<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1994
==============================================================================
Securities Act File No. 33-
Investment Company Act File No. 811-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. / /
Post Effective Amendment No. / /
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. / /
(Check appropriate box or boxes)
-------------------------
MERRILL LYNCH SMALLCAP WORLD FUND, INC.*
(exact name of registrant as specified in charter)
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (609) 282-2800
Arthur Zeikel
Merrill Lynch SmallCap World 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.
=============================================================================
* The Registrant was incorporated under the name Merrill Lynch SmallCap
World Fund, Inc. It is anticipated that Registrant's name will be
changed to Merrill Lynch SmallCap Global Fund, Inc. prior to the
effectiveness of this Registration Statement.
<PAGE>
MERRILL LYNCH SMALLCAP GLOBAL FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
N-1A Item No. Location
------------ --------
PART A
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; Additional
Information
Item 5. Management of the Fund . . . . . . . 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 Alternative Sales
Arrangements; Purchase of
Shares; Shareholder
Services; Additional
Information; Inside Back
Cover Page
Item 8. Redemption of Repurchase . . . . . Fee Table; Alternative Sales
Arrangements; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings . . . . . . Not Applicable
PART B
Item 10. Cover Page . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . Back Cover Page
Item 12. General Information and History . . . Not Applicable
Item 13. Investment Objective and Policies . . Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund . . . . . . . Management of the Fund
Item 15. Control Persons and Principal Holders Management of the Fund;
of Securities . . . . . . . . . . . . Additional Information
Item 16. Investment Advisory and Other Management of the Fund;
Services . . . . . . . . . . . . . . Purchase of Shares; General
Information
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices . . . . . . . . . . . . . .
Item 18. Capital Stock and Other Securities . General Information--
Description of Series and
Shares
Item 19. Purchase, Redemption and Pricing of Purchase of Shares;
Securities Being Offered . . . . . . 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
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.
i
<PAGE>
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.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 29, 1994
PROSPECTUS
- ----------
- ----------, 1994
Merrill Lynch SmallCap Global Fund, Inc.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800
Merrill Lynch SmallCap Global Fund, Inc. (the "Fund") is a non-
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 65% 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 35% 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. 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
(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)
Fund's average daily 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 7.
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 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 SmallCap Global Fund, Inc. (the "Fund") is a non-
diversified, open-end management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term 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 65% 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 considers SmallCap Issuers to be issuers with individual market
capitalizations of no greater than $1 billion. Under normal market
conditions, the Fund also may invest up to 35% 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 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".
3
<PAGE>
THE MANAGER
Merrill Lynch Asset Management, L.P. (the "Manager") acts as a manager
for the Fund and provides the Fund with management services. 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 February 28, 1994, the Manager and FAM
had a total of approximately $164.4 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 Reinvestments None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) None(f) 4.0% during
the first year
decreasing 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) -----% -----%
Custodial Fees -----% -----%
Other -----% -----%
Total Other Expenses -----% -----%
Total Fund Operating Expenses =====% =====%
(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 28.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative-- Class B Shares"--page 30.
(c) See "Management of the Fund--Management and Advisory Arrangements"--page 23.
(d) See "Purchase of Shares--Alternative Sales Arrangements--Distribution Plans"--page 27.
(e) See "Management of the Fund--Transfer Agency Services"--page 23.
(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 28.
(g) This amount represents the 0.25% account maintenance fee and the 0.75% distribution fee applicable to Class B
shares of the Fund.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION> Cumulative
Expenses Paid
for the Period of:
<S> 1 Year 3 Years
------ -------
EXAMPLE: <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 expense ratio of ___% for Class A shares and ___% for Class B
shares, (2) a 5% annual return throughout the periods and (3) redemption at
the end of the period:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
</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".
6
<PAGE>
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
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.
7
<PAGE>
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 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 65% 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.
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 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
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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.
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
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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
35% 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 with the terms of the security and generally involve
a greater volatility of price than securities in higher rating categories.
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, for temporary defensive purposes, up to 100%
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<PAGE>
of the Fund's total assets in the debt securities discussed above. See
"Investment Objective and Policies -- Characteristics of Certain Debt
Securities".
Derivatives Investments. In order to seek to hedge various portfolio
positions or to enhance its return, the Fund may invest in certain
instruments which may be characterized as derivatives. 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.
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. For a further discussion of the risks associated with
these investments, see "Investment Objective and Policies--Description of
Certain Investments," "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."
Borrowing. The Fund may borrow up to 331/3% 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.
Non-Diversified Status. As a non-diversified investment company, the
Fund may invest a larger percentage of its assets in individual issuers than
a diversified investment company. In this regard, the Fund is not subject to
the general limitation that, among other things, it may not, with respect to
75% of its assets, invest more than 5% of its total assets in the securities
of any one issuer. To the extent the Fund makes investments in excess of 5%
of its assets in a particular issuer, its exposure to credit and market risks
associated with that issuer is increased. Also, as a non-diversified
investment company, since a relatively high percentage of the Fund's assets
may be invested in the securities of a limited number of issuers, the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified investment company.
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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<PAGE>
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 65% 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 considers
SmallCap Issuers to be issuers with individual market capitalizations of no
greater than $1 billion. 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 35% 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 as such cycles develop. 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 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 65% 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,
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<PAGE>
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 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 35% of
its total assets in debt securities, including high yield/high risk
securities,
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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 "Certain Risks of 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.
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.
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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.
The Fund believes that indexed securities, including inverse securities,
represent flexible portfolio management instruments that may allow the Fund
to seek potential investment rewards, hedge other portfolio positions, or
vary the degree of portfolio leverage relatively efficiently under different
market conditions.
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
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
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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
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
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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 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 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
18
<PAGE>
acceptable terms. Furthermore, the Fund will only engage in hedging
activities from time to time and will not necessarily engage in hedging
transactions when movements in 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 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 331/3% 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
19
<PAGE>
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.
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 which the Fund has
committed to purchase. The Fund will enter into such agreements only for the
purpose of investing in the security underlying the commitment at a yield and
price which is considered advantageous to the Fund. The Fund will not enter
into a standby commitment with a remaining term in excess of 45 days and
presently will limit its investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments, together with
the value of portfolio securities subject to legal restrictions on resale,
will not exceed 15% 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
20
<PAGE>
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, 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 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). 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 331/3% of its assets for
temporary purposes such as to meet redemption requests or settle investment
transactions or for extraordinary or emergency purposes. As a non-
fundamental policy, the Fund will, for purposes of the 25% restriction 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. 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.
While the Fund may not purchase illiquid securities in an amount
exceeding 15% of its net assets (or 10%, as 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
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<PAGE>
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.
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.
Non-Diversified Status. The Fund is classified as non-diversified
within the meaning of the Investment Company Act, which means that the Fund
is not limited by such Act in the proportion of its assets that it may invest
in the securities of a single issuer. The Fund's investments will be
limited, however, in order to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"). See
"Additional Information--Taxes". To qualify, the Fund must comply with
certain requirements, including limiting its investments so that at the close
of each quarter of the taxable year (i) not more than 25% of the market value
of the Fund's total assets will be invested in the securities of a single
issuer and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer, and the Fund will not own more than 10% of
the outstanding voting securities of a single issuer. Foreign government
securities (unlike U.S. Government securities) are not exempt from the
diversification requirements of the Code and are considered obligations of a
single issuer. A fund which elects to be classified as "diversified" under
the Investment Company Act must satisfy the foregoing 5% and 10% requirements
with respect to 75% of its total assets. To the extent that the Fund assumes
large positions in the securities of a small number of issuers, the Fund's
net asset value may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers, and the Fund may be more susceptible to any single
economic, political or regulatory occurrence than a diversified company.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of ---- individuals, -----
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:
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<PAGE>
(To be supplied by amendment.)
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 February 28, 1994, the Manager and FAM had
a total of approximately $164.4 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 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.
The names of the persons associated with the Manager who are primarily
responsible for the day-to-day management of the Fund's portfolio, the length
of time that such persons have been so responsible, and their business
experience during the past five years are as follows:
(Description of experience of portfolio managers to be provided.)
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 ($----) per Class A
shareholder account and ($----) per Class B shareholder account,
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<PAGE>
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.
24
<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 Public Percentage/*/ of Pub
Offering Dollar Offering Dollar 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
__________________
/*/ Rounded to the nearest one-hundredth percent.
</TABLE>
Initial sales charges will 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(Service Mark) 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
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.
25
<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 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
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 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.
26
<PAGE>
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 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, as 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 with the
27
<PAGE>
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 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.
28
<PAGE>
<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
/*/ Rounded to the nearest one-hundredth
percent
</TABLE>
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(Service Mark) 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>
1.00%
0.60
0.40
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
29
<PAGE>
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 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
30
<PAGE>
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
YEAR SINCE PURCHASE PERCENTAGE OF
PAYMENT MADE DOLLAR AMOUNT
------------------- 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>
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 the
contingent deferred sales charge but not 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
31
<PAGE>
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.
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.
32
<PAGE>
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.
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 taxable ordinary
income dividends, tax-exempt income, and long-term capital gain
distributions. A shareholder may make additions
33
<PAGE>
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 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(Registered Trademark), CBA(Registered Trademark) 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
34
<PAGE>
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 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 calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return, and (2) the
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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.
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 affect 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.
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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.
Shareholders may be able to claim U.S. foreign tax credits with respect to
such taxes, subject to certain provisions 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
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include their proportionate share of such withholding taxes in their U.S.
income tax returns as gross income, treat such proportionate share as taxes
paid by them, and deduct such proportionate share 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 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.
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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 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.
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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 from the Commission permitting
the issuance and sale of two classes of shares. The issuance and sale of any
additional classes would require an additional order from the Commission.
The Fund has applied for such an order. If such exemptive relief would be
granted, the Fund may issue additional classes of shares. 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.
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.
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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
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 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.
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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 appreciation in the value of the underlying security will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction
cancels out the Fund's position as the purchaser of an option by means of any
offsetting sale of an identical option prior to the expiration of the option
it has purchased.
In certain circumstances, the Fund may purchase call options on
securities held in its portfolio on which it has written call options or on
securities which it intends to purchase. The Fund will not purchase options
on securities (including stock index options discussed below) if, as a result
of such purchase, the aggregate cost of all outstanding options on securities
held by the Fund would exceed 5% of the market value of the Fund's total
assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may
purchase or write put and call options on stock indices to hedge against the
risks of 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 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 that may in part or entirely offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, an
equivalent amount of futures contracts will be terminated by offsetting
sales. The Manager does not consider purchases of futures contracts to be a
speculative practice under these circumstances. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a futures contract or the purchase of a call
option or the writing of a put option on a future, but under unusual
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circumstances (e.g., the Fund experiences a significant amount of
redemptions), a long futures position may be terminated without the
corresponding purchase of securities.
The Fund also has authority to purchase and write call and put options
on futures contracts and stock indices in connection with its hedging
activities. Generally, these strategies are utilized under the same market
and market sector conditions (i.e., conditions relating to specific types of
investments) in which the Fund enters into futures transactions. The Fund
may purchase put options or write call options on futures contracts and stock
indices rather than selling the underlying futures contract in anticipation
of a decrease in the market value of its securities. Similarly, the Fund may
purchase call options, or write put options on futures contracts and stock
indices, as a substitute for the purchase of such futures to hedge against
the increased cost resulting from an increase in the market value of
securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S. and
foreign exchanges and in options in the over-the-counter markets ("OTC
options"). Exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) which, in general, have standardized strike prices and
expiration dates. OTC options transactions are two-party contracts with
prices and terms negotiated by the buyer and seller. See "Restrictions on
OTC Options" below for information as to restrictions on the use of OTC
options.
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. 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 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
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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 331/3% 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 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
A-4
<PAGE>
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 involves the risk
of imperfect correlation in movements in the price of options and futures and
movements in the price of the securities or currencies which are the subject
of the hedge. If the price of the options or futures moves more or less than
the price of the hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on the Manager's ability to predict correctly price movements in the
market involved in a particular options or futures transaction. In addition,
options and futures transactions in foreign markets are subject to the risk
factors associated with foreign investments generally. See "Risk Factors and
Special Considerations".
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can
be sold at a formula price provided for in the OTC option agreement. There
can be no assurance, however, that a liquid secondary market will exist at
any specific time. Thus, it may not be possible to close an options or
futures position. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of the bankruptcy of a broker with whom the Fund has
an open position in an option, a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call
or put options on the same underlying security or currency (whether or not
covered) that may be written be 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.
A-5
<PAGE>
MERRILL LYNCH SMALLCAP GLOBAL 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 SmallCap Global
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
Options One/ /pay dividends in cash gains
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.
or Taxpayer Identification No.
Name of Co-Owner (if any)
First Name Initial
Last Name . . . . . . . . . . . , 19. . .
Date
Address
(Zip Code)
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 SmallCap Global 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 International
Equity 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 SmallCap World 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
.........................................................................
B-1
<PAGE>
MERRILL LYNCH SMALLCAP GLOBAL 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 SmallCap World Fund, Inc., at cost or
current offering price. Begin systematic withdrawal on .., 19..Withdrawals
to be made either (check one) / /Monthly / /Quarterly*
(Date) *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):
(A) I HEREBY AUTHORIZE PAYMENT BY (B) I HEREBY AUTHORIZE PAYMENT BY
CHECK DIRECT DEPOSIT TO BANK ACCOUNT AND (IF
Draw checks payable NECESSARY) DEBIT ENTRIES AND
(check one) ADJUSTMENTS FOR ANY CREDIT ENTRIES
/ / as indicated in Item 1. MADE IN ERROR TO MY ACCOUNT.
/ / to the order of . . . . . . . Specify type of account (check one):
Mail to (check one) / / checking / / savings
/ / the address indicated in Item I agree that this authorization will
1. remain in effect until I provide
/ / Name (Please Print) . . . . . written notification to Financial Data
Services, Inc. amending or terminating
Address . . . . . . . . . . . . . . . this service.
Name on your Account . . . . . . . .
Signature of Owner . . . . . . . . . Bank . . . . . . . . . . . . . . . .
Bank# . . . . . . . . . . . . . . . .
Signature of Co-Owner (if any) . . . . Account # . . . . . . . . . . . . .
Bank Address . . . . . . . . . . . .
Signature of Depositor. . . . . . . .
. . . . . . . . . . . . . Date . . .
Signature of Depositor (if joint
account) . . . . . . . . . . . . . .
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.
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) or Merrill Lynch SmallCap Global Fund, Inc., subject to the
terms set forth below.
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS
You are hereby authorized to draw OR ACH DEBITS DRAWN BY
checks or an ACH debit each month on FINANCIAL DATA SERVICES, INC.
my bank account for investment in
Merrill Lynch SmallCap Global Fund, To . . . . . . . . . . . . . . . Bank
Inc. as indicated below: (Investor's Bank)
Amount of each check or ACH debit $
Bank Address . . . . . . . . . . . .
Account No. . . . . . . . . . . .
Please date and invest checks or City. . . . . . . . . . . .State. . .
draw ACH debits on the 20th day of . . . . . . .. . .Zip Code . . . . .
each month beginning . . . . . . . .
or as soon thereafter as possible. As a convenience to me, I hereby
(Month) request and authorize you to pay and
I agree that you are preparing these charge to my account checks or ACH
checks or drawing these debits debits drawn on my account by and
voluntarily at my request and that you payable to Financial Data Services,
shall not be liable for any loss Inc.,Transfer Agency Mutual Fund
arising from any delay in preparing or Operations, Jacksonville, Florida
failure to prepare any such check or 32232-5289. I agree that your rights
debit. If I change banks or desire to in respect to each such check or debit
terminate or suspend this program, I shall be the same as if it were a
agree to notify you promptly in check drawn on you and signed
writing. personally by me. This authority is
I further agree that if a check or to remain in effect until revoked
debit is not honored upon personally by me in writing. Until
presentation, Financial Data Services, you receive such notice, you shall be
Inc. is authorized to discontinue fully protected in honoring any such
immediately the Automatic Investment check or debit. I further agree that
Plan and to liquidate sufficient if any such check or debit be
shares held in my account to offset dishonored, whether with or without
the purchase made with the returned cause and whether intentionally or
check or dishonored debit. inadvertently, you shall be under no
. . . . . . . . . . . . . . . . . . liability.
Date Signature of Depositor . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . Date Signature of
Signature of Depositor Depositor
(If joint account, both . . . . . . . . . . . . . . . .
must sign) . . . . . . . . . . . . . . . . . . .
Bank Account Number Signature
of Depositor
(If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS
ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS
APPLICATION.
FOR DEALER ONLY We hereby authorize Merrill Lynch
Branch Office, Address, Stamp 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.
. . . . . . . . . . . . . . . . . . .
This form when completed should be Dealer Name and Address
mailed to: By . . . . . . . . . . . . . . . . .
Merrill Lynch SmallCap Global Fund, Authorized Signature of Dealer
Inc. / // // / / // // // / . . .
c/o Financial Data Services, Inc. Branch Code F/C
Transfer Agency Mutual Fund No. F/C Last
Operations Name
P.O. Box 45289 / // // / / // // // /
Jacksonville, Florida 32232-5289 Dealer's Customer A/C No.
B-2
<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
Independent Auditors
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
REPRESENTATIONS, OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN Prospectus
OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE INVESTMENT ADVISER OR (PICTURE)
THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFERING IN
ANY STATE IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
TABLE OF CONTENTS
Merrill Lynch
Page
---- SmallCap Global
Prospectus Summary Fund, Inc.
Fee Table
Alternative Sales Arrangements
Financial Highlights
Risk Factors and Special
Considerations -----------, 1994
Investment Objective and Policies
Certain Risks of Debt Securities Distributor:
Other Investment Policies and Merrill Lynch
Practices Funds Distributor, Inc.
Investment Restrictions
Management of the Fund This prospectus should be
Board of Directors retained for future reference.
Management and Advisory
Arrangements
Transfer Agency Services
Purchase of Shares
Subscription Offering
Continuous Offering
Alternative Sales Arrangements
Initial Sales Charge Alternative-
Class A Shares
Deferred Sales Charge
Alternative-
Class B Shares
Redemption of Shares
Redemption
Repurchase
Reinstatement Privilege--Class A
Shares
Shareholder Services
Performance Data
Additional Information
Dividends and Distributions
Taxes
Determination of Net Asset Value
Organization of the Fund
Shareholder Reports
Shareholder Inquiries
Appendix A
Authorization Form
Code #--------
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 29, 1994
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
Merrill Lynch SmallCap Global Fund, Inc.
Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
_______________________
Merrill Lynch SmallCap Global Fund, Inc. (the "Fund") is a non-
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 65% 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 35% 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
_______________________
The date of this Statement of Additional Information is _______, 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.
<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.
2
<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 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 Appendix A 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
3
<PAGE>
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 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
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be offset partially by the amount of the premium paid for the put option and
any related transaction costs. Prior to its expiration, a put option may be
sold in a closing sale transaction; profit or loss from the sale will depend
on whether the amount received is more or less than the premium paid for the
put option plus the related transaction cost. A closing sale transaction
cancels out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. In certain circumstances, the Fund may purchase call
options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund may purchase
either exchange-traded options or OTC options. The Fund will not purchase
options on securities (including stock index options discussed below) if as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. As described in
the Prospectus, the Fund is authorized to engage in transactions in stock
index options and futures and financial futures, and related options on such
futures. Set forth below is further information concerning futures
transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead,
an amount of cash or securities acceptable to the broker and the relevant
contract market, which varies, but is 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.
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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 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
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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 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.
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OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified
within the meaning of the Investment Company Act, which means that the Fund
is not limited by such Act in the proportion of its assets that it may invest
in securities of a single issuer. The Fund's investment will be limited,
however, 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, the Fund will
comply with certain requirements, including limiting its investments so that
at the close of each quarter of the taxable year (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities of
a single issuer and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer, and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. A fund
which elects to be classified as "diversified" under the Investment Company
Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of
its total assets. To the extent that the Fund assumes large positions in the
securities of a small number of issuers, the Fund's net asset value may
fluctuate to a greater extent than that of a diversified company as a result
of a changes in the financial condition or in the market's assessment of the
issuers, and the Fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities
are purchased or sold by the fund with payment and delivery taking place in
the future to secure what is considered an advantageous yield and price to
the Fund at the time of entering into the transaction. Although the Fund has
not established any limit on the percentage of its assets that may be
committed in connection with such transactions, the Fund will maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt 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,
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.
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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; 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.
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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:
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 331/3% (taken
at market value) of its total assets and pledge its assets to
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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.
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 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.
d. Make investments for the purpose of exercising control or
management.
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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 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
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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
DIRECTORS AND OFFICERS
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.
(Directors to be supplied by amendment.)
At _______________, 1994, the officers and Directors of the Fund as a
group (__ persons) owned an aggregate of less than 1% of the outstanding
shares of the Fund. At such date, ________, 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
$_____ per year plus $_____ 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 $_____ per meeting
attended. The Chairman of the Audit Committee receives an additional fee of
$_____ per meeting attended.
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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 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 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 of
the Fund incurred in connection with the offering of its shares. Certain
expenses will be financed by the Fund pursuant to
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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".
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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").
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
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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.
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
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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 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
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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.
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
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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.
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
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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".
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
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<PAGE>
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 afternoon of the 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 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.
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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 taxable ordinary income dividends, tax-exempt income, 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.
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.
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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(Registered Trademark) account may arrange to
have periodic investments made in the Fund in amounts of $250 or more through
the CMA(Registered Trademark) 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(Registered Trademark)
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 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
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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(Registered
Trademark), CBA(Registered Trademark) 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 Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment
and Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch
California Insured Municipal Bond Fund, Merrill Lynch California Municipal
Bond Fund, Merrill Lynch California Limited Maturity Municipal Bond Fund,
Merrill Lynch Capital Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc. (shares of which are
deemed Class A shares for purposes of the exchange privilege), Merrill Lynch
Colorado Municipal Bond Fund, Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Federal Securities Trust, Merrill Lynch Florida
Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Municipal Bond
Fund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Inc. (residents of Arizona must
meet investor suitability standards), Merrill Lynch Global Resources Trust,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of
Wisconsin must meet investor suitability standards), Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Municipal
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Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund,
Merrill Lynch Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal
Bond Fund, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal
Intermediate Term Fund, Merrill Lynch New Jersey Limited Maturity Municipal
Bond Fund, Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New
York Limited Maturity Municipal Bond Fund, Merrill Lynch New York Municipal
Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch
Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Pennsylvania Limited Maturity
Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund, Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas Municipal Bond
Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch World Income
Fund, Inc. on the basis described below. In addition, Class A shareholders
of the Fund may exchange their Class A shares for shares of Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money Fund and
Merrill Lynch Ready Assets Trust (or Merrill Lynch Retirement Reserves Money
Fund if the exchange occurs within certain retirement plans) (together, the
"Class A money market funds"), and Class B shareholders of the Fund may
exchange their Class B shares for shares of Merrill Lynch Government Fund,
Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund
and Merrill Lynch Treasury Fund (together, the "Class B money market funds")
on the basis described below. Shares with a net asset value of at least $250
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.
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 the
Class A money market funds 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
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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 Global Resources Trust after having held the Fund Class B
shares for two and a half years. The 2.0% 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 Merrill Lynch Global
Resources Trust 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 Merrill Lynch Global Resources Trust 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 from
any of the funds into shares of the Class A money market funds and Class B
money market funds, respectively, but the period of time that Class B shares
are held in a Class B 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 Class B money market fund which
were acquired as a result of an exchange for Class B shares of a 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 2.0% 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 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.
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MERRILL LYNCH AMERICAS
INCOME FUND, INC. A high level of current income, consistent
with prudent investment risk, by
investing primarily in debt securities
denominated in a currency of a country
located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).
MERRILL LYNCH ARIZONA
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide 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 RETIREMENT As high a level of total investment return as
is consistent with reasonable risk by
investing in common stocks and other types
of securities, including fixed income
securities and convertible securities.
MERRILL LYNCH BASIC
VALUE FUND, INC. Capital appreciation and, secondarily, income
through investment in securities,
primarily equities, that are undervalued
and therefore represent basic investment
value.
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MERRILL LYNCH CALIFORNIA
INSURED MUNICIPAL BOND FUND A portfolio of Merrill Lynch California
Municipal 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 primarily of
insured California Municipal Bonds.
MERRILL LYNCH CALIFORNIA
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
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 primarily of
intermediate-term investment grade
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide 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, INC. The highest total investment return
consistent with prudent risk through a
fully managed investment policy
utilizing equity, debt and convertible
securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and Colorado
income taxes as is consistent with prudent
investment management.
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MERRILL LYNCH CORPORATE
BOND FUND, INC. Current income from three separate diversified
portfolios of fixed income securities.
MERRILL LYNCH DEVELOPING
CAPITAL MARKETS FUND, INC. Long-term appreciation through investment
in securities, principally equities,
of issuers in countries having smaller
capital markets.
MERRILL LYNCH DRAGON
FUND, INC. Capital appreciation primarily through
investment 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.
MERRILL LYNCH EUROFUND Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
MERRILL LYNCH FEDERAL
SECURITIES TRUST High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-
backed certificates and other
mortgage-backed Government securities.
MERRILL LYNCH FLORIDA
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal income
taxes as is consistent with prudent
investment management while serving to
offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment
in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
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MERRILL LYNCH FLORIDA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
MERRILL LYNCH FUND
FOR TOMORROW, INC. Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic
and cultural changes as they affect
consumer markets.
MERRILL LYNCH FUNDAMENTAL
GROWTH FUND, INC. Long-term growth through investment in a
diversified 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 combination of which
will be varied from time to time both
with respect to the types of
securities and markets in response to
changing market and economic trends.
MERRILL LYNCH GLOBAL BOND
FUND FOR INVESTMENT
AND RETIREMENT High total investment return from investment
in a global portfolio of debt investments
denominated in various currencies and
multinational currency units.
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MERRILL LYNCH GLOBAL
CONVERTIBLE FUND, INC. High total return from investment
primarily in an internationally
diversified portfolio of convertible
debt securities, convertible preferred
stock and "synthetic" convertible
securities consisting of a combination
of debt securities or preferred stock
and warrants or options.
MERRILL LYNCH
GLOBAL HOLDINGS
(residents of Arizona
must meet investor suitability
standards). The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities.
MERRILL LYNCH GLOBAL
RESOURCES TRUST Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess
substantial 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,
telecommunications, gas or water.
MERRILL LYNCH
GOVERNMENT FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S.
Government, its agencies and
instrumentalities and in repurchase
agreements secured by such obligations.
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MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal
emphasis on those securities which
management of the fund believes to be
undervalued.
MERRILL LYNCH HEALTHCARE
FUND INC.
(residents of Wisconsin
must meet investor
suitability standards) Capital appreciation through
worldwide investment in
equity securities of
companies that derive or are
expected to derive a
substantial portion of their
sales from products and
services in healthcare.
MERRILL LYNCH INSTITUTIONAL
FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND Current income exempt from Federal income
taxes, preservation of capital and
liquidity available from investing in a
diversified portfolio of short-term, high
quality municipal bonds.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
MERRILL LYNCH LATIN
AMERICA FUND, INC. Capital appreciation by investing
primarily in Latin American equity and
debt securities.
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MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and Maryland
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and
Massachusetts income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Massachusetts Municipal
Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and
Massachusetts income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and
Michigan income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Michigan Municipal Bonds.
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MERRILL LYNCH MICHIGAN
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and Michigan
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MINNESOTA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and Minnesota
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MUNICIPAL
BOND FUND, INC Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income
exempt from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
MERRILL LYNCH NEW JERSEY
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and
New Jersey income taxes as is consistent
with prudent investment management through
a portfolio primarily of intermediate-term
investment grade New Jersey Municipal
Bonds.
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MERRILL LYNCH NEW JERSEY
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW YORK
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series
Trust, a series fund, whose objective
is as high a level of income exempt
from Federal, New York State and New
York City income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade New
York Municipal Bonds.
MERRILL LYNCH NEW YORK
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and North
Carolina income taxes as is consistent
with prudent investment management.
MERRILL LYNCH OHIO
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent
investment management.
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MERRILL LYNCH OREGON
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and Oregon
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH PACIFIC
FUND, INC. Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and Western
Pacific countries, including Japan,
Australia, Hong Kong, Singapore and
the Philippines.
MERRILL LYNCH PENNSYLVANIA
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as
is consistent with prudent investment
management through investment in a
portfolio of intermediate-term investment
grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and
Pennsylvania income taxes as is consistent
with prudent investment management.
MERRILL LYNCH PHOENIX
FUND, INC. Long-term growth of capital by investing
in equity and fixed income securities,
including tax-exempt securities, of
issuers in weak financial condition or
experiencing poor operating results
believed to be undervalued relative to
the current or prospective condition
of such issuer.
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<PAGE>
MERRILL LYNCH READY
ASSETS TRUST Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in
which the Trust invests.
MERRILL LYNCH RETIREMENT
RESERVES MONEY FUND
(available only if the
exchange occurs within certain
retirement plans) Currently the only portfolio of
Merrill Lynch Retirement Series
Trust, a series fund, whose
objectives are current income,
preservation of capital and
liquidity available from
investing in a diversified
portfolio of short-term money
market securities.
MERRILL LYNCH SHORT-TERM
GLOBAL INCOME FUND, INC. As high a level of current income as is
consistent with prudent investment
management from a global portfolio of
high quality debt securities
denominated in various currencies and
multinational currency units and
having remaining maturities not
exceeding three years.
MERRILL LYNCH SPECIAL
VALUE FUND, INC. Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to
have special investment value and emerging
growth companies regardless of size.
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.
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<PAGE>
MERRILL LYNCH TECHNOLOGY
FUND, INC. Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in technology.
MERRILL LYNCH TEXAS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas,
its political subdivisions, agencies and
instrumentalities.
MERRILL LYNCH TREASURY FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
MERRILL LYNCH U.S.A.
GOVERNMENT RESERVES Preservation of capital, current income and
liquidity available from investing in
direct obligations of the U.S. Government
and repurchase agreements relating to such
securities.
MERRILL LYNCH U.S.
TREASURY MONEY FUND Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term
marketable securities which are direct
obligations of the U.S. Treasury.
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<PAGE>
MERRILL LYNCH UTILITY
INCOME FUND, INC. High current income through investment in
equity and debt securities issued by
companies which are primarily engaged
in the ownership or operation of
facilities used to generate, transmit
or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME
FUND, INC. High current income by investing in a
global portfolio of fixed income
securities denominated in various
currencies, including multinational
currencies.
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. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-
term capital gain or loss may be realized. In addition, a shareholder
exchanging shares of any of the funds may be subject to a backup withholding
tax unless such shareholder certifies under penalty of perjury that the
taxpayer identification number on file with any such fund is correct and that
such shareholder is not otherwise subject to backup withholding. See "Taxes"
below.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange,
or if the exchange does not involve a money market fund, the shareholder may
write to the transfer agent requesting that the exchange be effected. Such
letter must be signed exactly as the account is registered with signatures
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, the existence and
validity of which may be verified by the transfer agent through the use of
industry publications. Shareholders of the Fund, and shareholders of the
other funds described above with shares for which certificates have not been
issued, may exercise the exchange privilege by wire through their securities
dealers. The Fund reserves the right to require a properly completed
exchange application. This exchange privilege may be modified or terminated
in accordance with the rules of the 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.
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<PAGE>
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 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 provisions and limitations contained in the
Code. For example, certain retirement accounts
41
<PAGE>
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 share of such withholding taxes in their U.S.
income tax returns as gross income, treat such proportionate share as taxes
paid by them and deduct such proportionate share 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. 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
42
<PAGE>
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.
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
43
<PAGE>
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. The
Fund may request a private letter ruling from the Internal Revenue Service on
some or all of these issues.
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.
------------------
44
<PAGE>
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and other total return data in advertisements or information furnished to
present or prospective shareholders. Total return figures are based on the
Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for Class
A 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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<PAGE>
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 from the Commission permitting the issuance
and sale of two classes of shares. The issuance and sale of any additional
classes would require an additional order from the Commission. The Fund has
applied for such an order. If such exemptive relief would be granted, the
Fund may issue additional classes of shares. 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 $____) 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
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<PAGE>
proportional amount of the unamortized organizational expenses which the
number of such initial shares being redeemed bears to the number of shares
initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
Number of Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value Per Share (net
assets divided by number of shares
outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
Sales Charge (for Class A Shares:
6.50% of offering price (6.95% of
net amount invested*)) . . . . . . . . . . . . . . . . . . . . . . . . . $ $ **
------------------- -------------------
Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
=================== ===================
____________________
* 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.
</TABLE>
INDEPENDENT AUDITORS
_________________________________________, 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
________________________________________ (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.
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<PAGE>
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations,
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the
Fund's transfer agent (the "Transfer Agent"). The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management
of the Fund--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on ____________ 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.
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APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of the
desirable investments. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
46
<PAGE>
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
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.
50
<PAGE>
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, in assigning
ratings to such issuers, Moody's evaluates the financial strength of the
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and
bonds, a variation of the bond rating symbols is being used in the quality
ranking of preferred stocks. The symbols presented below are designed to
avoid comparison with bond quality in absolute terms. It should always be
borne in mind that preferred stock occupies a junior position to bonds within
a particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of
preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
51
<PAGE>
"b" An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of time
may be small.
"caa" An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood
of eventual payments.
"c" This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF STANDARD & POOR'S 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 interest and repay
principal and differs from the highest rated issues only in small
degree.
52
<PAGE>
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation
and C the highest. While such debt will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
BBB-- rating.
B Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB-- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal. The CCC rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied B or B-- rating.
CC The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to senior
debt which is assigned an actual or implied CCC-- debt rating. The
C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the
date due even if the applicable grace
53
<PAGE>
period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (--): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative
standing within the major rating categories.
c The letter c indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated
conditions enumerated in the tender option documents.
L The letter L indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured and interest is adequately
collateralized. In the case of certificates of deposit, the letter
L indicates that the deposit, combined with other deposits being
held in the same right and capacity, will be honored for principal
and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the
event that the deposit is assumed by a successor insured
institution, upon maturity.
p The letter p indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
N.R. Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment
Grade" ratings) are generally regarded as eligible for bank investment. In
addition, the 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.
54
<PAGE>
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
(+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A- 1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period.
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by
Standard & Poor's from other sources it considers reliable. Standard &
Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and
any applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue, which issue
is intrinsically different from, and subordinated to, a debt issue.
Therefore, to reflect this difference, the preferred stock rating symbol will
normally not be higher than the debt rating symbol assigned to, or that would
be assigned to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
55
<PAGE>
I. Likelihood of payment -- capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the terms of
the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
filed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for
issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance,
B as predominately speculative with respect to the issuer's capacity
CCC to pay preferred stock obligations. "BB" indicates the lowest degree
of speculation and "CCC" the highest degree of speculation. While
such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard
& Poor's does not rate a particular type of obligation as a matter
of policy.
Plus (+) or minus (--): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may
be modified by the addition of a plus
56
<PAGE>
or minus sign to show relative standing within the
major rating categories.
A preferred stock rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result
of changes in, or unavailability of, such information, or based on other
circumstances.
57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
MERRILL LYNCH SMALLCAP WORLD FUND, INC.:
We have audited the accompanying statement of assets and liabilities of
Merrill Lynch SmallCap World Fund, Inc. as of ____________, 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 SmallCap World
Fund, Inc. as of _______________, 1994 in conformity with generally accepted
accounting principles.
____________, 1994
58
<PAGE>
<TABLE>
<CAPTION>
MERRILL LYNCH SMALLCAP WORLD FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
_____________, 1994
<S> <C>
Assets:
Cash in Bank $
Prepaid registration fees (Note 3)
Deferred organization expenses (Note 4) ---------
Total Assets
Liabilities--accrued expenses ---------
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 authorized) (Note 1) $
_________
_______________
Notes to Statement of Assets and Liabilities.
(1) Merrill Lynch SmallCap World 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.
59
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
(Picture)
________________
Table of Contents
Page
MERRILL LYNCH
SMALLCAP WORLD
Investment Objective and FUND, INC.
Policies . . . . . . . . . . .
Hedging Techniques . . . . . .
Other Investment Policies
and Practices . . . . . .
Investment Restrictions . . .
Management of the Fund . . . . . .
Directors and Officers . . . .
Management and Advisory
Arrangements . . . . . . .
Purchase of Shares . . . . . . . .
Alternative Sales
Arrangements . . . . . . .
Initial Sales Charge
Alternative--Class A _____________, 1994
Shares . . . . . . . . . .
Reduced Initial Sales Distributor:
Charge--Class A Shares . Merrill Lynch
Redemption of Shares . . . . . . . Funds Distributor, Inc.
Contingent Deferred Sales
Charge--Class B Shares . .
Portfolio Transactions and
Brokerage . . . . . . . . . .
Determination of Net Asset
Value . . . . . . . . . . . .
Shareholder Services . . . . . . .
Investment Account . . . . . .
Automatic Investment Plan . .
Reinvestment of Dividends
and Capital Gains
Distributions . . . . . .
Systematic Withdrawal
Plans--Class A Shares . .
Exchange Privilege . . . . . .
Taxes . . . . . . . . . . . . . . .
Tax Treatment of Options,
Futures and Forward
Foreign Exchange
Transactions . . . . . . .
Performance Data . . . . . . . . .
General Information . . . . . . . .
Description of Shares . . . .
Computation of Offering
Price Per Share . . . . . .
Independent Auditors . . . . .
Custodian . . . . . . . . . .
Transfer Agent . . . . . . . .
Legal Counsel . . . . . . . .
Reports to Shareholders . . .
Additional Information . . . .
Appendix . . . . . . . . . . . . .
Independent Auditors' Report . . .
Statement of Assets and Liabilities
Code # ____
<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 ________, 1994.
(B) EXHIBITS
Exhibit
Number
- -------
1 -- Articles of Incorporation of the Registrant.
2 -- By-Laws of the Registrant.
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.(a)
5 -- Form of Management Agreement between the Registrant and
Merrill Lynch Asset Management, L.P.(a)
6(a) -- Form of Class A Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.(a)
(b) -- Form of Class B Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.(a)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund
Adviser Program.(a)
7 -- None.
8 -- Form of Custody Agreement between the Registrant
and _____________________.(a)
9(a) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the Registrant
and Financial Data Services, Inc.(a)
(b) -- Form of License Agreement between Merrill Lynch & Co., Inc. and
the Registrant relating to the Registrant's use of the "Merrill
Lynch" name.(a)
10 -- Opinion of Brown & Wood, counsel for the Registrant.(a).
11 -- Consent of ____________, independent auditors for the Registrant.(a)
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, L.P.(a)
14 -- None.
15(a) -- Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
16 -- None.
___________________
(a) To be provided by amendment.
(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-1
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
Prior to the effective date of this Registration Statement, the Fund
will sell 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
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS , 1994
-------------- -----------
Class A Shares of Common Stock, par value $0.10 per share
Class B Shares of Common Stock, par value $0.10 per share
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.
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.
C-2
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE MANAGER
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 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.
C-3
<PAGE>
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>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION(S) WITH THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------
<S> <C> <C>
ML & CO. . . . . . . . . . . . . . . . . . Limited Partner Financial Services Holding Company
MERRILL LYNCH INVESTMENT Investment Advisory Services; Limited
MANAGEMENT, INC. . . . . . . . . . . . . . Limited Partner Partner of FAM
PRINCETON SERVICES, INC. General Partner of FAM
("Princeton Services") . . . . . . . . . General Partner
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.
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 Counsel and
General Counsel and Secretary 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 of
Controller 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 Treasurer Senior Vice President and 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>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for
each of the investment companies referred to in the first paragraph of Item
28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc.,
MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania 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,
C-5
<PAGE>
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 Treasurer None
MARK A. DESARIO . . . . . . . . . . . . . . Vice President None
JAMES T. FATSEAS . . . . . . . . . . . . . Vice President None
STANLEY GRACZYK . . . . . . . . . . . . . . Vice President None
MICHELLE T. LAU . . . . . . . . . . . . . . Vice President None
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
(c) Not applicable.
</TABLE>
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).
C-6
<PAGE>
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-7
<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 29th day of April, 1994.
MERRILL LYNCH SMALLCAP WORLD FUND, INC.
(Registrant)
By /s/ Philip L. Kirstein
--------------------------------
(Philip L. Kirstein, President)
Each person whose signature appears below hereby authorizes Philip L.
Kirstein, Robert Harris or Mark B. Goldfus, 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
--------- ----- ----
/s/ Philip L. Kirstein President (Principal April 29, 1994
- ---------------------- Executive Officer)
(Philip L. Kirstein) and Director
/s/ Robert Harris Treasurer (Principal Financial April 29, 1994
- ----------------- and Accounting Officer)
(Robert Harris) and Director
/s/ Mark B. Goldfus Director April 29, 1994
- -------------------
(Mark B. Goldfus)
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
Exhibit NUMBERED
Number DESCRIPTION PAGE
- ------ --------------------- -----------
<S> <C>
(a) Articles of Incorporation of the Registrant
(b) By-Laws of the Registrant
</TABLE>
<PAGE>
ARTICLES OF INCORPORATION
MERRILL LYNCH SMALLCAP WORLD FUND, INC.
THE UNDERSIGNED, M. ROSALIE BUENAVENTURA, whose post office address is
One World Trade Center, New York, New York 10048-0557, being at least
eighteen years of age, does hereby act as an incorporator, under and by
virtue of the General Laws of the State of Maryland authorizing the
formation of corporations and with the intention of forming a corporation.
ARTICLE I
NAME
----
The name of the corporation is MERRILL LYNCH SMALLCAP WORLD FUND, INC.
ARTICLE II
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed and the
business or objects to be transacted, carried on and promoted by it are as
follows:
(1) To conduct and carry on the business of an investment company of
the management type.
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts
and on such terms and conditions, for such purposes
<PAGE>
and for such amount or kind of consideration now or hereafter permitted by
the General Laws of the State of Maryland and by these Articles of
Incorporation, as its Board of Directors may determine; provided, however,
that the value of the consideration per share to be received by the
Corporation upon the sale or other disposition of any shares of its capital
stock shall not be less than the net asset value per share of such capital
stock outstanding at the time of such event.
(4) To exchange, classify, reclassify, change the designation of,
convert, rename, redeem, purchase or otherwise acquire, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its issued or unissued capital
stock, in any manner and to the extent now or hereafter permitted by the
General Laws of the State of Maryland and by these Articles of
Incorporation.
(5) To do any and all such further acts or things and to exercise any
and all such further powers or rights as may be necessary, incidental,
relative, conducive, appropriate or desirable for the accomplishment,
carrying out or attainment of all or any of the foregoing purposes or
objects.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations
by the General Laws of the State of Maryland now or hereafter in force, and
the enumeration of the foregoing
2
<PAGE>
shall not be deemed to exclude any powers, rights or privileges so granted
or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is The Corporation Trust Incorporated, a
corporation of this State, and the post office address of the resident
agent is 32 South Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Hundred Million (200,000,000) shares,
of the par value of Ten Cents ($.10) per share, and of the aggregate par
value of Twenty Million Dollars ($20,000,000). The capital stock initially
is classified into two classes, consisting of One Hundred Million
(100,000,000) shares of Class A Common Stock and One Hundred Million
(100,000,000) shares of Class B Common Stock.
(2) The Board of Directors may classify and reclassify any unissued
shares of capital stock into one or more additional or other classes or
series as may be established from time to time
3
<PAGE>
by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption of such shares of stock and pursuant to such classification or
reclassification to increase or decrease the number of authorized shares of
any existing class or series.
(3) The Board of Directors may classify and reclassify any issued
shares of capital stock into one or more additional or other classes or
series as may be established from time to time by setting or changing in
any one or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock
and pursuant to such classification or reclassification to increase or
decrease the number of authorized shares of any existing class or series;
provided, however, that any such classification or reclassification shall
not substantially adversely affect the rights of holders of such issued
shares.
(4) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, the holders of each class or series of capital
stock shall be entitled to dividends and distributions in such amounts and
at such times as may be determined by the Board of Directors, and the
dividends and distributions paid with respect to the various classes or
series
4
<PAGE>
of capital stock may vary among such classes and series. Dividends on a
class or series may be declared or paid only out of the net assets of that
class or series. Expenses related to the distribution of, and other
identified expenses that should properly be allocated to, the shares of a
particular class or series of capital stock may be charged to and borne
solely by such class or series and the bearing of expenses solely by a
class or series of capital stock may be appropriately reflected (in a
manner determined by the Board of Directors) and cause differences in the
net asset value attributable to, and the dividend, redemption and
liquidation rights of, the shares of each class or series of capital stock.
(5) Unless otherwise expressly provided in the charter of the
Corporation, including those matters set forth in Article II, Section (4)
hereof and including any Articles Supplementary creating any class or
series of capital stock, on each matter submitted to a vote of
stockholders, each holder of a share of capital stock of the Corporation
shall be entitled to one vote for each share standing in such holder's name
on the books of the Corporation, irrespective of the class or series
thereof, and all shares of all classes and series shall vote together as a
single class; provided, however, that (a) as to any matter with respect to
which a separate vote of any class or series is required by the Investment
Company Act of 1940, as amended, and in effect from time to time, or any
rules, regulations or orders issued thereunder, or by the Maryland General
Corporation Law, such
5
<PAGE>
requirement as to a separate vote by that class or series shall apply in
lieu of a general vote of all classes and series as described above, (b) in
the event that the separate vote requirements referred to in (a) above
apply with respect to one or more classes or series, then, subject to
paragraph (c) below, the shares of all other classes and series not
entitled to a separate class vote shall vote as a single class, and (c) as
to any matter which does not affect the interest of a particular class or
series, such class or series shall not be entitled to any vote and only the
holders of shares of the affected classes and series, if any, shall be
entitled to vote.
(6) Notwithstanding any provision of the Maryland General Corporation
Law requiring a greater proportion than a majority of the votes of all
classes or series of capital stock of the Corporation (or of any class or
series entitled to vote thereon as a separate class or series) to take or
authorize any action, the Corporation is hereby authorized (subject to the
requirements of the Investment Company Act of 1940, as amended, and in
effect from time to time, and any rules, regulations and orders issued
thereunder) to take such action upon the concurrence of a majority of the
votes entitled to be cast by holders of capital stock of the Corporation
(or a majority of the votes entitled to be cast by holders of a class or
series entitled to vote thereon as a separate class or series).
(7) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating
6
<PAGE>
any class or series of capital stock, in the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of each class or series of capital stock of the
Corporation shall be entitled, after payment or provision for payment of
the debts and other liabilities of the Corporation, to share ratably in the
remaining net assets of the Corporation applicable to that class or series.
(8) Any fractional shares shall carry proportionately all the rights
of a whole share, excepting any right to receive a certificate evidencing
such fractional share, but including, without limitation, the right to vote
and the right to receive dividends.
(9) The presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast shall
constitute a quorum at any meeting of stockholders, except with respect to
any matter which requires approval by a separate vote of one or more
classes of stock, in which case the presence in person or by proxy of the
holders of shares entitled to cast one-third of the votes entitled to be
cast by each class entitled to vote as a separate class shall constitute a
quorum.
(10) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of the charter and By-Laws of
the Corporation. As used in the charter of the Corporation, the terms
"charter" and "Articles of Incorporation" shall mean and include the
Articles of Incorporation of the Corporation as amended, supplemented and
restated from time to
7
<PAGE>
time by Articles of Amendment, Articles Supplementary, Articles of
Restatement or otherwise.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------
(1) The number of directors of the Corporation shall be three, which
number may be increased pursuant to the By-Laws of the Corporation but
shall never be less than three. The names of the directors who shall act
until their successors are duly elected and qualify are:
Philip L. Kirstein
Robert Harris
Mark B. Goldfus
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable, subject to such limitations as may be set
forth in these Articles of Incorporation or in the By-Laws of the
Corporation or in the General Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have
any right to purchase or subscribe for any shares of the capital stock of
the Corporation or any other security of the Corporation which it may issue
or sell (whether out of the number of shares authorized by these Articles
of Incorporation, or out of any shares of the capital stock of the
Corporation acquired by
8
<PAGE>
it after the issue thereof, or otherwise) other than such right, if any, as
the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be
indemnified by the Corporation to the full extent permitted by the General
Laws of the State of Maryland, subject to the requirements of the
Investment Company Act of 1940, as amended. No amendment of these Articles
of Incorporation or repeal of any provision hereof shall limit or eliminate
the benefits provided to directors and officers under this provision in
connection with any act or omission that occurred prior to such amendment
or repeal.
(5) To the fullest extent permitted by the General Laws of the State
of Maryland, subject to the requirements of the Investment Company Act of
1940, as amended, no director or officer of the Corporation shall be
personally liable to the Corporation or its security holders for money
damages. No amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from
time to time any of the By-Laws of the Corporation except any particular
By-Law which is specified as
9
<PAGE>
not subject to alteration or repeal by the Board of Directors, subject to
the requirements of the Investment Company Act of 1940, as amended.
(7) The Board of Directors of the Corporation from time to time may
change the Corporation's name, without the vote or consent of the
stockholders of the Corporation, in any manner and to the extent now or
hereafter permitted by the General Laws of the State of Maryland and by
these Articles of Incorporation.
ARTICLE VI
REDEMPTION
----------
Each holder of shares of capital stock of the Corporation shall be
entitled to require the Corporation to redeem all or any part of the shares
of capital stock of the Corporation standing in the name of such holder on
the books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the
redemption price of such shares as in effect from time to time as may be
determined by the Board of Directors of the Corporation in accordance with
the provisions hereof, subject to the right of the Board of Directors of
the Corporation to suspend the right of redemption of shares of capital
stock of the Corporation or postpone the date of payment of such redemption
price in accordance with provisions of applicable law. The redemption
price of shares of capital stock of the Corporation shall be the net asset
value thereof as determined by the Board of Directors
10
<PAGE>
of the Corporation from time to time in accordance with the provisions of
applicable law, less such redemption fee or other charge, if any, as may be
fixed by resolution of the Board of Directors of the Corporation. Payment
of the redemption price shall be made in cash by the Corporation at such
time and in such manner as may be determined from time to time by the Board
of Directors of the Corporation.
ARTICLE VII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to
the direction of the Board of Directors, as to the amount of assets,
obligations or liabilities of the Corporation, as to the amount of net
income of the Corporation from dividends and interest for any period or
amounts at any time legally available for the payment of dividends, as to
the amount of any reserves or charges set up and the propriety thereof, as
to the time of or purpose for creating reserves or as to the use,
alteration or cancellation of any reserves or charges (whether or not any
obligation or liability for which such reserves or charges shall have been
created, shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged), as to the price of any security owned
by the Corporation or as to any other matters relating to the issuance,
sale, redemption or other acquisition or disposition of
11
<PAGE>
securities or shares of capital stock of the Corporation, and any
reasonable determination made in good faith by the Board of Directors as to
whether any transaction constitutes a purchase of securities on "margin," a
sale of securities "short," or an underwriting or the sale of, or a
participation in any underwriting or selling group in connection with the
public distribution of, any securities, shall be final and conclusive, and
shall be binding upon the Corporation and all holders of its capital stock,
past, present and future, and shares of the capital stock of the
Corporation are issued and sold on the condition and understanding,
evidenced by the purchase of shares of capital stock or acceptance of share
certificates, that any and all such determinations shall be binding as
aforesaid. No provision of these Articles of Incorporation shall be
effective to (a) require a waiver of compliance with any provision of the
Securities Act of 1933, as amended, or the Investment Company Act of 1940,
as amended, or of any valid rule, regulation or order of the Securities and
Exchange Commission thereunder or (b) protect or purport to protect any
director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
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ARTICLE VIII
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE IX
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in any manner
now or hereafter prescribed by statute, including any amendment which
alters the contract rights, as expressly set forth in the charter, of any
outstanding stock and substantially adversely affects the stockholder's
rights, and all rights conferred upon stockholders herein are granted
subject to this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL LYNCH
SMALLCAP WORLD FUND, INC. hereby executes the foregoing Articles of
Incorporation and acknowledges the same to be his act.
Dated this 8th day of April, 1994.
/s/ M. ROSALIE BUENAVENTURA
---------------------------
M. Rosalie Buenaventura
13
<PAGE>
BY-LAWS
OF
MERRILL LYNCH SMALLCAP WORLD FUND, INC.
ARTICLE I
Offices
-------
Section 1. Principal Office. The principal office of Merrill Lynch
----------------
SmallCap World Fund, Inc. (the "Corporation") shall be in the City of
Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal executive office
--------------------------
of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices
-------------
in such places as the Board of Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. The Corporation shall not be required to
--------------
hold an annual meeting of its stockholders in any year in which the election
of directors is not required to be acted upon under the Investment Company
Act of 1940. In the event that the Corporation shall be required to hold an
annual
<PAGE>
meeting of stockholders to elect directors by the Investment Company Act of
1940, as amended, such meeting shall be held no later than 120 days after the
occurrence of the event requiring the meeting. Any stockholders' meeting
held in accordance with this Section shall for all purposes constitute the
annual meeting of stockholders for the year in which the meeting is held.
Section 2. Special Meetings. Special meetings of the stockholders,
----------------
unless otherwise provided by law, may be called for any purpose or purposes
by a majority of the Board of Directors, the President, or on the written
request of the holders of at least 10% of the outstanding shares of capital
stock of the Corporation entitled to vote at such meeting if they comply with
Section 2-502(b) or (c) of the Maryland General Corporation Law.
Section 3. Place of Meetings. Meetings of the stockholders shall be
-----------------
held at such place within the United States as the Board of Directors may
from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the place,
------------------------------------
date and time of the holding of each stockholders' meeting and, if the
meeting is a special meeting, the purpose or purposes of the special meeting,
shall be given personally or by mail, not less than ten nor more than ninety
days before the date of such meeting, to each stockholder entitled to vote at
such meeting and to each other stockholder entitled to notice of the meeting.
Notice by mail shall be deemed to be duly given when deposited in the United
States mail addressed to the stockholder
2
<PAGE>
at his address as it appears on the records of the Corporation, with postage
thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who
shall, either before or after the meeting, submit a signed waiver of notice
which is filed with the records of the meeting. When a meeting is adjourned
to another time and place, unless the Board of Directors, after the
adjournment, shall fix a new record date for an adjourned meeting, or the
adjournment is for more than one hundred and twenty days after the original
record date, notice of such adjourned meeting need not be given if the time
and place to which the meeting shall be adjourned were announced at the
meeting at which the adjournment is taken.
Section 5. Quorum. At all meetings of the stockholders, the holders
------
of shares of stock of the Corporation entitled to cast one-third of the votes
entitled to be cast, present in person or by proxy, shall constitute a quorum
for the transaction of any business, except with respect to any matter which
requires approval by a separate vote of one or more classes of stock, in
which case the presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast by each class
entitled to vote as a separate class shall constitute a quorum. In the
absence of a quorum no business may be transacted, except that the holders of
a majority of the shares of stock present in person or by proxy and entitled
to
3
<PAGE>
vote may adjourn the meeting from time to time, without notice other than
announcement thereat except as otherwise required by these By-Laws, until the
holders of the requisite amount of shares of stock shall be so present. At
any such adjourned meeting at which a quorum may be present any business may
be transacted which might have been transacted at the meeting as originally
called. The absence from any meeting, in person or by proxy, of holders of
the number of shares of stock of the Corporation in excess of a majority
thereof which may be required by the laws of the State of Maryland, the
Investment Company Act of 1940, as amended, or other applicable statute, the
Articles of Incorporation, or these By-Laws, for action upon any given matter
shall not prevent action at such meeting upon any other matter or matters
which may properly come before the meeting, if there shall be present
thereat, in person or by proxy, holders of the number of shares of stock of
the Corporation required for action in respect of such other matter or
matters.
Section 6. Organization. At each meeting of the stockholders, the
------------
Chairman of the Board (if one has been designated by the Board), or in his
absence or inability to act, the President, or in the absence or inability to
act of the Chairman of the Board and the President, a Vice President, shall
act as chairman of the meeting. The Secretary, or in his absence or
inability to act, any person appointed by the chairman of the meeting, shall
act as secretary of the meeting and keep the minutes thereof.
4
<PAGE>
Section 7. Order of Business. The order of business at all meetings
-----------------
of the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
------
Articles of Incorporation, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of such stock standing in his name
on the record of stockholders of the Corporation as of the record date
determined pursuant to Section 9 of this Article or if such record date shall
not have been so fixed, then at the later of (i) the close of business on the
day on which notice of the meeting is mailed or (ii) the thirtieth day before
the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases where such proxy states that
it is irrevocable and where an irrevocable proxy is permitted by law. Except
as otherwise provided by statute, the Articles of Incorporation or these
By-Laws, any corporate action to be taken by vote of the stockholders (other
than the election of directors, which shall be by plurality vote)
5
<PAGE>
may be authorized by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or represented by
proxy and entitled to vote on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute
or these By-Laws, or determined by the chairman of the meeting to be
advisable, any such vote need not be by ballot. On a vote by ballot, each
ballot shall be signed by the stockholder voting, or by his proxy, if there
be such proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a
---------------------
record date for the purpose of determining stockholders entitled to vote at
any meeting of the stockholders. The record date, which may not be prior to
the close of business on the day the record date is fixed, shall be not more
than ninety nor less than ten days before the date of the meeting of the
stockholders. All persons who were holders of record of shares at such time,
and not others, shall be entitled to vote at such meeting and any adjournment
thereof.
Section 10. Inspectors. The Board may, in advance of any meeting of
----------
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any
of them shall fail to appear or act, the chairman of the meeting may appoint
inspectors. Each
6
<PAGE>
inspector, before entering upon the discharge of his duties, may be required
to take and sign an oath to execute faithfully the duties of inspector at
such meeting with strict impartiality and according to the best of his
ability. The inspectors may be empowered to determine the number of shares
outstanding and the voting powers of each, the number of shares represented
at the meeting, the existence of a quorum, the validity and effect of
proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count
and tabulate all votes, ballots or consents, determine the result, and do
such acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the chairman of the meeting or any stockholder
entitled to vote thereat, the inspectors shall make a report in writing of
any challenge, request or matter determined by them and shall execute a
certificate of any fact found by them. No director or candidate for the
office of director shall act as inspector of an election of directors.
Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as
------------------------------------------
otherwise provided by statute or the Articles of Incorporation, any action
required to be taken at any meeting of stockholders, or any action which may
be taken at any meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
7
<PAGE>
records of stockholders meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote
thereat.
ARTICLE III
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the
--------------
Articles of Incorporation, the business and affairs of the Corporation shall
be managed under the direction of the Board of Directors. All powers of the
Corporation may be exercised by or under authority of the Board of Directors
except as conferred on or reserved to the stockholders by law or by the
Articles of Incorporation or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed
-------------------
from time to time by resolution of the Board of Directors adopted by a
majority of the entire Board of Directors; provided, however, that the number
of directors shall in no event be less than one nor more than fifteen. Any
vacancy created by an increase in Directors may be filled in accordance with
Section 6 of this Article III. No reduction in the number of directors shall
have the effect of removing any director from office prior to the expiration
of his term unless such director is specifi
8
<PAGE>
cally removed pursuant to Section 5 of this Article III at the time of such
decrease. Directors need not be stockholders.
Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually at a meeting of stockholders held for that purpose; provided,
however, that if no meeting of the stockholders of the Corporation is
required to be held in a particular year pursuant to Section 1 of Article II
of these By-Laws, directors shall be elected at the next meeting held. The
term of office of each director shall be from the time of his election and
qualification until the election of directors next succeeding his election
and until his successor shall have been elected and shall have qualified, or
until his death, or until he shall have resigned or until December 31 of the
year in which he shall have reached seventy-two years of age, or until he
shall have been removed as hereinafter provided in these By-Laws, or as
otherwise provided by statute or the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may resign at
-----------
any time by giving written notice of his resignation to the Board or the
Chairman of the Board or the President or the Secretary. Any such
resignation shall take effect at the time specified therein or, if the time
when it shall become effective shall not be specified therein, immediately
upon its receipt; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
9
<PAGE>
Section 5. Removal of Directors. Any director of the Corporation may
--------------------
be removed by the stockholders by a vote of a majority of the votes entitled
to be cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether arising from
---------
death, resignation, removal, an increase in the number of directors or any
other cause, may be filled by a vote of the majority of the Board of
Directors then in office even though such majority is less than a quorum,
provided that no vacancies shall be filled by action of the remaining
directors, if after the filling of said vacancy or vacancies, less than
two-thirds of the directors then holding office shall have been elected by
the stockholders of the Corporation. In the event that at any time there is
a vacancy in any office of a director which vacancy may not be filled by the
remaining directors, a special meeting of the stockholders shall be held as
promptly as possible and in any event within sixty days, for the purpose of
filling said vacancy or vacancies.
Section 7. Place of Meetings. Meetings of the Board may be held at
-----------------
such place as the Board may from time to time determine or as shall be
specified in the notice of such meeting.
Section 8. Regular Meetings. Regular meetings of the Board may be held
----------------
without notice at such time and place as may be determined by the Board of
Directors.
10
<PAGE>
Section 9. Special Meetings. Special meetings of the Board may be
----------------
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 10. Telephone Meetings. Members of the Board of Directors or
------------------
of any committee thereof may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Subject
to the provisions of the Investment Company Act of 1940, as amended,
participation in a meeting by these means constitutes presence in person at
the meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting
--------------------------
of the Board shall be given by the Secretary as hereinafter provided, in
which notice shall be stated the time and place of the meeting. Notice of
each such meeting shall be delivered to each director, either personally or
by telephone or any standard form of telecommunication, at least twenty-four
hours before the time at which such meeting is to be held, or by first-class
mail, postage prepaid, addressed to him at his residence or usual place of
business, at least three days before the day on which such meeting is to be
held.
Section 12. Waiver of Notice of Meetings. Notice of any special
----------------------------
meeting need not be given to any director who shall, either before or after
the meeting, sign a written waiver of notice which is filed with the records
of the meeting or who
11
<PAGE>
shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver or notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, of
-----------------
the members of the entire Board shall be present in person at any meeting of
the Board in order to constitute a quorum for the transaction of business at
such meeting, and except as otherwise expressly required by statute, the
Articles of Incorporation, these By-Laws, the Investment Company Act of 1940,
as amended, or other applicable statute, the act of a majority of the
directors present at any meeting at which a quorum is present shall be the
act of the Board. In the absence of a quorum at any meeting of the Board, a
majority of the directors present thereat may adjourn such meeting to another
time and place until a quorum shall be present thereat. Notice of the time
and place of any such adjourned meeting shall be given to the directors who
were not present at the time of the adjournment and, unless such time and
place were announced at the meeting at which the adjournment was taken, to
the other directors. At any adjourned meeting at which a quorum is present,
any business may be transacted which might have been transacted at the
meeting as originally called.
Section 14. Organization. The Board may, by resolution adopted by a
------------
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In
12
<PAGE>
the absence or inability of the Chairman of the Board to preside at a
meeting, the President or, in his absence or inability to act, another
director chosen by a majority of the directors present, shall act as chairman
of the meeting and preside thereat. The Secretary (or, in his absence or
inability to act, any person appointed by the Chairman) shall act as
secretary of the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject
-------------------------------------------------
to the provisions of the Investment Company Act of 1940, as amended, any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writings or writing are filed with the minutes of the
proceedings of the Board or committee.
Section 16. Compensation. Directors may receive compensation for
------------
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the
Board.
Section 17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of
portfolio securities and the other investment practices of the Corporation
are at all times consistent with the investment policies and restrictions
with respect to securities investments and otherwise of the Corporation, as
13
<PAGE>
recited in the Prospectus of the Corporation included in the Registration
Statement of the Corporation, as recited in the current Prospectus and
Statement of Additional Information of the Corporation, as filed from time to
time with the Securities and Exchange Commission and as required by the
Investment Company Act of 1940, as amended. The Board however, may delegate
the duty of management of the assets and the administration of its day to day
operations to an individual or corporate management company and/or investment
adviser pursuant to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of renewals thereof,
of the Board of Directors and/or the stockholders of the Corporation in
accordance with the provisions of the Investment Company Act of 1940, as
amended.
ARTICLE IV
Committees
----------
Section 1. Executive Committee. The Board may, by resolution adopted
-------------------
by a majority of the entire board, designate an Executive Committee
consisting of two or more of the directors of the corporation, which
committee shall have and may exercise all the powers and authority of the
Board with respect to all matters other than:
14
<PAGE>
(a) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Articles of
Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the Investment
Company Act of 1940, as amended, or the taking of any other action required
to be taken by the Board of Directors by the Investment Company Act of 1940,
as amended;
(e) the amendment or repeal of these By-Laws or the adoption of new By-
Laws;
(f) the amendment or repeal of any resolution of the Board
which by its terms may be amended or repealed only by the Board;
(g) the declaration of dividends and the issuance of capital stock of
the Corporation; and
(h) the approval of any merger or share exchange which does not require
stockholder approval.
The Executive Committee shall keep written minutes of its proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
15
<PAGE>
Section 2. Other Committees of the Board. The Board of Directors may
-----------------------------
from time to time, by resolution adopted by a majority of the whole Board,
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the
Board of Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of the members
-------
of any committee shall be present in person at any meeting of such committee
in order to constitute a quorum for the transaction of business at such
meeting, and the act of a majority present shall be the act of such
committee. The Board may designate a chairman of any committee and such
chairman or any two members of any committee may fix the time and place of
its meetings unless the Board shall otherwise provide. In the absence or
disqualification of any member of any committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent
or disqualified member. The Board shall have the power at any time to change
the membership of any committee, to fill all vacancies, to designate
alternate members to replace any absent or disqualified member, or to
dissolve any such committee. Nothing herein shall be deemed to prevent the
Board from appointing one or more committees consisting in whole or in part
16
<PAGE>
of persons who are not directors of the Corporation; provided, however, that
no such committee shall have or may exercise any authority or power of the
Board in the management of the business or affairs of the Corporation.
ARTICLE V
Officers, Agents and Employees
------------------------------
Section 1. Number of Qualifications. The officers of the Corporation
------------------------
shall be a President, a Secretary and a Treasurer, each of whom shall be
elected by the Board of Directors. The Board of Directors may elect or
appoint one or more Vice Presidents and may also appoint such other officers,
agents and employees as it may deem necessary or proper. Any two or more
offices may be held by the same person, except the offices of President and
Vice President, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity. Such officers shall be elected by the
Board of Directors each year at a meeting of the Board of Directors, each to
hold office for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he shall have
resigned, or have been removed, as hereinafter provided in these By-Laws.
The Board may from time to time elect, or delegate to the President the power
to appoint, such officers (including one or more Assistant Vice Presidents,
one or more Assistant Treasurers and one or more Assistant Secretaries)
17
<PAGE>
and such agents, as may be necessary or desirable for the business of the
Corporation. Such officers and agents shall have such duties and shall hold
their offices for such terms as may be prescribed by the Board or by the
appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at
------------
any time by giving written notice of resignation to the Board, the Chairman
of the Board, President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall
be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent
-------------------------------------
or employee of the Corporation may be removed by the Board of Directors with
or without cause at any time, and the Board may delegate such power of
removal as to agents and employees not elected or appointed by the Board of
Directors. Such removal shall be without prejudice to such person's
contract rights, if any, but the appointment of any person as an officer,
agent or employee of the Corporation shall not of itself create contract
rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
---------
death, resignation, removal or any other cause, may be filled for the
unexpired portion of the term of the office
18
<PAGE>
which shall be vacant, in the manner prescribed in these By-Laws for the
regular election or appointment to such office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive
---------
officer of the Corporation. In the absence of the Chairman of the Board (or
if there be none), he shall preside at all meetings of the stockholders and
of the Board Directors. He shall have, subject to the control of the Board
of Directors, general charge of the business and affairs of the Corporation.
He may employ and discharge employees and agents of the Corporation, except
such as shall be appointed by the Board, and he may delegate these powers.
Section 8. Vice President. Each Vice President shall have such powers
--------------
and perform such duties as the Board of Directors or the President may from
time to time prescribe.
Section 9. Treasurer. The Treasurer shall
---------
19
<PAGE>
(a) have charge and custody of, and be responsible for, all the funds
and securities of the Corporation, except those which the Corporation has
placed in the custody of a bank or trust company or member of a national
securities exchange (as that term is defined in the Securities Exchange Act
of 1934, as amended) pursuant to a written agreement designating such bank or
trust company or member of a national securities exchange as custodian of the
property of the Corporation;
(b) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(c) cause all moneys and other valuables to be deposited to the credit
of the Corporation;
(d) receive, and give receipts for, moneys due and payable, to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment
of its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(f) in general, perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him
by the Board or the President.
Section 10. Secretary. The Secretary shall
---------
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;
20
<PAGE>
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept
and filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him
by the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any
--------------------
officer of the Corporation, or for any other reason that the Board may deem
sufficient, the Board may confer for the time being the powers or duties, or
any of them, of such officer upon any other officer or upon any director.
ARTICLE VI
Indemnification
---------------
Each officer and director of the Corporation shall be indemnified by the
Corporation to the full extent permitted under
21
<PAGE>
the Maryland General Corporation Law, except that such indemnity shall not
protect any such person against any liability to the Corporation or any
stockholder thereof to which such person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Corporation to indemnify such person must be
based upon the reasonable determination of independent legal counsel or the
vote of a majority of a quorum of the directors who are neither "interested
persons," as defined in Section 2(a)(19) of the Investment Company Act of
1940, as amended, nor parties to the proceeding ("non-party independent
directors"), after review of the facts, that such officer or director is not
guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the Maryland General Corporation Law
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without a preliminary determination as to his or her ultimate entitlement to
indemnification (except as set forth below); provided, however, that the
person seeking indemnification shall provide to the Corporation a written
affirmation of his good faith belief that the standard of conduct necessary
for indemnification by the Corporation has been met and a written undertaking
to repay any such advance, if it should ultimately be determined that the
standard of conduct has not been met, and provided further that at least one
of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Corporation for his undertaking; (b) the Corporation is insured against
losses arising by reason of the advance; (c) a majority of a quorum of
non-party independent directors, or independent legal counsel in a written
opinion, shall determine, based on a review of facts readily available to the
Corporation at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under the
General Laws of the State of Maryland, from liability arising from his
activities as officer or director of the Corporation. The Corporation,
however, may not purchase insurance on behalf of any officer or director of
the Corporation
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that protects or purports to protect such person from liability to the
Corporation or to its stockholders to which such officer or director would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of
his office.
The Corporation may indemnify, make advances or purchase insurance to
the extent provided in this Article VI on behalf of an employee or agent who
is not an officer or director of the Corporation.
ARTICLE VII
Capital Stock
-------------
Section 1. Stock Certificates. Each holder of stock of the Corporation
------------------
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation owned by him, provided, however, that certificates
for fractional shares will not be delivered in any case. The certificates
representing shares of stock shall be signed by or in the name of the
Corporation by the Chairman, President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer and sealed with the seal of the Corporation. Any or all of the
signatures or the seal on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile
signature
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has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate shall be issued, it may
be issued by the Corporation with the same effect as if such officer,
transfer agent or registrar were still in office at the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall
-------------------------------------------
be kept at the principal executive office of the Corporation correct and
complete books and records of account of all the business and transactions of
the Corporation. There shall be made available upon request of any
stockholder, in accordance with Maryland law, a record containing the number
of shares of stock issued during a specified period not to exceed twelve
months and the consideration received by the Corporation for each such share.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or certificates,
if issued, for such shares properly endorsed or accompanied by a duly
executed stock transfer power and the payment of all taxes thereon. Except
as otherwise provided by law, the Corporation shall be entitled to recognize
the exclusive right of a person in whose name any share or shares stand on
the record of
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stockholders as the owner of such share or shares for all purposes,
including, without limitation, the rights to receive dividends or other
distributions, and to vote as such owner, and the Corporation shall not be
bound to recognize any equitable or legal claim to or interest in any such
share or shares on the part of any other person.
Section 4. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer agents or one or more transfer
clerks and one or more registrars and may require all certificates for shares
of stock to bear the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of
-----------------------------------------
any certificates representing shares of stock of the Corporation shall
immediately notify the Corporation of any loss, destruction or mutilation of
such certificate, and the Corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it which the owner thereof
shall allege to have been lost or destroyed or which shall have been
mutilated, and the Board may, in its discretion, require such owner or his
legal representatives to give to the Corporation a bond in such sum, limited
or unlimited, and in such
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form and with such surety or sureties, as the Board in its absolute
discretion shall determine, to indemnify the Corporation against any claim
that may be made against it on account of the alleged loss or destruction of
any such certificate, or issuance of a new certificate. Anything herein to
the contrary notwithstanding, the Board, in its absolute discretion, may
refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions.
-------------------------------------------------------
The Board may fix, in advance, a date not more than ninety days preceding the
date fixed for the payment of any dividend or the making of any distribution
or the allotment of rights to subscribe for securities of the Corporation, or
for the delivery of evidences of rights or evidences of interests arising out
of any change, conversion or exchange of common stock or other securities, as
the record date for the determination of the stockholders entitled to receive
any such dividend, distribution, allotment, rights or interests, and in such
case only the stockholders of record at the time so fixed shall be entitled
to receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of
--------------------------------------
the Corporation or his agent may inspect and copy during usual business hours
the Corporation's By-Laws, minutes of the proceedings of its stockholders,
annual statements of its
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affairs, and voting trust agreements on file at its principal office.
ARTICLE VIII
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal" and "Maryland." Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner
reproduced.
ARTICLE IX
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the ___ day of _____________.
ARTICLE X
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be
------------
deposited with such banks or other depositories as the Board of Directors of
the Corporation may from time to time determine.
Section 2. Custodians. All securities and other investments shall be
----------
deposited in the safe keeping of such banks or other companies as the Board
of Directors of the Corporation
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may from time to time determine. Every arrangement entered into with any
bank or other company for the safe keeping of the securities and investments
of the Corporation shall contain provisions complying with the Investment
Company Act of 1940, as amended, and the general rules and regulations
thereunder.
ARTICLE XI
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
--------------------------
acceptances, bills of exchange and other orders or obligations for the
payment of money shall be signed by such officer or officers or person or
persons as the Board of Directors by resolution shall from time to time
designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds
------------------------------
or other securities at any time owned by the Corporation may be held on
behalf of the Corporation or sold, transferred or otherwise disposed of
subject to any limits imposed by these By-Laws and pursuant to authorization
by the Board and, when so authorized to be held on behalf of the Corporation
or sold, transferred or otherwise disposed of, may be transferred from the
name of the Corporation by the signature of the President or a Vice President
or the Treasurer or pursuant to any procedure approved by the Board of
Directors, subject to applicable law.
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ARTICLE XII
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the
Securities and Exchange Commission shall be selected annually by the Board of
Directors and, if required by the provisions of the Investment Company Act of
1940, as amended, ratified by the stockholders.
ARTICLE XIII
Annual Statement
----------------
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of
the Corporation and at such other times as may be directed by the Board. A
report to the stockholders based upon each such examination shall be mailed
to each stockholder of the Corporation of record on such date with respect to
each report as may be determined by the Board, at his address as the same
appears on the books of the Corporation. Such annual statement shall also be
available at the annual meeting of stockholders, if any, and, within 20 days
after the meeting (or, in the absence of an annual meeting, within 20 days
after the end of the month of October following the end of the fiscal year),
be placed on file at the Corporation's principal office. Each such
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report shall show the assets and liabilities of the Corporation as of the
close of the annual or quarterly period covered by the report and the
securities in which the funds of the Corporation were then invested. Such
report shall also show the Corporation's income and expenses for the period
from the end of the Corporation's preceding fiscal year to the close of the
annual or quarterly period covered by the report and any other information
required by the Investment Company Act of 1940, as amended, and shall set
forth such other matters as the Board or such firm of independent public
accountants shall determine.
ARTICLE XIV
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by the
Board of Directors. The stockholders shall have no power to make, amend,
alter or repeal By-Laws.
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