution Agreement (the "Distribution Agreement") between
ourself and the Fund and reference is made herein to certain provisions of such
Distribution Agreement. This Agreement relates solely to the subscription
period described in Section 3(a) of such Distribution Agreement. Subject to the
foregoing, as principal, we offer to sell to you, as a member of the Selected
Dealers Group, Class B shares of the Fund upon the following terms and
conditions:
1. The subscription period referred to in Section 3(a) of the
Distribution Agreement will continue through ______ __, 1994. The subscription
period may be extended upon agreement between the Fund and the Distributor.
Subject to the provisions of such Section and the conditions contained herein,
we will sell to you on the fifth business day following the termination of the
subscription period, or such other date as we may advise (the "Closing Date"),
such number of Class B shares as to which you have placed orders with us not
later than 5:00 P.M. on the second full business day preceding the Closing Date.
2. In all sales of these Class B shares to the public you shall act
as dealer for your own account, and in no transaction
A-1
<PAGE>
shall you have any authority to act as agent for the Fund, for us or for any
other member of the Selected Dealers Group.
3. You shall not place orders for any of the Class B shares unless
you have already received purchase orders for such Class B shares at the
applicable public offering prices and subject to the terms hereof and of the
Distribution Agreement. All orders are subject to acceptance by the Distributor
or the Fund in the sole discretion of either. The minimum initial and
subsequent purchase requirements are as set forth in the Prospectus, as amended
from time to time. You agree that you will not offer or sell any of the Class B
shares except under circumstances that will result in compliance with the
applicable Federal and state securities laws and that in connection with sales
and offers to sell Class B shares you will furnish to each person to whom any
such sale or offer is made a copy of the Prospectus and, if requested, the
Statement of Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class B shares of the
Fund which is inconsistent in any respect with the information contained in the
Prospectus and Statement of Additional Information (as then amended or
supplemented) or cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of the Fund.
4. Payment for Class B shares purchased by you is to be made by
certified or official bank check at the office of Merrill Lynch Funds
Distributor, Inc., Box 9011, Princeton, New Jersey 08543-9011, on such date as
we may advise, in New York Clearing House funds payable to the order of Merrill
Lynch Funds Distributor, Inc., or by federal funds wire transfer, against
delivery by us of non-negotiable share deposit receipts ("Receipts") issued by
Financial Data Services, Inc., as shareholder servicing agent, acknowledging the
deposit with it of the Class B shares so purchased by you. You agree that as
promptly as practicable after the delivery of such Class B shares you will issue
appropriate written transfer instructions to the Fund or to the shareholder
servicing agent as to the purchasers to whom you sold the Class B shares.
5. No person is authorized to make any representations concerning
Class B shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class B
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Informa-
A-2
<PAGE>
tion and supplemental information above mentioned. Any printed information
which we furnish you other than the Fund's Prospectus and Statement of
Additional Information, periodic reports and proxy solicitation material are
our sole responsibility and not the responsibility of the Fund, and you agree
that the Fund shall have no liability or responsibility to you in these respects
unless expressly assumed in connection therewith.
6. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus and, if requested, the Statement
of Additional Information at or prior to the time of offering or sale and you
agree thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain Proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
7. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class B shares entirely. Each party hereto has
the right to cancel this Agreement upon notice to the other party.
8. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
9. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
10. Upon application to us, we will inform you as to the states in
which we believe the Class B shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your right to sell Class B
shares in any jurisdiction. We will file with the Department of
A-3
<PAGE>
State in New York a Further State Notice with respect to the Class B shares, if
necessary.
11. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
12. You agree that you will not sell any Class B shares of the Fund to
any account over which you exercise discretionary authority.
13. This Agreement shall terminate at the close of business on the
Closing Date, unless earlier terminated, provided, however, this Agreement shall
continue after termination for the purpose of settlement of accounts hereunder.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:___________________________________________
By:__________________________________________________
Address:_____________________________________________
_____________________________________________________
Date:________________________________________________
A-4
<PAGE>
EXHIBIT B
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
CLASS B SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
-------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Global SmallCap Fund, Inc., a Maryland corporation
(the "Fund"), pursuant to which it acts as the distributor for the sale of Class
B shares of common stock, par value $0.10 per share (herein referred to as the
"Class B shares"), of the Fund, and as such has the right to distribute Class B
shares of the Fund for resale. The Fund is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and its Class B
shares being offered to the public are registered under the Securities Act of
1933, as amended (the "Securities Act"). You have received a copy of the Class
B shares Distribution Agreement (the "Distribution Agreement") between ourself
and the Fund and reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of Additional
Information" as used herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and Exchange Commission
(the "Commission") which is part of the most recent effective registration
statement pursuant to the Securities Act. As principal, we offer to sell to
you, as a member of the Selected Dealers Group, Class B shares of the Fund upon
the following terms and conditions:
1. In all sales of these Class B shares to the public you shall act
as dealer for your own account, and in no transaction shall you have any
authority to act as agent for the Fund, for us or for any other member of the
Selected Dealers Group.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 4 hereof and
instructions which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.
B-1
<PAGE>
3. You shall not place orders for any of the Class B shares unless
you have already received purchase orders for such Class B shares at the
applicable public offering prices and subject to the terms hereof and of the
Distribution Agreement. You agree that you will not offer or sell any of the
Class B shares except under circumstances that will result in compliance with
the applicable Federal and state securities laws and that in connection with
sales and offers to sell Class B shares you will furnish to each person to whom
any such sale or offer is made a copy of the Prospectus and, if requested, the
Statement of Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class B shares of the
Fund, which is inconsistent in any respect with the information contained in the
Prospectus and Statement of Additional Information (as then amended or
supplemented) or cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class B shares of the Fund to be resold by us
to you subject to the applicable terms and conditions governing the placement of
orders by us set forth in Section 3 of the Distribution Agreement, and (ii) to
tender Class B shares directly to the Fund or its agent for redemption subject
to the applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
5. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
6. No person is authorized to make any representations concerning
Class B shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class B
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material are our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or responsibility to you in these respects unless expressly assumed in
connection therewith.
7. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus and, if requested, the Statement
of Additional Information at or prior to the time of offering or sale and you
agree thereafter to deliver
B-2
<PAGE>
to such purchasers copies of the annual and interim reports and proxy
solicitation materials of the Fund. You further agree to endeavor to obtain
proxies from such purchasers. Additional copies of the Prospectus and Statement
of Additional Information, annual or interim reports and proxy solicitation
materials of the Fund will be supplied to you in reasonable quantities upon
request.
8. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class B shares entirely. Each party hereto has
the right to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act, or of the rules and regulations of the Commission issued
thereunder.
10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the states in
which we believe the Class B shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your right to sell Class B
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class B shares, if necessary.
12. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
B-3
<PAGE>
13. Your first order placed pursuant to this Agreement for the
purchase of Class B shares of the Fund will represent your acceptance of this
Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By__________________________________
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: __________________________________________
By:__________________________________________________
Address: ____________________________________________
_____________________________________________________
Date: _______________________________________________
B-4
<PAGE>
EXHIBIT 99.8
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made this ____ day of _______________, 1994, between MERRILL
LYNCH GLOBAL SMALLCAP FUND, INC. (the "Fund") and Brown Brothers Harriman & Co,
(the "Custodian").
WITNESSETH: That in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. The Fund hereby employs and appoints the Custodian as a custodian for
the term and subject to the provisions of this Agreement. The Custodian shall
not be under any duty or obligation to require the Fund to deliver to it any
securities or funds owned by the Fund and shall have no responsibility or
liability for or on account of securities or funds not so delivered. The Fund
will deposit with the Custodian copies of the Certificate of Incorporation and
By-Laws (or comparable documents) of the Fund and all amendments thereto, and
copies of such votes and other proceedings of the Fund as may be necessary for
or convenient to the Custodian in the performance of its duties.
2. Except for securities and funds held by subcustodians appointed
pursuant to the provisions of Section 3 hereof, the Custodian shall have and
perform the following powers and duties:
A. Safekeeping - To keep safely the securities of the Fund that have been
-----------
delivered to the Custodian and from time to time to receive delivery of
securities for safekeeping.
2
<PAGE>
B. Manner of Holding Securities - To hold securities of the Fund (1) by
----------------------------
physical possession of the share certificates or other instruments representing
such securities in registered or bearer form, or (2) in book-entry form by a
Securities System (as said term is defined in Section 2S).
C. Registered Name; Nominee - To hold registered securities of the Fund
------------------------
(1) in the name or any nominee name of the Custodian or the Fund, or in the name
or any nominee name of any agent appointed pursuant to Section 5E, or (2) in
street certificate form, so-called, and in any case with or without any
indication of fiduciary capacity.
D. Purchases - Upon receipt of Proper Instructions, as defined in Section
---------
V on Page 14, inso(Pounds)ar as funds are available for the purpose, to pay for
and receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities (1) by the Custodian, or (2) by a clearing
corporation of a national securities exchange of which the Custodian is a
member, or (3) by a Securities System. However, (i) in the case of repurchase
agreements entered into by the Fund, the Custodian may release funds to a
Securities System or to a Subcustodian prior to the receipt of advice from the
Securities System or Subcustodian that the securities underlying such repurchase
agreement have been transferred by book entry into the Account (as defined in
Section 2S) of the Custodian maintained with such Securities System or
Subcustodian, so long
3
<PAGE>
as such payment instructions to Securities System or Subcustodian include a
requirement that delivery is only against payment of securities, and (ii) in the
case of time deposits, call account deposits, currency deposits, and other
deposits, contracts or options pursuant to Sections 2K, 2L and 2M, the Custodian
may make payment therefor without receiving an instrument evidencing said
deposit so long as such payment instructions detail specific securities to be
acquired.
E. Exchanges - Upon receipt of proper instructions, to exchange securities
---------
held by it for the account of the Fund for other securities in connection with
any reorganization, recapitalization, split-up of shares, change of par value,
conversion or other event, and to deposit any such securities in accordance with
the terms of any reorganization or protective plan. Without such instructions,
the Custodian may surrender securities in temporary form for definitive
securities, may surrender securities for transfer into a name or nominee name as
permitted in Section 2C, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided the securities to be issued are to be
delivered to the Custodian and further provided custodian shall at the time of
surrendering securities or instruments receive a receipt or other evidence of
ownership thereof.
4
<PAGE>
F. Sales of Securities - Upon receipt of proper instructions, to make
-------------------
delivery of securities which have been sold for the account of the Fund, but
only against payment therefor (1) in cash, by a certified check, bank cashier's
check, bank credit, or bank wire transfer, or (2) by credit to the account of
the Custodian with a clearing corporation of a national securities exchange of
which the Custodian is a member or (3) by credit to the account of the Custodian
or an Agent of the Custodian with a Securities System.
G. Depositary Receipts - Upon receipt of proper instructions, to instruct
-------------------
a subcustodian appointed pursuant to Section 3 hereof (a "Subcustodian") or an
agent of the Custodian appointed pursuant to Section 5E hereof (an "Agent") to
surrender securities to the depositary used by an issuer of American Depositary
Receipts or International Depositary Receipts (hereinafter collectively referred
to as "ADRs") for such securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to the Subcustodian
or Agent that the depositary has acknowledged receipt of instructions to issue
with respect to such securities ADRs in the name of the Custodian, or a nominee
of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at
such other place as the Custodian may from time to time designate.
5
<PAGE>
Upon receipt of proper instructions, to surrender ADRs to the issuer
thereof against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause the depositary to
deliver the securities underlying such ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of proper
---------------------------------
instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants puts, calls, rights or similar securities for the purpose of
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and, upon receipt
of proper instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
-----------------------------
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Borrowings - Upon receipt of proper instructions, to deliver securities
----------
of the Fund to lenders or their agents as collateral for borrowings effected by
the Fund, provided that such borrowed money is payable to or upon the
Custodian's order as Custodian for the Fund.
6
<PAGE>
K. Demand Deposit Bank Accounts - To open and operate an account or
----------------------------
accounts in the name of the Fund on the Custodian's books subject only to draft
or order by the Custodian. All funds received by the Custodian from or for the
account of the Fund shall be deposited in said accounts(s). The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U. S. bank for a similar deposit.
If and when authorized by proper instructions, the Custodian may open and
operate an additional accounts) in such other banks or trust companies as may be
designated by the Fund in such instructions (any such bank or trust company so
designated by the Fund being referred to hereafter as a "Banking Institution"),
provided that such account(s) shall be in the name of the Custodian for account
of the Fund and subject only to the Custodian's draft or order. Such accounts
may be opened with Banking Institutions in the United States and in other
countries and may be denominated in either U. S. Dollars or other currencies as
the Fund may determine. All such deposits shall be deemed to be portfolio
securities of the Fund and accordingly the responsibility of the Custodian
therefore shall be the same as and neither lesser nor greater than the
Custodian's responsibility in respect of other portfolio securities of the Fund.
7
<PAGE>
L. Interest Bearing Call or Time Deposits - To place interest bearing
--------------------------------------
fixed term and call deposits with such banks and in such amounts as the Fund may
authorize pursuant to proper instructions. Such deposits may be placed with the
Custodian or with Subcustodians or other Banking Institutions as the Fund may
determine. Deposits may be denominated in U. S. Dollar or other currencies and
need not be evidenced by the issuance or delivery of a certificate to the
Custodian provided that the Custodian shall include in its records with respect
to the assets of the Fund, appropriate notation as to the amount and currency of
each such deposit, the accepting Banking Institution, and other appropriate
details. Such deposits, other than those placed with the Custodian, shall be
deemed portfolio securities of the Fund and the responsibilities of the
Custodian therefor shall be the same as those for demand deposit bank accounts
placed with other banks, as described in Section K of this agreement. The
responsibility of the Custodian for such deposits accepted on the Custodian's
books shall be that of a U. S. bank for a similar deposit.
M. Foreign Exchange Transactions and Futures Contracts - Pursuant to
---------------------------------------------------
proper instructions, to enter into foreign exchange contracts or options to
purchase and sell foreign currencies for spot and future delivery on behalf and
for the account of the Fund. Such transactions may be undertaken by the
Custodian with such Banking Institutions, including the Custodian and
8
<PAGE>
Subcustodian(s) as principals, as approved and authorized by the Fund, Foreign
exchange contracts and options other than those executed with the Custodian
shall be deemed to be portfolio securities of the Fund and the responsibilities
of the Custodian therefor shall be the same as those for demand deposit bank
accounts placed with other banks as described in Section 2-K of this agreement.
Upon receipt of proper instructions, to receive and retain confirmations
evidencing the purchase or sale of a futures contract or an option on a futures
contract by the Fund; to deposit and maintain in a segregated account, for the
benefit of any futures commission merchant or to pay to such futures commission
merchant, assets designated by the fund as initial, maintenance or variation
"margin" deposits intended to secure the Fund's performance of its obligations
under any futures contracts purchased or sold or any options on futures
contracts written by the Fund, in accordance with the provisions of any
agreement or agreements among any of the Fund, the Custodian and such futures
commission merchant, designated to comply with the rules of the Commodity
Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding such margin deposits; and to release
and/or transfer assets in such margin accounts only in accordance with any such
agreements or rules.
N. Stock Loans - Upon receipt of proper instructions, to deliver
-----------
securities of the Fund, in connection with loans of
9
<PAGE>
securities by the Fund, to the borrower thereof upon the receipt of the cash
collateral, if any, for such borrowing. In the event U.S. Government securities
are to be used as collateral, the Custodian will not release the securities to
be loaned until it has received confirmation that such collateral has been
delivered to the Custodian. The Custodian and Fund understand that the timing
of receipt of such confirmation will normally require that the delivery of
securities to be loaned will be made one day after receipt of the U.S.
Government collateral.
O. Collections - To collect, receive and deposit in said account or
-----------
accounts all income and other payments with respect to the securities held
hereunder, and to execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of income or other
payments with respect to securities of the Fund or in connection with transfer
of securities, and pursuant to proper instructions to take such other actions
with respect to collection or receipt of funds or transfer of securities which
involve an investment decision.
P. Dividends, Distributions and Redemptions - Upon receipt of proper
----------------------------------------
instructions from the Fund, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized),
10
<PAGE>
the Custodian shall release funds or securities to the Shareholder Servicing
Agent or otherwise apply funds or securities, insofar as available, for the
payment of dividends or other distributions to Fund shareholders. Upon receipt
of proper instructions from the Fund, or upon receipt of instructions from the
Shareholder Servicing Agent (given by such person or persons and in such manner
on behalf of the Shareholder Servicing Agent as the Fund shall have authorized)
the Custodian shall release funds or securities, insofar as available, to the
Shareholder Servicing Agent or as such Agent shall otherwise instruct for
payment to Fund shareholders who have delivered to such Agent a request for
repurchase or redemption of their shares of capital stock of the Fund.
Q. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund all
----------------------
forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, and upon receipt of proper instructions, to execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominee shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper instructions.
11
<PAGE>
R. Bills - Upon receipt of proper instructions from the Administrator, to
-----
pay or cause to be paid, insofar as funds are available for the purpose, bills,
statements, or other obligations of the Fund.
S. Deposit of Fund Assets in Securities Systems - The Custodian may
--------------------------------------------
deposit and/or maintain securities owned by the Fund in (i) The Depository Trust
Company, (ii) any book-entry system as provided in Subpart O of Treasury
Circular No. 30Q, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry
regulations of federal agencies substantially in the form of Subpart O, or (iii)
any other domestic clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 which acts
as a securities depository and whose use the Fund has previously approved in
writing (each of the foregoing being referred to in this Agreement as a
"Securities System"). Utilization of a Securities System shall be in accordance
with applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:
(1) The Custodian may deposit and/or maintain Fund securities, either
directly or through one or more Agents appointed by the Custodian (provided that
any such agent shall be qualified to act as a custodian of the Fund pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder), in
a Securities System provided that such securities
12
<PAGE>
are represented in an account ("Account") of the Custodian or such Agent in the
Securities System which shall not include any assets of the Custodian or Agent
other than assets held as a fiduciary, custodian, or otherwise for customers;
(2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-entry those
securities belonging to the Fund;
(3) The Custodian shall pay for securities purchased for the account of
the Fund upon (i) receipt of advice from the Securities System that such
securities have been transferred to the AccountS and (ii) the making of an entry
on the records of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall Transfer securities sold for the
account of the Fund upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices from the Securities
System of transfers of securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian or an Agent as referred to
above, and be provided to the Fund at its request. The Custodian shall furnish
the Fund confirmation of each transfer to or from the account of the fund in the
form of a written advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's
13
<PAGE>
transactions in the Securities System for the account of the Fund on the next
business day;
(4) The Custodian shall provide the Fund with any report obtained by the
Custodian or any Agent as referred to above on the Securities System's
accounting system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System; and the Custodian and such Agents
shall send to the Fund such reports on their own systems of internal accounting
control as the Fund may reasonably request from time to time.
(5) At the written request of the Fund, the Custodian will terminate the
use of any such Securities System on behalf of the Fund as promptly as
practicable.
T. Other Transfers - Upon receipt of Proper Instructions, to deliver
---------------
securities, funds and other property of the Fund to a Subcustodian or another
custodian of the Fund; and, upon receipt of proper instructions, to make such
other disposition of securities, funds or other property of the Fund in a manner
other than or for purposes other than as enumerated elsewhere in this Agreement,
provided that the instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
securities to be delivered and the name of the person or persons to whom
delivery is to be made,
14
<PAGE>
U. Investment Limitations - In performing its duties generally, and more
----------------------
particularly in connection with the purchase, sale and exchange of securities
made by or for the Fund, the Custodian may assume unless and until notified in
writing to the contrary that proper instructions received by it are not in
conflict with or in any way contrary to any provisions of the Fund's Certificate
of Incorporation or By-Laws (or comparable documents) or votes or proceedings of
the shareholders or Directors of the Fund. The Custodian shall in no event be
liable to the Fund and shall be indemnified by the Fund for any violation which
occurs in the course of carrying out instructions given by the Fund of any
investment limitations to which the Fund is subject or other limitations with
respect to the Fund's powers to make expenditures, encumber securities, borrow
or take similar actions affecting its portfolio.
V. Proper Instructions - Proper instructions shall mean a tested telex
-------------------
from the Fund or a written request, direction, instruction or certification
signed or initialled on behalf of the Fund by two or more persons as the Board
of Directors of the Fund shall have from time to time authorized, provided,
however, that no such instructions directing the delivery of securities or the
payment of funds to an authorized signatory of the Fund shall be signed by such
person. Those persons authorized to give proper instructions may be identified
by the Board of Directors by name, title or position and will include at least
one officer
15
<PAGE>
empowered by the Board to name other individuals who are authorized to give
proper instructions on behalf of the Fund. Telephonic or other oral
instructions given by any one of the above persons will be considered proper
instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. Oral instructions will be confirmed by tested telex or in writing in
the manner set forth above but the lack of such confirmation shall in no way
affect any action taken by the Custodian in reliance upon such oral
instructions. The Fund authorizes the Custodian to tape record any and all
telephonic or other oral instructions given to the Custodian by or on behalf of
the Fund (including any of its officers, Directors, employees or agents) and
will deliver to the Custodian a similar authorization from any investment
manager or adviser or person or entity with similar responsibilities which is
authorized to give proper instructions on behalf of the Fund to the Custodian.
Proper instructions may relate to specific transactions or to types or classes
of transactions and may be in the form of standing instructions.
Proper instructions may include communications effected directly between
electro-mechanical or electronic devices or systems, in addition to tested
telex, provided that the Fund and the Custodian agree to the use of such device
or system.
16
<PAGE>
3. Securities, funds and other property of the Fund may be held by
subcustodians appointed pursuant to the provisions of this Section 3 (a
"Subcustodian"). The Custodian may, at any time and from time to time, appoint
any bank or trust company (meeting the requirements of a custodian or a foreign
custodian under the Investment Company Act of 1940 and the rules and regulations
thereunder) to act as a Subcustodian for the Fund, provided that the Fund shall
have approved in writing (1) any such bank or trust company and the subcustodian
agreement to be entered into between such bank or trust company and the
Custodian and (2) if the subcustodian is a bank organized under the laws of a
country other than the United States, the holding of securities, cash and other
property of the Fund in the country in which it is proposed to utilize the
services of such subcustodian. Upon such approval by the Fund, the Custodian is
authorized on behalf of the Fund to notify each Subcustodian of its appointment
as such. The Custodian may, at any time in its discretion, remove any bank or
trust company that has been appointed as a Subcustodian but will promptly notify
the Fund of any such action.
Those Subcustodians, their offices or branches which the Fund has approved
to date are set forth on Appendix A hereto. Such Appendix shall be amended from
time to time as Subcustodians, branches or offices are changed, added or
deleted. The Fund shall be responsible for informing the Custodian
17
<PAGE>
sufficiently in advance of a proposed investment which is to be held at a
location not listed on Appendix A, in order that there shall be sufficient time
for the Fund to give the approval required by the preceding paragraph and for
the Custodian to put the appropriate arrangements in place with such
Subcustodian pursuant to such subcustodian agreement.
Although the Fund does not intend to invest in a country before the
foregoing procedures have been completed, in the event that an investment is
made prior to approval, if practical, such security shall be removed to an
approved location or if not practical such security shall be held by such agent
as the Custodian may appoint. In such event, the-Custodian shall be liable to
the Fund for the actions of such agent if and only to the extent the Custodian
shall have recovered from such agent for any damages caused the Fund by such
agent and provided that the Custodian shall pursue its rights against such
agent.
In the event that any Subcustodian appointed pursuant to the provisions of
this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to perform fully
its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian and, if necessary or desirable, appoint
another subcustodian in
18
<PAGE>
accordance with the provisions of this Section 3. At the election of the Fund,
it shall have the right to enforce, to the extent permitted by the subcustodian
agreement and applicable law, the Custodian's rights against any such
Subcustodian for loss or damage caused the Fund by such Subcustodian.
At the written request of the Fund, the Custodian will terminate any
subcustodian appointed pursuant to the provisions of this Section 3 in
accordance with the termination provisions under the applicable subcustodian
agreement. The Custodian will not amend any subcustodian agreement or agree to
change or permit any changes thereunder except upon the prior written approval
of the Fund.
In the event the Custodian receives a claim from a Subcustodian under the
indemnification provisions of any subcustodian agreement, the Custodian shall
promptly give written notice to the Fund of such claim. No more than thirty
days after written notice to the Fund of the Custodian's intention to make such
payment, the Fund will reimburse the Custodian the amount of such payment except
in respect of any negligence or misconduct of the Custodian.
4. The Custodian may assist generally in the preparation o(Pounds) reports
to Fund shareholders and others, audits of accounts, and other ministerial
matters of like nature.
5. A. The Custodian shall not be liable for any action taken or omitted
in reliance upon proper instructions believed by
19
<PAGE>
it to be genuine or upon any other written notice, request, direction,
instruction, certificate or other instrument believed by it to be genuine and
signed by the proper party or parties.
The Chairman of the Board of the Fund shall certify to the Custodian the
names, signatures and scope of authority of all persons authorized to give
proper instructions or any other such notice, request, direction, instruction,
certificate or instrument on behalf of the Fund, the names and signatures of the
officers of the Fund, the name and address of the Shareholder Servicing Agent,
and any resolutions, votes, instructions or directions of the Fund's Board of
Directors or shareholders. Such certificate may be accepted and relied upon by
the Custodian as conclusive evidence of the facts set forth therein and may be
considered in full force and effect until receipt of a similar certificate to
the contrary
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement.
The Custodian shall be entitled, at the expense of the Fund (but only to
the extent such expenses are reasonable), to receive and act upon advice of
counsel (who may be counsel for the Fund) on all matters, and the Custodian
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
20
<PAGE>
B. With respect to the portfolio securities, cash and other property of
the Fund held by a Securities System, the Custodian shall be liable to the Fund
only for any loss or damage to the Fund resulting from use o(Pounds) the
Securities System if caused by any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their employees or from any
failure of the Custodian or any such agent to enforce effectively such rights as
it may have against the Securities System.
C. The Custodian shall be liable to the Fund for any loss or damage to the
Fund caused by or resulting from the acts or omissions of any Subcustodian if
such acts or omissions would be deemed to be negligence, gross negligence or
willful misconduct hereunder if such acts or omissions were those of the
Custodian taken or omitted by the Custodian in the country in which the
Subcustodian is operating. The Custodian shall also be liable to the Fund for
its own negligence in transmitting any instructions received by it from the Fund
and for its own negligence in connection with the delivery of any securities or
funds held by it to any Subcustodian.
D. Except as may otherwise be set forth in this Agreement with respect to
particular matters, the Custodian shall be held only to the exercise of
reasonable care and diligence in carrying out the provisions of this Agreement,
provided that the Custodian shall not thereby be required to take any action
which is in contravention of any applicable law. However, nothing herein
21
<PAGE>
shall exempt the Custodian from liability due to its own negligence or willful
misconduct. The Fund agrees to indemnify and hold harmless the Custodian and
its nominees from all claims and liabilities (including reasonable counsel fees)
incurred or assessed against it or its nominees in connection with the
performance of this Agreement, except such as may arise from its or its
nominee's breach of the relevant standard of conduct set forth in this
Agreement. Without limiting the foregoing indemnification obligation of the
Fund, the Fund agrees to indemnify the Custodian and its nominees against any
liability the Custodian or such nominee may incur by reason of taxes assessed to
the Custodian or such nominee or other costs, liability or expense incurred by
the Custodian or such nominee resulting directly or indirectly from the fact
that portfolio securities or other property of the Fund is registered in the
name of the Custodian or such nominee.
In order that the indemnification provisions contained in this Paragraph
5-C shall apply, however, it is understood that if in any case the Fund may be
asked to indemnify or hold the Custodian harmless, the Fund shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the Custodian will use all reasonable care to
identify and notify the Fund promptly concerning any situation which presents or
appears likely to present the probability of such a claim for indemnification
22
<PAGE>
against the Fund. The Fund shall have the option to defend the Custodian
against any claim which may be the subject of this indemnification, and in the
event that the Fund so elects it will so notify the Custodian, and thereupon the
Fund shall take over complete defense of the claim, and the Custodian shall in
such situation initiate no further legal or other expenses for which it shall
seek indemnification under this Paragraph 5-C. The Custodian shall in no case
confess any claim or make any compromise in any case in which the Fund will be
asked to indemnify the Custodian except with the Funds prior written consent.
It is also understood that the Custodian shall not be liable for any loss
involving any securities, currencies, deposits or other property of the Fund,
whether maintained by it, a Subcustodian, an agent of the Custodian or a
Subcustodian, a Securities System, or a Banking Institution, or a loss arising
from a foreign currency transaction or contract, resulting from a Sovereign
Risk. A "Sovereign Risk" shall mean nationalization, expropriation,
devaluation, revaluation, confiscation, seizure, cancellation, destruction or
similar action by any governmental authority, de facto or de jure; or enactment,
promulgation, imposition or enforcement by any such governmental authority of
currency restrictions, exchange controls, taxes, levies or other charges
affecting the Fund's property; or acts of war, terrorism,
23
<PAGE>
insurrection or revolution; or any other similar act or event beyond the
Custodian's control.
E. The Custodian shall be entitled to receive reimbursement from the Fund
on demand, in the manner provided in Section 6, for its cash disbursements,
expenses and charges (including the fees and expenses of any Subcustodian or any
Agent) in connection with this Agreement, but excluding salaries and usual
overhead expenses.
F. The Custodian may at any time or times in its discretion appoint (and
may at any time remove) any other bank or trust company as its agent (an
"Agent") to carry out such of the provisions of this Agreement as the Custodian
may from time to time direct, provided, however, that the appointment of such
Agent (other than an Agent appointed pursuant to the third paragraph of Section
3) shall not relieve the Custodian of any of its responsibilities under this
agreement.
G. Upon request, the Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
6. The Fund shall pay the Custodian a custody fee based on such fee
schedule as may from time to time be agreed upon in writing by the Custodian and
the Fund. Such fee, together with
24
<PAGE>
all amounts for which the Custodian is to be reimbursed in accordance with
Section 5D, shall be billed to the Fund in such a manner as to permit payment by
a direct cash payment to the Custodian.
7. This Agreement shall continue in full force and effect until terminated
by either party by an instrument in writing delivered or mailed, postage prepaid
to the other party, such termination to take effect not sooner than seventy-five
(75) days after the date of such delivery or mailing. In the event of
termination the Custodian shall be entitled to receive prior to delivery of the
securities, funds and other property held by it all accrued fees and
unreimbursed expenses the payment of which is contemplated by Sections 5D and 6,
upon receipt by the Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed that
the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
8. This Agreement constitutes the entire understanding and agreement of
the parties hereto with respect to the subject matter hereof. No provision of
this Agreement may be amended or terminated except by a statement in writing
signed by the party
25
<PAGE>
against which enforcement of the amendment or termination is sought.
In connection with the operation of this Agreement, the Custodian and the
Fund may agree in writing from time to time on such provisions interpretative of
or in addition to the provisions of this Agreement as may in their joint opinion
be consistent with the general tenor of this Agreement. No interpretative or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Agreement.
9. This instrument is executed and delivered in The Commonwealth of
Massachusetts and shall be governed by and construed according to the laws of
said Commonwealth.
10. Notices and other writings delivered or mailed postage prepaid to the
Fund addressed to the Fund in care of Merrill Lynch Asset Management, Inc., 800
Scudders Mill Road, Plainsboro, New Jersey 08536, Mailing address: Post Office
Box 9011, Princeton, New Jersey 08543, Attention: Mr. Gerald M. Richard,
Senior Vice President/Treasurer, or to such other address as the Fund may have
designated to the Custodian in writing, or to the Custodian at 40 Water Street,
Boston, Massachusetts 02109, Attention: Manager, Securities Department, or to
such other address as the Custodian may have designated to the Fund in writing,
shall be deemed to have been properly delivered or given hereunder to the
respective addressee.
26
<PAGE>
11. This Agreement shall be binding on and shall inure to the benefit of
the Fund and the Custodian and their respective successors and assigns, provided
that neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
12. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original. This Agreement shall become effective when
one or more counterparts have been signed and delivered by each of the parties.
27
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
MERRILL LYNCH GLOBAL
SMALLCAP FUND, INC. BROWN BROTHERS HARRIMAN & CO.
By_________________________ per pro ____________________
28
<PAGE>
EXHIBIT 99.9(A)
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the 16th day of June, 1994 by and between Merrill
Lynch Global SmallCap Fund, Inc., a Maryland corporation (the "Fund"), and
Financial Data Services, Inc. ("FDS"), a New Jersey corporation.
WITNESSETH:
WHEREAS, the Fund wishes to appoint FDS to be the Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent upon, and subject to, the terms
and provisions of this Agreement, and FDS is desirous of accepting such
appointment upon, and subject to, such terms and provisions:
NOW THEREFORE, in consideration of mutual covenants contained in this
Agreement, the Fund and FDS agree as follows:
1. Appointment of FDS as Transfer Agent, Dividend Disbursing Agent and
-------------------------------------------------------------------
Shareholder Servicing Agent.
- ----------------------------
a. The Fund hereby appoints FDS to act as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund upon, and subject
to, the terms and provisions of this Agreement.
b. FDS hereby accepts the appointment as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund, and agrees to act
as such upon, and subject to, the terms and provisions of this Agreement.
2. Definitions.
-----------
a. In this Agreement:
(i) The term "Act" means the Investment Company Act of 1940 as amended
from time to time and any rule or regulation thereunder;
(ii) The term "Account" means any account of a Shareholder, or, if the
shares are held in an account in the name of MLPF&S for benefit of an identified
customer, such account, including a Plan Account, any account under a plan (by
whatever name referred to in the Prospectus) pursuant to the Self-Employed
Individuals Retirement Act of 1962 ("Keogh Act Plan") and any plan (by whatever
name referred to in the Prospectus) in conjunction with Section 401 of the
Internal Revenue Code ("Corporation Master Plan");
(iii) The term "application" means an application made by a Shareholder or
prospective Shareholder respecting the opening of an Account;
<PAGE>
(iv) The term "MLFD" means Merrill Lynch Funds Distributor, Inc., a
Delaware corporation;
(v) The term "MLPF&S" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation;
(vi) The term "Officer's Instruction" means an instruction in writing
given on behalf of the Fund to FDS, and signed on behalf of the Fund by the
President, any Vice President, the Secretary or the Treasurer of the Fund;
(vii) The term "Prospectus" means the Prospectus and the Statement of
Additional Information of the Fund as from time to time in effect;
(viii) The term "Shares" means shares of stock or beneficial interest, as
the case may be, of the Fund, irrespective of class or series;
(ix) The term "Shareholder" means the holder of record of Shares;
(x) The term "Plan Account" means an account opened by a Shareholder or
prospective Shareholder in respect to an open account, monthly payment or
withdrawal plan (in each case by whatever name referred to in the Prospectus),
and may also include an account relating to any other plan if and when provision
is made for such plan in the Prospectus.
3. Duties of FDS as Transfer Agent, Dividend Disbursing Agent and
--------------------------------------------------------------
Shareholder Servicing Agent.
- ---------------------------
a. Subject to the succeeding provisions of the Agreement, FDS hereby
agrees to perform the following functions as Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing Agent for the Fund;
(i) Issuing, transferring and redeeming Shares;
(ii) Opening, maintaining, servicing and closing Accounts;
(iii) Acting as agent for the Fund Shareholders and/or customers of MLPF&S
in connection with Plan Accounts, upon the terms and subject to the conditions
contained in the Prospectus and application relating to the specific Plan
Account;
(iv) Acting as agent of the Fund and/or MLPF&S, maintaining such records
as may permit the imposition of such contingent deferred sales charges as may be
described in the Prospectus, including such reports as may be reasonably
requested by the Fund with respect to such Shares as may be subject to a
contingent deferred sales charge;
2
<PAGE>
(v) Upon the redemption of Shares subject to such a contingent deferred
sales charge, calculating and deducting from the redemption proceeds thereof the
amount of such charge in the manner set forth in the Prospectus. FDS shall pay,
on behalf of MLFD, to MLPF&S such deducted contingent deferred sales charges
imposed upon all Shares maintained in the name of MLPF&S, or maintained in the
name of an account identified as a customer account of MLPF&S. Sales charges
imposed upon any other Shares shall be paid by FDS to MLFD.
(vi) Exchanging the investment of an investor into, or from the shares of
other open-end investment companies or other series portfolios of the Fund, if
any, if and to the extent permitted by the Prospectus at the direction of such
investor.
(vii) Processing redemptions;
(viii) Examining and approving legal transfers;
(ix) Replacing lost, stolen or destroyed certificates representing Shares,
in accordance with, and subject to, procedures and conditions adopted by the
Fund;
(x) Furnishing such confirmations of transactions relating to their Shares
as required by applicable law;
(xi) Acting as agent for the Fund and/or MLPF&S, furnishing such
appropriate periodic statements relating to Accounts, together with additional
enclosures, including appropriate income tax information and income tax forms
duly completed, as required by applicable law;
(xii) Acting as agent for the Fund and/or MLPF&S, mailing annual, semi-
annual and quarterly reports prepared by or on behalf of the Fund, and mailing
new Prospectuses upon their issue to Shareholders as required by applicable law;
(xiii) Furnishing such periodic statements of transactions effected by
FDS, reconciliations, balances and summaries as the Fund may reasonably request;
(xiv) Maintaining such books and records relating to transactions effected
by FDS as are required by the Act, or by any other applicable provision of law,
rule or regulation, to be maintained by the Fund or its transfer agent with
respect to such transactions, and preserving, or causing to be preserved any
such books and records for such periods as may be required by any such law, rule
or regulation and as may be agreed upon from time to time between FDS and the
Fund. In addition, FDS agrees to maintain and preserve master files and
historical computer tapes on a daily basis in multiple separate locations a
sufficient distance apart to insure preservation of at least one copy of such
information;
3
<PAGE>
(xv) Withholding taxes on non-resident alien Accounts, preparing and
filing U.S. Treasury Department Form 1099 and other appropriate forms as
required by applicable law with respect to dividends and distributions; and
(xvi) Reinvesting dividends for full and fractional shares and disbursing
cash dividends, as applicable.
b. FDS agrees to act as proxy agent in connection with the holding of
annual, if any, and special meetings of Shareholders, mailing such notices,
proxies and proxy statements in connection with the holding of such meetings as
may be required by applicable law, receiving and tabulating votes cast by proxy
and communicating to the Fund the results of such tabulation accompanied by
appropriate certifications, and preparing and furnishing to the Fund certified
lists of Shareholders as of such date, in such form and containing such
information as may be required by the Fund.
c. FDS agrees to deal with, and answer in a timely manner, all
correspondence and inquiries relating to the functions of FDS under this
Agreement with respect to Accounts.
d. FDS agrees to furnish to the Fund such information and at such
intervals as is necessary for the Fund to comply with the registration and/or
the reporting requirements (including applicable escheat laws) of the Securities
and Exchange Commission, Blue Sky authorities or other governmental authorities.
e. FDS agrees to provide to the Fund such information as may reasonably be
required to enable the Fund to reconcile the number of outstanding Shares
between FDS's records and the account books of the Fund.
f. Notwithstanding anything in the foregoing provisions of this paragraph,
FDS agrees to perform its functions thereunder subject to such modification
(whether in respect of particular cases or in any particular class of cases) as
may from time to time be contained in an Officer's Instruction.
4. Compensation.
------------
The charges for services described in this Agreement, including "out-of-
pocket" expenses, will be set forth in the Schedule of Fees attached hereto.
5. Right of Inspection.
-------------------
FDS agrees that it will in a timely manner make available to, and permit,
any officer, accountant, attorney or authorized agent of the Fund to examine and
make transcripts and copies (including photocopies and computer or other
electronical information storage media and print-outs) of any and all of its
4
<PAGE>
books and records which relate to any transaction or function performed by FDS
under or pursuant to this Agreement.
6. Confidential Relationship.
-------------------------
FDS agrees that it will, on behalf of itself and its officers and
employees, treat all transactions contemplated by this Agreement, and all
information germane thereto, as confidential and not to be disclosed to any
person (other than the Shareholder concerned, or the Fund, or as may be
disclosed in the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the Fund by way of
an Officer's Instruction.
7. Indemnification.
---------------
The Fund shall indemnify and hold FDS harmless from any loss, costs, damage
and reasonable expenses, including reasonable attorney's fees (provided that
such attorney is appointed with the Fund's consent, which consent shall not be
unreasonably withheld), incurred by it resulting from any claim, demand, action,
or suit in connection with the performance of its duties hereunder, provided
that this indemnification shall not apply to actions or omissions of FDS in
cases of willful misconduct, failure to act in good faith or negligence by FDS,
its officers, employees or agents, and further provided, that prior to
confessing any claim against it which may be subject to this indemnification,
FDS shall give the Fund reasonable opportunity to defend against said claim in
its own name or in the name of FDS. An action taken by FDS upon any Officer's
Instruction reasonably believed by it to have been properly executed shall not
constitute willful misconduct, failure to act in good faith or negligence under
this Agreement.
5
<PAGE>
8. Regarding FDS.
-------------
a. FDS hereby agrees to hire, purchase, develop and maintain such
dedicated personnel, facilities, equipment, software, resources and capabilities
as may be reasonably determined by the Fund to be necessary for the satisfactory
performance of the duties and responsibilities of FDS. FDS warrants and
represents that its officers and supervisory personnel charged with carrying out
its functions as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent for the Fund possess the special skill and technical knowledge
appropriate for that purpose. FDS shall at all times exercise due care and
diligence in the performance of its functions as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund. FDS agrees that,
in determining whether it has exercised due care and diligence, its conduct
shall be measured by the standard applicable to persons possessing such special
skill and technical knowledge.
b. FDS warrants and represents that is duly authorized and permitted to
act as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
under all applicable laws and that it will immediately notify the Fund of any
revocation of such authority or permission or of the commencement of any
proceeding or other action which may lead to such revocation.
9. Termination.
-----------
a. This Agreement shall become effective as of the date first above
written and shall thereafter continue from year to year. This Agreement may be
terminated by the Fund or FDS (without penalty to the Fund or FDS) provided that
the terminating party gives the other party written notice of such termination
at least sixty (60) days in advance, except that the Fund may terminate this
Agreement immediately upon written notice to FDS if the authority or permission
of FDS to act as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent has been revoked or if any proceeding or other action which the
Fund reasonably believes will lead to such revocation has been commenced.
b. Upon termination of this Agreement, FDS shall deliver all unissued and
cancelled stock certificates representing Shares remaining in its possession,
and all Shareholder records, books, stock ledgers, instruments and other
documents (including computerized or other electronically stored information)
made or accumulated in the performance of its duties as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund along with a
certified locator document clearly indicating the complete contents therein, to
such successor as may be specified in a notice of termination or Officer's
Instruction; and the Fund assumes all responsibility for failure thereafter to
produce any paper, record or documents so delivered and
6
<PAGE>
identified in the locator document, if and when required to be produced.
10. Amendment.
---------
Except to the extent that the performance by FDS or its functions under
this Agreement may from time to time be modified by an Officer's Instruction,
this Agreement may be amended or modified only by further written Agreement
between the parties.
11. Governing Law.
-------------
This Agreement shall be governed by the laws of the State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective duly authorized officers and their respective
corporate seals hereunto duly affixed and attested, as of the day and year above
written.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
By:_____________________________________
Title:
FINANCIAL DATA SERVICES, INC.
By:_____________________________________
Title:
7
<PAGE>
Schedule of Fees
----------------
The Fund will pay to FDS an annual fee of $7.00 per Class A Shareholder
Account and $9.00 per Class B Shareholder Account in addition to reimbursement
for the out-of-pocket expenses incurred by FDS pursuant to this Agreement.
8
<PAGE>
EXHIBIT 99.9(B)
LICENSE AGREEMENT RELATING TO USE OF NAME
AGREEMENT made as of the 16th day of June, 1994, by, between MERRILL LYNCH
& CO., INC., a Delaware corporation ("ML&Co."), and MERRILL LYNCH GLOBAL
SMALLCAP FUND, INC., a Maryland corporation (the "Fund");
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, ML&Co. was incorporated under the laws of the State of Delaware on
March 27, 1973 under the corporate name "Merrill Lynch & Co., Inc." and has used
such name at all times thereafter;
WHEREAS, ML&Co. was duly qualified as a foreign corporation under the laws
of the State of New York on April 25, 1973 and has remained so qualified at all
times thereafter;
WHEREAS, the Fund was incorporated under the laws of the State of Maryland
on April 12, 1994; and
WHEREAS, the Fund desires to qualify as a foreign corporation under the
laws of the State of New York and has requested ML&Co. to give its consent to
the use of the name "Merrill Lynch" in the Fund's corporate name.
NOW, THEREFORE, in consideration of the premises and of the covenants
hereinafter contained, ML&Co. and the Fund hereby agree as follows:
1. ML&Co. hereby grants the Fund a non-exclusive license to use the words
"Merrill Lynch" in its corporate name.
<PAGE>
2. ML&Co. hereby consents to the qualification of the Fund as a foreign
corporation under the laws of the State of New York with the words "Merrill
Lynch" in its corporate name and agrees to execute such formal consents as may
be necessary in connection with such filing.
3. The non-exclusive license hereinabove referred to has been given and is
given by ML&Co. on the condition that it may at any time, in its sole and
absolute discretion, withdraw the non-exclusive license to the use of the words
"Merrill Lynch" in the name of the Fund; and, as soon as practicable after
receipt by the Fund of written notice of the withdrawal of such non-exclusive
license, and in no event later than ninety days thereafter, the Fund will change
its name so that such name will not thereafter include the words "Merrill Lynch"
or any variation thereof.
4. ML&Co. reserves and shall have the right to grant to any other company,
including without limitation, any other investment company, the right to use the
words "Merrill Lynch" or variations thereof in its name and no consent or
permission of the Fund shall be necessary; but, if required by an applicable law
of any state, the Fund will forthwith grant all requisite consents.
5. The Fund will not grant to any other company the right to use a name
similar to that of the Fund or ML&Co. without the written consent of ML&Co.
2
<PAGE>
6. Regardless of whether the Fund should hereafter change its name and
eliminate the words "Merrill Lynch" or any variation thereof from such name, the
Fund hereby grants to ML&Co. the right to cause the incorporation of other
corporations or the organization of voluntary associations which may have names
similar to that of the Fund or to that to which the Fund may change its name and
to own all or any portion of the shares of such other corporations or
associations and to enter into contractual relationships with such other
corporations or associations, subject to any requisite approval of a majority
of the Fund's shareholders and the Securities and Exchange Commission and
subject to the payment of a reasonable amount to be determined at the time of
use, and the Fund agrees to give and execute any such formal consents or
agreements as may be necessary in connection therewith.
7. This Agreement may be amended at any time by a writing signed by the
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH & CO., INC.
By________________________
Executive Vice President
MERRILL LYNCH GLOBAL SMALLCAP
FUND, INC.
By___________________________
President
3
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global SmallCap Fund, Inc.
We consent to the use in Pre-Effective Amendment No. 1 to Registration Statement
No. 33-53399 of our report dated June 15, 1994 appearing in the Statement of
Additional Information, which is a part of such Registration Statement.
DELOITTE & TOUCHE
Princeton, New Jersey
June 22, 1994
<PAGE>
EXHIBIT 99.13
CERTIFICATE OF SOLE SHAREHOLDER
Merrill Lynch Asset Management, L.P. ("MLAM"), the holder of 5,000 Class A
shares of common stock, par value $0.10 per share, and 5,000 Class B shares of
common stock, par value $0.10 per share, of Merrill Lynch Global SmallCap Fund,
Inc. (the "Fund"), a Maryland corporation, does hereby confirm to the Fund its
representation that it purchased such shares for investment purposes, with no
present intention of redeeming or reselling any portion thereof, and does
further agree that if it redeems any portion of such shares prior to the
amortization of the Fund's organizational expenses, the proceeds thereof will be
reduced by the proportionate amount of unamortized organizational expenses which
the number of shares being redeemed bears to the number of shares initially
purchased and outstanding at the time of redemption. MLAM further agrees that
in the event such shares are sold or otherwise transferred to any other party,
that prior to such sale or transfer MLAM will obtain on behalf of the Fund an
agreement from such other party to comply with the foregoing as to the reduction
of redemption proceeds and to obtain a similar agreement from any transferee of
such party.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By:_________________________________
Vice President
Dated: June 14, 1994
<PAGE>
EXHIBIT 99.15(A)
CLASS A DISTRIBUTION PLAN
OF
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 16th day of June, 1994, by and between
Merrill Lynch Global SmallCap Fund, Inc., a Maryland corporation (the "Fund"),
and Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
--------------------
WHEREAS, the Fund intends to engage in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class A Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class A
shares of common stock, par value $0.10 per share (the "Class A shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class A Shares Distribution Plan
pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the
Fund will pay an account maintenance fee to MLFD with respect to the Fund's
Class A shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of this Distribution Plan will benefit the
Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and the Distributor hereby agrees
to the terms of, this Class A Shares Distribution Plan (the "Plan") in
accordance with Rule 12b-1 under the Investment Company Act on the following
terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class A shares to compensate MLFD and securities firms with
which MLFD enters
<PAGE>
into related agreements ("Sub-Agreements") pursuant to Paragraph 2 hereof for
providing account maintenance services. Expenditures under the Plan may consist
of payments to financial consultants for maintaining accounts in connection with
Class A shares of the Fund, and payment of expenses incurred in connection with
such account maintenance activities including the costs of making services
available to shareholders including assistance in connection with inquiries
related to shareholder accounts.
2. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may reallocate all
or a portion of its account maintenance fee to such Securities Firms as
compensation for the above-mentioned activities. Such Sub-Agreement shall
provide that the Securities Firms shall provide MLFD with such information as is
reasonably necessary to permit MLFD to comply with the reporting requirements
set forth in Paragraph 3 hereof.
3. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee during such period.
4. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class A voting securities of the Fund.
5. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Plan and such related
agreements.
6. This Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in Paragraph 5.
7. This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class A voting
securities of the Fund.
2
<PAGE>
8. This Plan may not be amended to increase materially the rate of
payments provided for in Paragraph 1 hereof unless such amendment is approved in
the manner provided for initial approval in Paragraph 4 and 5 hereof, and no
material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal of Paragraph 5 hereof.
9. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
10. The Fund shall preserve copies of this Plan and any related agreements
and all reports made pursuant to Paragraph 3 hereof, for a period of not less
than six years from the date of this Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
By______________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By______________________________________
Title:
3
<PAGE>
CLASS A SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 16th day of June, 1994 by and between Merrill
Lynch Funds Distributor, Inc. a Delaware corporation (the "Distributor"), and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation
("Securities Firm").
W I T N E S S E T H :
--------------------
WHEREAS, the Distributor has entered into an agreement with Merrill Lynch
Global SmallCap Fund, Inc., a Maryland corporation (the "Fund"), pursuant to
which it acts as the exclusive distributor for the sale of Class A shares of
common stock, par value $0.10 per share (the "Class A shares"), of the Fund; and
WHEREAS, the Distributor and Fund have entered into a Class A Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (the "Act") pursuant to which the Distributor receives a
distribution fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class A shares for providing sales and
promotional activities and services related to the distribution of Class A
shares; and
WHEREAS, the Distributor desires the Securities Firm to perform certain
sales and promotional activities and services for the Fund's Class A
shareholders and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class A shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 1 of the Plan.
2. As compensation for its services performed under this Sub-Agreement,
the Distributor shall pay the Securities Firm a fee at the end of each calendar
month in an amount agreed upon by the parties hereto.
3. The Securities Firm shall provide the Distributor, at least quarterly,
such information as reasonably requested by the Distributor to enable the
Distributor to comply with the reporting requirements of Rule 12b-1 regarding
the disbursement of the fee during such period referred to in Paragraph 3 of the
Plan.
4
<PAGE>
4. This Sub-Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of this Plan or any agreements related to it (the "Rule 12b-1 Directors"), cast
in person at a meeting or meetings called for the purpose of voting on this
Agreement.
5. This Sub-Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 5 of the Plan.
6. This Sub-Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By___________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By___________________________________
Title:
5
<PAGE>
EXHIBIT 99.15(B)
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 16th day of June, 1994, by and between
Merrill Lynch Global SmallCap Fund, Inc., a Maryland corporation (the "Fund"),
and Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
--------------------
WHEREAS, the Fund intends to engage in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class B Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class B
shares of common stock, par value $0.10 per share (the "Class B shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class B Shares Distribution Plan
pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the
Fund will pay an account maintenance fee and a distribution fee to MLFD with
respect to the Fund's Class B Shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of this Class B Shares Distribution Plan
will benefit the Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and the Distributor hereby agrees
to the terms of, this Class B Shares Distribution Plan (the "Plan") in
accordance with Rule 12b-1 under the Investment Company Act on the following
terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class B shares
<PAGE>
to compensate MLFD and securities firms with which MLFD enters into related
agreements ("Sub-Agreements") pursuant to Paragraph 3 hereof for account
maintenance activities with respect to Class B shareholders of the Fund.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end of
each month at the annual rate of 0.75% of average daily net assets of the Fund
relating to Class B shares to compensate MLFD and securities firms with which
MLFD enters into related agreements ("Sub-Agreements") pursuant to Paragraph 3
hereof for providing sales and promotional activities and services. Such
activities and services will relate to the sale, promotion and marketing of the
Class B shares of the Fund. Such expenditures may consist of sales commissions
to financial consultants for selling Class B shares of the Fund, compensation,
sales incentives and payments to sales and marketing personnel, and the payment
of expenses incurred in its sales and promotional activities including
advertising expenditures related to the Fund, the costs of preparing and
distributing promotional materials.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the above-
mentioned activities and services. Such Sub-Agreement shall provide that the
Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class B voting securities of the Fund.
6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no
2
<PAGE>
direct or indirect financial interest in the operation of this Plan or any
agreements related to it (the "Rule 12b-1 Directors"), cast in person at a
meeting or meetings called for the purpose of voting on this Plan and such
related agreements.
7. This Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in Paragraph 6.
8. This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class B voting
securities of the Fund.
9. This Plan may not be amended to increase materially the rate of
payments provided for herein unless such amendment is approved by at least a
majority, as defined in the Investment Company Act, of the outstanding Class B
voting securities of the Fund, and by the Directors of the Fund in the manner
provided for in Paragraph 6 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 6 hereof.
10. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
11. The Fund shall preserve copies of this Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of this Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Plan as of the
date first above written.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
By______________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By______________________________________
Title:
3
<PAGE>
CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 16th day of June, 1994 by and between Merrill
Lynch Funds Distributor, Inc. (the "Distributor"), and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
--------------------
WHEREAS, the Distributor has entered into an agreement with Merrill Lynch
Global SmallCap Fund, Inc., a Maryland corporation (the "Fund"), pursuant to
which it acts as the exclusive distributor for the sale of Class B shares of
common stock, par value $0.10 per share (the "Class B shares"), of the Fund; and
WHEREAS, the Distributor and Fund have entered into a Class B Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (the "Act") pursuant to which the Distributor receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class B shares for account maintenance
services related to the Class B shares of the Fund and a distribution fee from
the Fund at the annual rate of 0.75% of average daily net assets of the Fund
relating to Class B shares for providing sales and promotional activities and
services related to the distribution of Class B shares; and
WHEREAS, the Distributor desires the Securities Firm to perform certain
account maintenance activities and sales and promotional activities and services
for the Fund's Class B shareholders and the Securities Firm is willing to
perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities with
respect to the Class B shares of the Fund of the types referred to in Paragraph
1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class B shares of the Fund, and incur
distribution expenditures of the types referred to in paragraph 2 of the Plan.
3. As compensation for its activities and services performed under this
Sub-Agreement, the Distributor shall pay the Securities Firm an account
maintenance fee and a distribution fee at the end of each calendar month in an
amount agreed upon by the parties hereto.
4. The Securities Firm shall provide the Distributor, at least quarterly,
such information as reasonably requested by the Distributor to enable the
Distributor to comply with the reporting requirements of Rule 12b-1 regarding
the disbursement of the fee during such period referred to in Paragraph 3 of the
Plan.
5. This Sub-Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of
4
<PAGE>
the Fund and (b) those Directors of the Fund who are not "interested persons"
of the Fund, as defined in the Act, and have no direct or indirect financial
interest in the operation of this Plan or any agreements related to it (the
"Rule 12b-1 Directors"), cast in person at a meeting or meetings called for the
purpose of voting on this Agreement.
6. This Sub-Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 5.
7. This Sub-Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By___________________________________
Title: Treasurer
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By___________________________________
Title: Vice President
5
