<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1995
SECURITIES ACT FILE NO. 33-53399
INVESTMENT COMPANY ACT FILE NO. 811-07171
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 2 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 4 [X]
(Check appropriate box or boxes)
----------------
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
----------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ. PRINCETON, NEW JERSEY 08543-9011
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON AUGUST 22, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page............... Cover Page
Item 2. Synopsis................. Prospectus Summary; Fee Table; Merrill
Lynch Select Pricing SM System
Item 3. Condensed Financial
Information............. Financial Highlights
Item 4. General Description of
Registrant.............. Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund... Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance..... Not Applicable
Item 6. Capital Stock and Other
Securities.............. Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered........... Cover Page; Fee Table; Merrill Lynch
Select Pricing SM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase. Fee Table; Merrill Lynch Select
Pricing SM System; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal
Proceedings............. Not Applicable
PART B
Item 10. Cover Page............... Cover Page
Item 11. Table of Contents........ Back Cover Page
Item 12. General Information and
History................. Not Applicable
Item 13. Investment Objective and
Policies................ Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund... Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities.............. Management of the Fund; Additional
Information
Item 16. Investment Advisory and
Other Services.......... Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices......... Portfolio Transactions
Item 18. Capital Stock and Other
Securities.............. General Information--Description of
Shares
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered........... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status............... Distributions and Taxes
Item 21. Underwriters............. Purchase of Shares
Item 22. Calculation of
Performance Data........ Performance Data
Item 23. Financial Statements..... Statement of Assets and Liabilities
(audited); Financial Statements
(unaudited)
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
OCTOBER 25, 1995
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified,
open-end management investment company seeking long-term growth of capital by
investing primarily in a portfolio of equity securities of issuers with
relatively small market capitalizations ("SmallCap Issuers") located in
various foreign countries and in the United States. Under normal market
conditions, the Fund expects to invest at least 66% of its total assets in
equity securities of SmallCap Issuers. While the Fund expects to invest
primarily in equity securities of SmallCap Issuers, the Fund reserves the
right to invest up to 34% of its total assets, under normal market conditions,
in equity securities of issuers having larger individual market
capitalizations and in debt securities. It is anticipated that a substantial
portion of the Fund's total assets will be invested in the developed countries
of Europe and the Far East and that a significant portion of its total assets
also may be invested in developing countries. The Fund may employ a variety of
investments and techniques to hedge against market and currency risk. There
can be no assurance that the Fund's investment objective will be achieved.
Investments on an international basis in foreign securities markets involve
certain risk factors, as do investments in SmallCap Issuers. See "Risk Factors
and Special Considerations" on page 11, herein. For more information on the
Fund's investment objective and policies, please see "Investment Objective and
Policies" on page 16.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. As a
result of the implementation of the Merrill Lynch Select Pricing SM System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares offered by this Prospectus
differ from the Class A shares offered prior to October 21, 1994, in many
respects, including sales charges, exchange privilege and the classes of
persons to whom such shares are offered. See "Merrill Lynch Select Pricing SM
System" on page 6.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000,
and the minimum subsequent purchase is $50, except that for retirement plans
where the minimum initial purchase is $100, and the minimum subsequent
purchase is $1. Merrill Lynch may charge its customers a processing fee
(presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated October 25, 1995 (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>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments............................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............ None(d) 4.0% during the first 1% for one year None(d)
year, decreasing 1.0%
annually thereafter to
0.0% after the
fourth year
Exchange Fee.............................. None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)(e):
Management Fees(f)........................ 0.85% 0.85% 0.85% 0.85%
12b-1 Fees(g):
Account Maintenance Fees.................. None 0.25% 0.25% 0.25%
Distribution Fees......................... None 0.75% 0.75% None
(Class B shares convert
to
Class D shares
automatically
after approximately
eight years
and cease being subject
to distribution fees)
Other Expenses:
Custodial Fees............................ 0.10% 0.10% 0.10% 0.10%
Shareholder Servicing Costs(h)............ 0.21% 0.25% 0.25% 0.21%
Other..................................... 0.36% 0.36% 0.36% 0.36%
----- ----- ----- -----
Total Other Expenses..................... 0.67% 0.71% 0.71% 0.67%
----- ----- ----- -----
Total Fund Operating Expenses............. 1.52% 2.56% 2.56% 1.77%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and investment programs. The Class A shares offered by
this Prospectus differ from the Class A shares offered prior to October
21, 1994. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares"--page 31.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 34.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A or Class D purchases of $1,000,000 or more
may not be subject to an initial sales charge. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares"--page 31.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
may not be subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year of purchase.
(e) Information under "Other Expenses" for all classes of shares is estimated
for the fiscal year ending June 30, 1996.
(f) See "Management of the Fund--Management and Advisory Arrangements"--page
27.
(g) See "Purchase of Shares--Distribution Plans"--page 37.
(h) See "Management of the Fund--Transfer Agency Services"--page 29.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
----------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a
$1,000 investment
including the maximum
$52.50 initial sales
charge (Class A and Class
D shares only) and
assuming (1) the Total
Fund Operating Expenses
for each class set forth
above, (2) a 5% annual
return throughout the
periods and (3)
redemption at the end of
the period:
Class A................. $67 $ 98 $131 $224
Class B................. $66 $100 $136 $271*
Class C................. $36 $ 80 $136 $290
Class D................. $70 $105 $143 $250
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
Class A................. $67 $ 98 $131 $224
Class B................. $26 $ 80 $136 $271*
Class C................. $26 $ 80 $136 $290
Class D................. $70 $105 $143 $250
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
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 and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD"). Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information.
THE FUND
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified, open-
end management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of capital
by investing primarily in a portfolio of equity securities of issuers with
relatively small market capitalizations ("SmallCap Issuers") located in various
foreign countries and in the United States. Under normal market conditions, the
Fund expects to invest at least 66% of its total assets in equity securities of
SmallCap Issuers. The Fund applies U.S. size standards in determining SmallCap
Issuers, and based on recent U.S. share prices, the Fund presently considers
SmallCap Issuers to be issuers with individual market capitalizations of no
greater than $1 billion. However, the Fund presently anticipates that it will
invest primarily in SmallCap Issuers having market capitalizations of $750
million or less (determined at the time of purchase). Under normal market
conditions, the Fund also may invest up to 34% of its total assets in equity
securities of issuers with individual market capitalizations of greater than
U.S.$1 billion ("LargeCap Issuers") and in debt securities. The Fund may invest
up to 100% of its assets in such securities for temporary defensive purposes.
It is anticipated that a substantial portion of the Fund's total assets will
be invested in the developed countries of Europe and the Far East and that a
significant portion of its total assets also may be invested in developing
countries. While investments in markets of developing countries are subject to
considerable risks (see "Risk Factors and Special Considerations"), the Fund
believes that recent developments, including liberalization of government
policies, development of labor-intensive, export-oriented industries and rapid
growth of securities markets, in such developing countries could present
attractive investment opportunities.
The Fund is authorized to employ a variety of investment techniques to hedge
against market and currency risks. However, the Fund may not necessarily be
engaging in hedging activities when market or currency movements occur. See
"Investment Objective and Policies".
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investments in securities of SmallCap Issuers involve special considerations
and risks not typically associated with investments in securities of LargeCap
Issuers, including risks associated with limited product lines, markets or
financial and management resources; risks associated with lesser frequency and
volume of trading of stocks of SmallCap Issuers as compared to LargeCap Issuers
and the greater effect of abrupt or erratic price movements on SmallCap
Issuers; and risks associated with the sensitivity of SmallCap Issuers to
market changes.
4
<PAGE>
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".
THE MANAGER
Merrill Lynch Asset Management, L.P. (the "Manager"or "MLAM") acts as a
manager for the Fund and provides the Fund with management services. Merrill
Lynch Asset Management U.K. Limited ("MLAM U.K."), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co.") and an affiliate of the
Manager, acts as the sub-adviser for the Fund and provides investment advisory
services to the Manager with respect to the Fund. The Manager or its affiliate,
Fund Asset Management, L.P. ("FAM"), acts as the investment adviser for over
125 other registered investment companies. The Manager and FAM also offer
portfolio management and portfolio analysis services to individuals and
institutions. As of September 30, 1995, the Manager and FAM had a total of
approximately $189.4 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 at a price equal to the next determined
net asset value per share subject to the sales charges and ongoing fee
arrangements described below. See "Merrill Lynch Select PricingSM System" and
"Purchase of Shares".
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute 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
15 minutes after the close of business on the New York Stock Exchange
(generally 4:00 p.m., New York time), on each day during which the New York
Stock Exchange is open for trading. See "Additional Information--Determination
of Net Asset Value".
5
<PAGE>
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select PricingSM System is used by more than 50
mutual funds advised by MLAM or FAM, an affiliate of MLAM. Funds advised by
MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on the Class D shares, are imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares will be calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select PricingSM System, followed
by a more detailed description of each class and a discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select PricingSM System that the investor believes is
most beneficial under his particular circumstances. More detailed information
as to each class of shares is set forth under "Purchase of Shares".
6
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% eight years(/4/)
- ------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Certain Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead will be subject to a 1.0% CDSC for one year. See "Class A" and
"Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Eligible investors include certain retirement plans
and participants in certain investment programs. In addition, Class A
shares will be offered to ML & Co. and its subsidiaries (the term
"subsidiaries", when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly wholly-
owned and controlled by ML & Co.) and their directors and employees
and to members of the Boards of MLAM-advised mutual funds. The
maximum initial sales charge is 5.25%, which is reduced for purchases
of $25,000 and over and waived for purchases by certain retirement
plans in connection with certain investment programs. Certain
purchases of $1,000,000 or more may not be subject to an initial
sales charge but if the initial sales charge is waived, such
purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Sales charges also are
reduced under a right of accumulation which takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's
7
<PAGE>
average net assets attributable to Class B shares and a CDSC if they
are redeemed within four years of purchase. Approximately eight years
after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee but
no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once each month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also will
convert automatically to Class D shares. The conversion period for
dividend reinvestment shares, and the conversion and holding periods
for certain retirement plans, are modified as described under "Purchase
of Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D
8
<PAGE>
shares because there is an account maintenance fee imposed on Class D shares.
Investors qualifying for significantly reduced initial sales charges may find
the initial sales charge alternative particularly attractive because similar
sales charge reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Class A, Class B, Class C and Class D share holdings will
count toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges".
9
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audit of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the fiscal period August 5, 1994 (commencement of
operations) to June 30, 1995, are included in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or by writing the Fund at the telephone number or
address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D(/1/)
----------------- ---------------- ----------------- ----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
OCTOBER 21, 1994+ AUGUST 5, 1994+ OCTOBER 21, 1994+ AUGUST 5, 1994+
TO JUNE 30, 1995 TO JUNE 30, 1995 TO JUNE 30, 1995 TO JUNE 30, 1995
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 9.82 $ 10.00 $ 9.80 $ 10.00
------- -------- ------ -------
Investment income--net. .04 .01 .01 .08
Realized and unrealized
loss on investments
and foreign currency
transactions--net..... (.93) (1.16) (.96) (1.16)
------- -------- ------ -------
Total from investment
operations............. (.89) (1.15) (.95) (1.08)
------- -------- ------ -------
Less distributions in
excess of realized gain
on investments--net.... (.01) (.01) (.01) (.01)
------- -------- ------ -------
Net asset value, end of
period................. $ 8.92 $ 8.84 $ 8.84 $ 8.91
======= ======== ====== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. (9.11)%# (11.55)%# (9.75)%# (10.85)%#
======= ======== ====== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance and
distribution fees...... 1.62%* 1.56%* 1.66%* 1.52%*
======= ======== ====== =======
Expenses................ 1.62%* 2.56%* 2.66%* 1.77%*
======= ======== ====== =======
Investment income--net.. 1.06%* .10%* .20%* .90%*
======= ======== ====== =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $ 5,992 $132,296 $4,924 $23,928
======= ======== ====== =======
Portfolio turnover...... 47.96% 47.96% 47.96% 47.96%
======= ======== ====== =======
</TABLE>
- --------
+ Commencement of Operations.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
(1) Includes Class D shares sold after October 21, 1994 and the Fund's
outstanding Class A shares which were redesignated Class D shares on
October 21, 1994.
10
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in SmallCap Issuers. Under normal market conditions, the Fund
expects to invest at least 66% of its assets in equity securities of SmallCap
Issuers. Based on recent U.S. share prices, the Fund considers SmallCap Issuers
to be issuers with individual market capitalizations of no greater than $1
billion (determined at the time of purchase). While the SmallCap Issuers in
which the Fund will primarily invest may offer greater opportunities for
capital appreciation than LargeCap Issuers, investments in smaller companies
may involve greater risks and thus may be considered speculative. For example,
small companies may have limited product lines, markets or financial resources,
or they may be dependent on a limited management group. Full development of
these companies takes time and, for this reason, the Fund should be considered
as a long-term investment and not as a vehicle for seeking short-term profits,
nor should an investment in the Fund be considered a complete investment
program. In addition, many small company stocks trade less frequently and in
smaller volume, and may be subject to more abrupt or erratic price movements,
than stocks of large companies. The securities of small companies may also be
more sensitive to market changes than the securities of large companies. These
factors may result in above-average fluctuations in the net asset value of the
Fund's shares. The Fund is not an appropriate investment for individual
investors requiring safety of principal or a predictable return of income from
their investment.
International Investing. Investments on an international basis involve
certain risks not involved in domestic investment, including fluctuations in
foreign exchange rates, future political and economic developments, different
legal systems and the existence or possible imposition of exchange controls or
other foreign or U.S. governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial, political and social factors. Because the Fund will invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets.
These forces are, in turn, affected by international balance of payments and
other economic and financial conditions, government intervention, speculation
and other factors. With respect to certain countries, there may be the
possibility of expropriation of assets, confiscatory taxation, high rates of
inflation, political or social instability or diplomatic developments which
could affect investment in those countries. In addition, certain foreign
investments may be subject to foreign withholding taxes. As a result,
management of the Fund may determine that, notwithstanding otherwise favorable
investment criteria, it may not be practicable or appropriate to invest in a
particular country.
It is anticipated that a substantial portion of the securities held by the
Fund will not be registered with the Securities and Exchange Commission (the
"Commission"), nor will the issuers thereof be subject to the reporting
requirements of such agency. In that regard, there may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which U.S.
companies are subject. Moreover, because the Fund emphasizes the stocks of
issuers with smaller market capitalizations (by U.S. standards), the Fund can
be expected to have more difficulty obtaining information about the issuers or
valuing or disposing of its securities than it would if it were to concentrate
on more widely held stocks.
11
<PAGE>
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 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 and 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
12
<PAGE>
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 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% (10% to the extent required by
certain state laws) 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 of 1940, as amended (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)
13
<PAGE>
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; No Rating Criteria for Debt Securities. While
the Fund intends to invest primarily in equity securities, the Fund reserves
the right to invest up to 34% of its total assets, under normal market
conditions, in debt securities, including high yield/high risk securities (as
defined below), foreign sovereign debt obligations, debt obligations of the
U.S. government or its political subdivisions ("U.S. Government Obligations")
and short-term securities such as money market securities or commercial paper.
The Fund has established no rating criteria for the debt securities in which it
may invest, and such securities may not be rated at all for creditworthiness.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of
comparable quality ("high yield/high risk securities") are predominately
speculative with respect to the capacity to pay interest and to repay principal
in accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. These
securities are commonly referred to as "junk" bonds. The Fund is not authorized
to purchase debt securities that are in default, except for sovereign debt
obligations, and may invest no more than 5% of its total assets in sovereign
debt obligations which are in default. Certain of the sovereign debt
obligations in which the Fund may invest may involve great risk and are deemed
to be the equivalent in terms of quality to high yield/high risk securities.
The Fund may have difficulty disposing of certain sovereign debt obligations
because there may be no liquid secondary trading market for such securities.
The Fund may invest up to 5% of its total assets in sovereign debt obligations
that are in default. Whenever, in the judgment of the Manager, market or
economic conditions warrant, the Fund may invest, for temporary defensive
purposes, up to 100% of the Fund's total assets in the debt securities
discussed above. See "Investment Objective and Policies--Characteristics of
Certain Debt Securities".
Derivative Investments. In order to seek to hedge various portfolio
positions, including to hedge against price movements in markets in which the
Fund anticipates increasing its exposure, the Fund may invest in certain
instruments which may be characterized as derivative investments. These
investments include various types of interest rate transactions, options and
futures. Such investments also may consist of indexed securities, including
inverse securities. The Fund has express limitations on the percentage of its
assets that may be committed to certain of such investments. Other of such
investments have no express quantitative limitations, although they may be made
solely for hedging purposes, not for speculation, and may in some cases require
limitations as to the type of permissible counter-party to the transaction.
Interest rate transactions involve the risk of an imperfect correlation between
the index used in the hedging transactions and that pertaining to the
securities which are the subject of such transactions. Similarly, utilization
of options and futures transactions involves the risk of imperfect correlation
in movements in the price of options and futures and movements in the price of
the securities or interest rates which are the subject of the hedge.
Investments in indexed securities, including inverse securities, subject the
Fund to the risks associated with changes in the particular indices, which may
include reduced or eliminated interest payments and losses of invested
principal. For a further discussion of these investments and their attendant
risks, see "Investment Objective and Policies--Description of Certain
Investments--Indexed and Inverse Securities", "Other Investment Policies and
Practices--Portfolio Strategies Involving Options, Futures and Forward Foreign
Exchange Transactions" and "Appendix A--Options, Futures and Forward Foreign
Exchange Transactions". Management of the Fund believes the above investments
are appropriate for the Fund.
14
<PAGE>
Borrowing. The Fund may borrow up to 33 1/3% of its total assets, taken at
market value, but only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed 5%
of its total assets, except (a) to honor prior commitments or (b) to exercise
subscription rights when outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging increases the Fund's exposure to capital risk, and borrowed
funds are subject to interest costs which will reduce net income.
Fees and Expenses. The management fee (at the annual rate of 0.85% of the
Fund's average daily net assets) and other operating expenses of the Fund may
be higher than the management fees and operating expenses of other mutual funds
managed by the Manager and other investment advisers or of investment companies
investing exclusively in the U.S. securities market.
Other Special Considerations. The Fund may invest up to 15% of its net assets
in illiquid investments which includes securities for which there is no readily
available market. (However, under the law of certain states, the Fund presently
is limited with respect to such investments to 10% of its net assets.)
15
<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
66% of the Fund's total assets will be invested in equity securities of
SmallCap Issuers. The Fund applies U.S. size standards in determining SmallCap
Issuers, and based on recent U.S. share prices, the Fund presently considers
SmallCap Issuers to be issuers with individual market capitalizations of no
greater than $1 billion. However, the Fund presently intends to invest
primarily in SmallCap Issuers with capitalizations of $750 million or less. The
Fund does not generally expect to invest in SmallCap Issuers whose market
capitalizations are less than $50 million. Because the Fund is permitted to
apply the U.S. size standard on a global basis, it may invest in issuers that
might in some countries rank among the largest companies in terms of
capitalization. While the Fund expects to invest primarily in equity securities
of SmallCap Issuers, the Fund may invest up to 34% of its total assets, under
normal market conditions, in equity securities of companies with individual
market capitalizations of greater than U.S.$1 billion ("LargeCap Issuers") and
in debt securities. For purposes of the above, market capitalizations are
determined at the time of purchase. 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,
rights to subscribe for common stock and other securities the return on which
is determined by the performance of a common stock or a basket or index of
common stocks. The Manager believes that the equity securities of specific
SmallCap Issuers may present different opportunities for long-term capital
appreciation during varying portions of economic or securities markets cycles,
as well as during varying stages of their business development. The market
valuation of SmallCap Issuers tends to fluctuate during economic or market
cycles, presenting attractive investment opportunities at various points during
these cycles. However, investments in SmallCap Issuers may involve greater
risks. See "Risk Factors and Special Considerations". The Fund may invest in
securities of SmallCap Issuers in the relatively early stages of business
development which have a new technology, a unique or proprietary product or
service, or a favorable market position; in securities of relatively more
developed companies that the Manager believes will experience above-average
earnings growth or will receive greater market recognition; and, in securities
of mature companies that the Manager believes to be relatively undervalued in
the marketplace. The Fund's investment policy is further based on the belief
that investment opportunities change rapidly, not only from company to company
and from industry to industry, but also from one national economy to another.
Accordingly, the Fund will invest in a global portfolio of equity securities of
SmallCap Issuers located throughout the world. However, investments in foreign
markets may involve greater risks. See "Risk Factors and Special
Considerations".
Under certain adverse investment conditions, the Fund may restrict the
markets in which its assets will be invested and may increase the proportion of
assets invested in equity securities of LargeCap Issuers and in debt
securities. Investments made for defensive purposes will be maintained only
during periods in which the Manager determines that economic or financial
conditions are adverse for holding or being invested to a greater degree in
equity securities of SmallCap Issuers. The Fund, however, will make such
temporary
16
<PAGE>
defensive investments only to the extent management of the Fund believes
temporary defensive investments present less risk than the types of investments
in which the Fund normally invests.
Under normal conditions, at least 66% of the Fund's total assets will be
invested in the securities of issuers from at least three different countries.
While there are no prescribed limits on the geographic allocation of the Fund's
investments, management of the Fund anticipates that a substantial portion of
its assets will be invested in the developed countries of Europe and the Far
East. However, for the reasons stated below, management of the Fund will give
special attention to investment opportunities in the developing countries of
the world, including, but not limited to, Eastern Europe, Latin America and the
Far East. It is presently anticipated that a significant portion of the Fund's
assets may be invested in such developing countries.
For purposes of the Fund's investment policies, an issuer ordinarily will be
considered to be located in the country under the laws of which it is organized
or where the primary trading market of its securities is located. The Fund,
however, may consider a company to be located in a country, without reference
to its domicile or to the primary trading market of its securities, when at
least 50% of its non-current assets, capitalization, gross revenues or profits
in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider closed-end investment companies to be located in the
country or countries in which they primarily make their portfolio investments.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Manager based primarily on an assessment of
the relative condition and growth potential of the various economies and
securities markets, currency and taxation considerations and other pertinent
financial, social, national and political factors. Within such allocations, the
Manager will seek to identify equity investments in each market which are
expected to provide a total return which equals or exceeds the return of such
market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such
countries. Certain such countries, particularly so-called "emerging" countries,
developing more market-oriented economies may experience relatively high rates
of economic growth.
In accordance with the foregoing, the Fund may purchase securities issued by
United States or foreign corporations or financial institutions. The Fund also
may purchase securities issued or guaranteed by United States or foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities") or issued or
guaranteed by international organizations designated or supported by multiple
governmental entities to promote economic reconstruction or development
("supranational entities").
As a result of its global investment focus, the Fund may invest in securities
denominated in any currency or multinational currency unit. An illustration of
a multinational currency unit is the European Currency Unit ("ECU") which is a
"basket" consisting of specified amounts of the currencies of certain of the
twelve
17
<PAGE>
member states of the European Community, a Western European economic
cooperative association including France, Germany, the Netherlands and the
United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Manager does not
believe that such adjustments will adversely affect holders of ECU-denominated
obligations or the marketability of such securities. European supranational
entities (described further below), in particular, issue ECU-denominated
obligations. The Fund may invest in securities denominated in the currency of
one nation although issued by a governmental entity, corporation or financial
institution of another nation. For example, the Fund may invest in a British
pound sterling-denominated security issued by a United States corporation. Such
investments involve risks associated with the issuer and currency risks
associated with the currency in which the obligation is denominated.
While the Fund intends to invest primarily in equity securities of domestic
and foreign SmallCap Issuers, the Fund also may invest up to 34% of its total
assets in debt securities, including high yield/high risk securities, foreign
sovereign debt obligations, U.S. Government Obligations and short-term
securities including money market securities or commercial paper. The Fund has
established no rating criteria for the debt securities in which it may invest,
and such securities may not be rated at all for creditworthiness. See
"Characteristics of Certain Debt Securities" below.
The Fund may invest in the securities of foreign issuers in the form of
Depositary Receipts or other securities convertible into securities of foreign
issuers. The Depositary Receipts may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world. The Fund may invest in unsponsored
Depositary Receipts. The issuers of unsponsored Depositary Receipts are not
obligated to disclose material information in the United States, and therefore,
there may not be a correlation between such information and the market value of
such securities.
DESCRIPTION OF CERTAIN INVESTMENTS
Illiquid Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933, as amended (the
"Securities Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under that Act. However, the Fund will not invest more
than 15% of its net assets in securities subject to contractual restrictions on
resale, or otherwise restricted securities, unless the Fund's Board of
Directors determines, based on the trading markets for the specific restricted
security, that it is liquid. (However, under the law of certain states, the
Fund presently is limited with respect to such investments to 10% of its net
assets.) The Board of Directors has determined to treat as liquid Rule 144A
securities which are freely tradeable in their primary markets offshore. The
Board of Directors may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of restricted securities. The
Board of Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
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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 debt security
that pays interest or returns principal based on the change in an equity index,
an index of interest rates or an index based on the value of one or more
precious or industrial metals. Interest or 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 or principal when a particular
index decreases and pay a lower rate of interest or principal when the value of
the index increases. To the extent that the Fund invests in such types of
securities, it will be subject to the risks associated with changes in the
particular indices, which may include reduced or eliminated interest payments
and losses of invested principal. Examples of such types of securities are
indexed or inverse securities issued with respect to a stock market index in a
particular foreign country.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities.
Management of the Fund believes that indexed securities, including inverse
securities, represent flexible portfolio management instruments that may allow
the Fund to hedge other portfolio positions, including serving as an
anticipatory hedge in markets in which the Fund is seeking a higher degree of
exposure, or vary the degree of portfolio leverage relatively efficiently under
certain 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 Ratings Group ("S&P") and Moody's Investors Service,
Inc. ("Moody's") and unrated securities of comparable quality (referred to
herein as "high yield/high risk securities") are 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" for additional information regarding ratings of debt
securities. 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.
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The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield/high risk
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers
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
20
<PAGE>
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. In the event of a default by the issuer of a sovereign
debt obligation, the Fund may have few or no effective legal remedies for
collecting on such debt.
Certain of the sovereign debt obligations in which the Fund may invest
involve great risk and are deemed to be the equivalent in terms of quality to
high yield/high risk securities discussed above and are subject to many of the
same risks as such securities. Similarly, the Fund may have difficulty
disposing of such sovereign debt obligations because there may be a thin
trading market for such securities. The Fund will not invest more than 5% of
its total assets in sovereign debt obligations which are in default.
Supranational Entities. The Fund also may invest in debt securities of
supranational entities. These entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and
related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The government members, or "stockholders", usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
United States Government Obligations. United States Government Obligations in
which the Fund may invest include: (i) U.S. Treasury obligations (bills, notes
and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the United
States; and (ii) obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, including government guaranteed mortgage-related or
asset-backed securities, some of which are backed by the full faith and credit
of the U.S. Treasury (e.g., direct pass-through certificates of the Government
National Mortgage Association), some of which are supported by the right of the
issuer to borrow from the U.S. Government (e.g., obligations of Federal Home
Loan Banks) and some of which are backed only by the credit of the issuer
itself (e.g., obligations of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the holder
of an individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, a mortgage-related security is often
subject to more rapid prepayment of principal than its stated maturity would
indicate. Because the prepayment
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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 (including
anticipatory hedging) purposes, the options, futures and currency portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options, futures and currency
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of
Fund shares will fluctuate. Reference is made to the Appendix to this
Prospectus and to the Statement of Additional Information for further
information concerning these strategies.
There can be no assurance that the Fund's hedging transactions will be
effective. Suitable hedging instruments may not be available with respect to
securities of developing countries on a timely basis and on acceptable terms.
Furthermore, the Fund may only engage in hedging activities from time to time
and may not necessarily engage in hedging transactions when movements in the
equity, debt or currency markets occur.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Risk Factors and Special Considerations". In executing
portfolio transactions, the Manager seeks to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. The Fund may invest in certain securities
traded in the OTC market and, where possible, will deal directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve either
brokerage
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<PAGE>
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 NASD, the Fund may consider
sales of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Fund. It is expected that the
majority of the shares of the Fund will be sold by Merrill Lynch. Costs
associated with transactions in foreign securities are generally higher than in
the U.S., although the Fund will endeavor to achieve the best net results in
effecting its portfolio transactions.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined
in the Investment Company Act. During the period of such a loan, the Fund
typically receives the income on both the loaned securities and the collateral
and thereby increases its yield. In certain circumstances, the Fund may receive
a flat fee. Such loans are terminable at any time, and the borrower, after
notice, will be required to return borrowed securities within five business
days. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Portfolio Turnover. The Manager will effect portfolio transactions without
regard to holding period, if, in its judgment, such transactions are advisable
in light of a change in circumstance in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 100%
under normal conditions, it is impossible to predict portfolio turnover rates.
The portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. A high portfolio turnover rate involves certain tax consequences and
correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions, which are borne directly by the Fund.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
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connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of its commitments in
connection with such purchase transactions.
There can be no assurance that the securities purchased on a when-issued
basis or purchased or sold for delayed delivery will be issued, and the value
of the security, if issued, on the delivery date may be more or less than its
purchase price. The Fund may bear the risk of a decline in the value of such
security and may not benefit from an appreciation in the value of the security
during the commitment period.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the agreement
the Fund is paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.50% of the aggregate
purchase price of the security which the Fund has committed to purchase. The
Fund will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price which is considered
advantageous to the Fund. The Fund will not enter into a standby commitment
with a remaining term in excess of 45 days and presently will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its assets taken at the time of
acquisition of such a commitment. The Fund will at all times maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying a commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This insulates
the Fund from fluctuations in the market value of the underlying security
during such period, although, to the extent the repurchase agreement is not
denominated in U.S.
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<PAGE>
dollars, the Fund's return may be affected by currency fluctuations. Repurchase
agreements may be entered into only with a member bank of the Federal Reserve
System, a primary dealer in U.S. government securities or an affiliate thereof.
A purchase and sale contract is similar to a repurchase agreement, but purchase
and sale contracts, unlike repurchase agreements, allocate interest on the
underlying security to the purchaser during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when
investing in repurchase agreements or purchase and sale contracts.
Nevertheless, if the seller were to default on its obligation to repurchase a
security under a repurchase agreement or purchase and sale contract and the
market value of the underlying security at such time was less than the Fund had
paid to the seller, the Fund would realize a loss. The Fund may not invest more
than 15% (10% to the extent required by certain state laws) of its net assets
in repurchase agreements or purchase and sale contracts maturing in more than
seven days, together with all other illiquid securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies which are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not (i)
invest more than 25% of its total assets, taken at market value at the time of
each investment, in the securities of issuers of any particular industry
(excluding the U.S. Government and its agencies or instrumentalities); (ii)
with respect to 75% of its total assets, invest in the securities of any one
issuer if, immediately after and as a result of such investment, the value of
the holdings of the Fund in the securities of such issuer exceeds 5% of the
Fund's total assets, taken at market value; and (iii) with respect to 75% of
its total assets, invest in the securities of any one issuer if, immediately
after and as a result of such investment, the Fund owns more than 10% of the
outstanding voting securities of such issuer. As a non-fundamental policy, the
Fund will, for purposes of the 25%, 5% and 10% restrictions set forth above and
to the extent required by the Commission, consider securities issued or
guaranteed by the government of any one foreign country as the obligations of a
single issuer. Other fundamental policies include policies which restrict the
issuance of senior securities and limit borrowings, except that the Fund may
borrow from banks in amounts of up to 33 1/3% of its assets for temporary
purposes such as to meet redemption requests or settle investment transactions
or for extraordinary or emergency purposes. The Fund will not purchase
securities while borrowings exceed 5% of its total assets, except (a) to honor
prior commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained exclusively for settlements for other securities
transactions. The purchase of securities while borrowings are outstanding will
have the effect of leveraging the Fund. Such leveraging or borrowing increases
the Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income.
As another non-fundamental policy, the Fund will not invest in securities
which are (a) subject to material legal restrictions on repatriation of assets
or (b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its net assets, taken at market value would
be invested in such securities.
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Nothing in the foregoing investment restrictions shall be deemed to prohibit
the Fund from purchasing the securities of any issuer pursuant to the exercise
of subscription rights distributed to the Fund by the issuer, except that no
such purchase may be made if as a result the Fund will no longer be a
diversified investment company as defined in the Investment Company Act or fail
to meet the diversification requirements of the Internal Revenue Code of 1986,
as amended (the "Code").
While the Fund may not purchase illiquid securities in an amount exceeding
15% of its net assets (or 10%, to the extent presently required by certain
state laws), the Fund may purchase without regard to that limitation securities
that are not registered under the Securities Act, but that can be offered and
sold to "qualified institutional buyers" under Rule 144A under the Securities
Act, provided that the Fund's Board of Directors continuously determines, based
on the trading markets for the specific Rule 144A security, that it is liquid.
The Board of Directors may adopt guidelines and delegate to the Manager the
daily function of determining and monitoring liquidity of restricted
securities. The Board has determined that securities which are freely tradeable
in their primary market offshore should be deemed liquid. The Board, however,
will retain sufficient oversight and be ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how the market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President of the Manager and FAM; President and Director of
Princeton Services, Inc.; Executive Vice President of ML & Co.; Executive Vice
President of Merrill Lynch; Director of the Distributor.
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive Officer
of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
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Richard R. West--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the investment adviser of the Fund and provides the Fund
with management and investment advisory services. The Manager is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Manager, or an affiliate of the Manager, FAM, acts as the
investment adviser to more than 125 other registered investment companies and
provides investment advisory services to individual and institutional accounts.
As of September 30, 1995, the Manager and FAM had a total of approximately
$189.4 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. For the period August 5, 1994
(commencement of operations) to June 30, 1995, the fee paid by the Fund to the
Manager was $1,300,660 (based upon average net assets of approximately $171.0
million). At September 30, 1995, the assets of the Fund aggregated
approximately $154.0 million. At this asset level, the annual management fee
would aggregate approximately $1.3 million.
The Management Agreement provides that, subject to the direction of the Board
of Directors of the Fund, the Manager is responsible for the actual management
of the Fund's portfolio and constantly reviews the Fund's holdings in light of
its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Manager, subject to review by the Board of Directors. The
Manager is also obligated to perform certain administrative and management
services for the Fund and is obligated to provide all of the office space,
facilities, equipment and personnel necessary to perform its duties under the
Management Agreement.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co.
and an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a
fee for providing investment advisory services to the Manager with respect to
the Fund in an amount to be determined from time to time by the Manager and
MLAM U.K. but in no event in excess of the amount that the Manager actually
receives for providing services to the Fund pursuant to the Management
Agreement. For the period August 5, 1994 (commencement of operations) to June
30, 1995, MLAM paid MLAM U.K. a fee of $133,021 pursuant to such agreement.
MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
The Fund pays certain expenses incurred in its operations, including, among
other things, the management fees; legal and audit fees; unaffiliated
Directors' fees and expenses; registration fees; custodian and transfer agency
fees; accounting and pricing costs; and certain of the costs of printing
proxies, shareholder reports, prospectuses and statements of additional
information. Also, accounting services are provided to the
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<PAGE>
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the period August 5,
1994 (commencement of operations) to June 30, 1995, the Fund reimbursed the
Manager $111,195 for accounting services. For the period August 5, 1994
(commencement of operations) to June 30, 1995, the annualized ratio of total
expenses to average net assets was 2.56% for Class B shares and 1.77% for Class
D shares (including Class A shares which were redesignated on October 21,
1994). For the period October 21, 1994 (commencement of operations) to June 30,
1995, the annualized ratio of total expenses to average net assets was 1.62%
for Class A shares and 2.66% for Class C shares.
Decisions concerning the allocation of the Fund's assets among the three
prime regions outside the United States (i.e., Europe, Latin America and the
Pacific Basin) will be centralized in London, with country and individual
security decisions made in both London and Princeton, New Jersey. Information
about the persons associated with the Manager who are primarily responsible for
the day-to-day management of the Fund's portfolio and their titles and business
experience during the past five years is set forth below:
Andrew John Bascand--Vice President of the Fund--Director of MLAM U.K. since
1993 and Director of Merrill Lynch Global Asset Management Limited ("MLGAM")
since 1994. Previously, Mr. Bascand was with A.M.P. Asset Management plc in
London and had previously served as Chief Economist with A.M.P. Investments
(NZ) in New Zealand. He has served as Economic Adviser to the Chief Economist
of the Reserve Bank of New Zealand and as Research Officer of the Bank of
England's International Department. Mr. Bascand is the Asset Allocator for the
Fund and, as such, is primarily responsible for determining the allocation of
the Fund's assets among world markets.
Adrian Holmes--Vice President of the Fund--Managing Director of MLAM U.K.
since 1993, Vice President from 1990 to 1993 and an employee thereof since
1987; Director of MLGAM since 1993. Mr. Holmes is primarily responsible for
European investments.
Grace Pineda--Vice President of the Fund--Vice President of the Manager since
1989. Prior to joining the Manager, Ms. Pineda was a portfolio manager with
Clemente Capital, Inc. Ms. Pineda is primarily responsible for investments in
Latin America.
Dennis W. Stattman--Vice President of the Fund--Vice President of the Manager
since 1989; Vice President of Meridian Management Company from 1984 to 1989.
Mr. Stattman is primarily responsible for investments in North America.
James Russell--Vice President of the Fund--Vice President of the Manager
since 1992. Manager, Foreign Investments, Taylor & Co. from 1990 to 1992; Vice
President, Merrill Lynch Japan, Inc. from 1989 to 1990. Mr. Russell is
primarily responsible for investments in Japan.
Ken Chiang--Vice President of the Fund--Employee of the Manager since 1991.
Prior to joining the Manager, Mr. Chiang was employed with Prudential Insurance
Company from 1990 to 1991, and was an employee of Boston Consulting Group in
1989. Mr. Chiang is primarily responsible for Asian investments outside of
Japan.
28
<PAGE>
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act which incorporates the Code of
Ethics of the Manager (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Manager and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $11.00 per Class A or Class D shareholder
account and $14.00 per Class B or Class C shareholder account, nominal
miscellaneous fees (e.g., account closing fees) and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the period August 5, 1994 (commencement of operations) to
June 30, 1995, the Fund paid the Transfer Agent $368,332 pursuant to the
Transfer Agency Agreement. At September 30, 1995, the Fund had 693 Class A
shareholder accounts, 16,842 Class B shareholder accounts, 866 Class C
shareholder accounts and 2,739 Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $285,664 plus out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and of Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000, and the minimum subsequent purchase is $50,
except that for retirement plans, the minimum initial purchase is $100, and the
minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending
29
<PAGE>
upon the class of shares selected by the investor under the Merrill Lynch
Select PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the New York Stock Exchange on that day provided
the Distributor in turn receives the order from the securities dealer prior to
30 minutes after the close of business on the New York Stock Exchange on that
day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the New York Stock Exchange, orders
shall be deemed received on the next business day. The Fund or the Distributor
may suspend the continuous offering of the Fund's shares of any class at any
time in response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may be rejected by
the Distributor or the Fund. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a sale of shares to such customers. Purchases directly through the
Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a contingent deferred sales charge and ongoing
distribution fees. A discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System is set forth under "Merrill Lynch Select PricingSM System" on
page 6.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except the Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, will be imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares will be calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid. See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege".
30
<PAGE>
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% eight years(/4/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Certain Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
31
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DISCOUNT TO
PERCENTAGE PERCENTAGE* OF SELECTED DEALERS
OF OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ------------------ ------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000.............. 5.25% 5.54% 5.00%
$25,000 but less than $50,000.. 4.75 4.99 4.50
$50,000 but less than $100,000. 4.00 4.17 3.75
$100,000 but less than
$250,000...................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000.................... 2.00 2.04 1.80
$1,000,000 and over**.......... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994 and on Class A
purchases by certain retirement plan investors in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases will be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994, may be subject to a CDSC if the
shares are redeemed within one year of purchase at the following rates:
1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of
$2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000;
and 0.25% on purchases of more than $5,000,000 in lieu of paying an initial
sales charge. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed. A
sales charge of 0.75% will be charged on purchases of $1,000,000 or more of
Class A or Class D shares by certain 401(k) plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
As noted above, as a result of the implementation of the Merrill Lynch
Select PricingSM System, Class A shares of the Fund outstanding prior to
October 21, 1994, were redesignated Class D shares. The Class A shares offered
by this Prospectus differ from the Class A shares offered prior to October 21,
1994, in many respects, including sales charges, exchange privilege and the
classes of persons to whom such shares are offered.
During the period October 21, 1994 (commencement of operations) to June 30,
1995, the Fund sold 940,965 of its new Class A shares for aggregate net
proceeds to the Fund of $8,735,463. The gross sales charges for the sale of
its Class A shares for the period were $165, of which $8 and $157 were
received by the Distributor and Merrill Lynch, respectively. During such
period, the Distributor received no CDSCs with respect to redemptions within
one year after purchase of the Class A shares purchased subject to front-end
sales charge waivers.
During the period August 5, 1994 (commencement of operations) to June 30,
1995, the Fund sold 3,959,595 of its Class D shares (including Class A shares
sold prior to October 21, 1994) for aggregate net proceeds to the Fund of
$39,101,204. The gross sales charges for the sale of its Class D shares for
the period were $1,104,179, of which $20,112 and $1,084,067 were received by
the Distributor and Merrill Lynch,
32
<PAGE>
respectively. During such period, the Distributor received CDSCs of $1,059.36
with respect to redemptions within one year after purchase of Class D shares
(including redesignated Class A shares) purchased subject to front-end sales
charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares of the Fund at net
asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMASM Managed Trusts to which Merrill Lynch Trust
Company provides discretionary trustee services and certain purchases made in
connection with the Merrill Lynch Mutual Fund Adviser ("MFA") program. In
addition, Class A shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Fund. Certain persons who
acquired shares of certain MLAM-advised closed-end funds who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met. For
example, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc.
in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain employer
sponsored retirement or savings plans and to Employee Access Accounts SM
available through employers which provide such plans.
Class D shares are also offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges,
including information regarding investment by Employee Sponsored Retirement and
Savings Plans, is set forth in the Statement of Additional Information.
33
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans".
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. The proceeds from account maintenance fees are used to
compensate Merrill Lynch for providing continuing account maintenance
activities. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made convert into
Class D shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar
34
<PAGE>
amount subject thereto. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares derived
from reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- -----------------
<S> <C>
0-1........................................................ 4.00%
1-2........................................................ 3.00
2-3........................................................ 2.00
3-4........................................................ 1.00
4 and thereafter........................................... 0.00
</TABLE>
For the period August 5, 1994 (commencement of operations) to June 30, 1995,
the Distributor received CDSCs of $390,517 with respect to redemptions of Class
B shares, all of which were paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the MFA program, the time
period that such Class A shares are held in the MFA program will be included in
determining the holding period of Class B shares reacquired upon termination of
participation in the MFA program (see "Shareholder Services--Exchange
Privilege").
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans. The CDSC
35
<PAGE>
also is waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption and for any Class B shares that were acquired and held at the time
of the redemption in an Employee Access AccountSM available through employers
providing eligible 401(k) plans. The Class B CDSC also is waived for any Class
B shares which are purchased by a Merrill Lynch rollover IRA that was funded by
a rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. For the fiscal period October 21,
1994 (commencement of operations ) to June 30, 1995, the Distributor received
CDSCs of $2,540 with respect to redemptions of Class C shares, all of which
were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account on the Conversion Date, those shares
will be converted to Class D shares of the Fund.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a
36
<PAGE>
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply,
and the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
The Conversion Period also is modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period for the Class B shares originally held for purposes of
calculating the Conversion Period for Class B shares reacquired upon
termination of participation in the MFA program.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including
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payments to financial consultants for selling Class B and Class C shares of the
Fund. The Distribution Plans relating to Class B and Class C shares are
designed to permit an investor to purchase Class B and Class C shares through
dealers without the assessment of an initial sales charge and at the same time
permit the dealer to compensate its financial consultants in connection with
the sale of the Class B and Class C shares. In this regard, the purpose and
function of the ongoing distribution fees and the CDSC are the same as those of
the initial sales charge with respect to the Class A and Class D shares of the
Fund in that the deferred sales charges provide for the financing of the
distribution of the Fund's Class B and Class C shares.
For the period August 5, 1994 (commencement of operations) to June 30, 1995,
the Fund paid the Distributor $1,246,220 pursuant to the Distribution Plan
relating to the Class B shares (based on average net assets subject to such
Distribution Plan of approximately $137.8 million), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. During the period
October 21, 1994 (commencement of operations) to June 30, 1995, the Fund paid
the Distributor $24,770 pursuant to the Distribution Plan relating to the Class
C shares (based on average net assets subject to such Distribution Plan of
approximately $3.6 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the period August 5, 1994 (commencement
of operations) to June 30, 1995, the Fund paid the Distributor $58,337 pursuant
to the Distribution Plan relating to the Class D shares (including the
redesignated Class A shares) (based on average net assets subject to such
Distribution Plan of approximately $25.8 million), all of which was paid to
Merrill Lynch for providing account maintenance services in connection with
such shares. At September 30, 1995, the net assets of the Fund subject to the
Class B Distribution Plan aggregated approximately $123.5 million. At this
asset level, the annual fees payable pursuant to the Class B Distribution Plan
would aggregate approximately $1.2 million. At September 30, 1995, the net
assets of the Fund subject to the Class C Distribution Plan aggregated
approximately $4.3 million. At this asset level, the annual fees payable
pursuant to the Class C Distribution Plan would aggregate approximately
$42,751. At September 30, 1995, the net assets of the Fund subject to the Class
D Distribution Plan aggregated approximately $24.4 million. At this asset
level, the annual fees payable pursuant to the Class D Distribution Plan would
aggregate approximately $60,969.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation. As of June 30,
1995, direct cash expenses for the period since commencement of the offering of
Class B shares exceeded direct cash revenues by $627,036 (.474% of Class B net
assets at that date). At December 31, 1994, the fully allocated accrual
expenses incurred by the Distributor and Merrill
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Lynch with respect to Class B shares for the period since commencement of
operations exceeded fully allocated accrual revenues for such period by
approximately $3,959,000 (2.629% of Class B net assets at that date). Similar
fully allocated accrual data is not yet available with respect to Class C
shares which the Fund commenced offering to the public on October 21, 1994.
From October 21, 1994 (commencement of operations) to June 30, 1995, direct
cash revenues exceeded direct cash expenses by $2,791 (.057% of Class C net
assets at that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the NASD imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance 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.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth above under "Deferred Sales
Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
REDEMPTION OF SHARES
The Fund is required to redeem for cash all 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
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notice of redemption. Except for any CDSC which may be applicable there will be
no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. The notice in
either event requires the signatures of all persons in whose names the shares
are registered, signed exactly as their names appear on the Transfer Agent's
register or on the certificate, as the case may be. The signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution"
(including, for example, Merrill Lynch branches and certain other financial
institutions) as such is defined in Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended, the existence and validity of which may be verified by
the Transfer Agent through the use of industry publications. Notarized
signatures are not sufficient. In certain instances, the Transfer Agent may
require additional documents, such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice
of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
New York Stock Exchange (generally, 4:00 p.m., New York time) on the day
received and such request is received by the Fund from such dealer not later
than 30 minutes after the close of business on the New York Stock Exchange on
the same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the New York Stock Exchange, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
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<PAGE>
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 AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a one-
time privilege to reinstate their accounts by purchasing Class A or Class D
shares of the Fund, as the case may be, at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege
and may be exercised by the Class A or Class D shareholder only the first time
such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services, copies of the various plans described below and
instructions as to how to participate in the various 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 statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of income dividends and long-term capital gain distributions.
A shareholder may make additions to his Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders also may maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically without charge, at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an
41
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Investment Account maintained for such shares at the Transfer Agent may request
their new brokerage firm to maintain such shares in an account registered in
the name of the brokerage firm for the benefit of the shareholder. Shareholders
considering transferring a tax deferred retirement account such as an IRA from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of the Fund, a shareholder must either redeem
the shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his Investment Account in the form
of payments by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis. A Class A or Class D
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject
to certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C or
Class D 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(R) accounts may arrange to have periodic investments made in the Fund in
their CMA(R) account or in certain related accounts in amounts of $100 or more
through the CMA(R) Automated Investment Program.
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 business on 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. Cash payments can also be
directly deposited to the shareholder's bank account. 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. Shareholders of each class of shares of the Fund have an
exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire
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Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares
of the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange by holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one year holding period does not apply to shares acquired
through reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be re-exchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption of
Class B or Class C shares so reacquired, or the Conversion Period for Class B
shares so reacquired, the holding period for the Class A shares will be
"tacked" to the holding period for the Class B or Class C shares originally
held. The
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Fund's exchange privilege is also modified with respect to purchases of Class A
and Class D shares by non-retirement plan investors under the MFA program.
First, the initial allocation of assets is made under the MFA program. Then,
any subsequent exchange under the MFA program of Class A or Class D shares of a
MLAM-advised mutual fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual
fund and the sales charge payable on the shares of the Fund being acquired in
the exchange under the MFA program.
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, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A and Class D shares
and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B
and Class C shares. Dividends paid by the Fund with respect to all shares, to
the extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance fees, distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.
The Fund will include performance data for all classes of shares of the Fund in
any advertisement or information including performance data of the Fund.
The Fund 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 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 waiver of the CDSC in the case of Class B and Class C shares (such
as investors in certain retirement plans) or to reduced sales charges in the
case of Class A and Class D shares, performance data may take into account the
reduced, and not the maximum, sales charge, or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or waiver of the CDSC, a lower amount of expenses may be
deducted. See "Purchase of Shares". The Fund's total return
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<PAGE>
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 indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all 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 each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class.
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 income 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 income
dividend, reducing each shareholder's tax basis in Fund shares for Federal
income tax purposes, and resulting in a capital gain for any shareholder who
received a distribution greater than the shareholder's tax basis in Fund shares
(provided such shares were held as a capital asset). See "Additional
Information--Taxes".
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TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income 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
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. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. 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 conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate
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shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding
tax on the income resulting from the Fund's election described in this
paragraph but may not be able to claim a credit or deduction against such U.S.
tax for the foreign taxes treated as having been paid by such shareholder. The
Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under proposed
regulations the Fund would be able to 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 income 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).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
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If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all the classes of the Fund is
determined once daily as of 15 minutes after the close of business on the New
York Stock Exchange (generally, 4:00 p.m., New York time), on each day during
which the New York Stock Exchange is open for trading. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. The net asset value is computed
by dividing the 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 A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net
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asset value of the classes will tend to converge (although not necessarily
meet) immediately after the payment of dividends or distributions which will
differ by approximately the amount of the expense accrual differentials between
the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the
time of valuation. Portfolio securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the broadest and
most representative market. When the Fund writes a call option, the amount of
the premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
by the Fund are valued at their last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
last bid price. Other investments, including futures contracts and related
options, 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.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 12, 1994. As of the
date of this Prospectus, the Fund has an authorized capital of 400,000,000
shares of Common Stock, par value $0.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock, each of which
consists of 100,000,000 shares. Class A, Class B, Class C and Class D shares
represent interests in the same assets of the Fund and are identical in all
respects except that the Class B, Class C and Class D shares bear certain
expenses related to the account maintenance associated with such shares, and
Class B and Class C shares bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to account maintenance and distribution expenditures, as applicable.
See "Purchase of Shares". The Fund has received an order from the Commission
permitting the issuance and sale of multiple classes of shares. Such order
permits the Fund to issue additional classes of shares if the Board of
Directors deems such issuance to be in the best interest of the Fund. The
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold an annual meeting of shareholders in any year in which the Investment
Company Act does not require shareholders to elect Directors. Also, the by-laws
of the Fund require that a special meeting of shareholders be held upon the
written request of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting, if such request is in compliance 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
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and have no preemptive rights. Shares have the conversion rights described in
this Prospectus. Each share of Common Stock is entitled to participate equally
in dividends and distributions declared by the Fund and in the net assets of
the Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities, except that, as noted above, 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:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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APPENDIX A
OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund is authorized to engage in various portfolio hedging strategies.
These strategies are described in more detail below:
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency and stock index options and futures,
options on such futures and forward foreign exchange transactions. The Fund may
enter into such transactions only in connection with its hedging strategies.
While the Fund's use of hedging strategies is intended to reduce the volatility
of the net asset value of Fund shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund may not necessarily be engaging in
hedging activities when movements in the equity markets or currency exchange
rates occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Manager believes that, because the Fund will only engage in
these transactions for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions. Tax
requirements may limit the Fund's ability to engage in the hedging transactions
and strategies discussed below. See "Additional Information--Taxes".
Set forth below are descriptions of certain hedging strategies in which the
Fund is authorized to engage.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified future
date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the
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exercise price of the underlying securities. By writing a put, the Fund will be
obligated to purchase the underlying security at a price that may be higher
than the market value of that security at the time of exercise for as long as
the option is outstanding. The Fund may engage in closing transactions in order
to terminate put options that it has written. The Fund will not write put
options if the aggregate value of the obligations underlying the put options
shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the exercise price,
thus limiting the Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any profit on the sale
in the value of the underlying security will be partially offset by the amount
of the premium paid for the put option and any related transaction costs. Prior
to its expiration, a put option may be sold in a closing sale transaction and
profit or loss from the sale will depend on whether the amount received is more
or less than the premium paid for the put option plus the related transaction
costs. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of any offsetting sale of an identical option
prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if, as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is authorized
to engage in transactions in stock index options and futures and financial
futures, and related options on such futures. The Fund may purchase or write
put and call options on stock indices to hedge against the risks of marketwide
stock price movements in the securities in which the Fund invests. Options on
indices are similar to options on securities except that on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Fund may invest in stock index
options based on a broad market index or based on a narrow index representing
an industry, country or market segment.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions".
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The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market
advance, it may purchase futures in order to gain rapid market exposure. This
technique generally will allow the Fund to gain exposure to a market in a
manner which is more efficient than purchasing individual securities, and may
in part or entirely offset increases in the cost of securities in such market
that the Fund ultimately purchases. As such purchases are made, an equivalent
amount of futures contracts will be terminated by offsetting sales. The Manager
does not consider purchases of futures contracts to be a speculative practice
under these circumstances. It is anticipated that, in a substantial majority of
these transactions, the Fund will purchase such securities upon termination of
the long futures position, whether the long position is the purchase of a
futures contract or the purchase of a call option or the writing of a put
option on a future, but under unusual circumstances (e.g., the Fund experiences
a significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging (including
anticipatory hedging) activities. Generally, these strategies are utilized
under the same market and market sector conditions (i.e., conditions relating
to specific types of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call options on
futures contracts and stock indices rather than selling the underlying futures
contract in anticipation of a decrease in the market value of its securities.
Similarly, the Fund may purchase call options, or write put options on futures
contracts and stock indices, as a substitute for the purchase of such futures
to hedge against the increased cost resulting from an increase in the market
value of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated
by the buyer and seller. The Fund may engage in OTC options to effect the same
strategies as it would through exchange-traded options. See "Restrictions on
OTC Options" below for information as to restrictions on the use of OTC
options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest
and multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price set at the time of the contract. The
Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of
shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Fund has no limitation on transaction hedging. The Fund will not speculate
in forward foreign exchange. If the Fund enters into a position hedging
transaction, the Fund's custodian will place cash or liquid debt
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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, for example, as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar-denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund. As an illustration, the Fund may use such techniques to
hedge the stated value in U.S. dollars of an investment in a pound sterling
denominated security. In such circumstances, for example, the Fund may purchase
a foreign currency put option enabling it to sell a specified amount of pounds
for dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the pound relative to the dollar will tend
to be offset by an increase in the value of the put option. To offset, in whole
or in part, the cost of acquiring such a put option, the Fund may also sell a
call option which, if exercised, requires it to sell a specified amount of
pounds for dollars at a specified price by a future date (a technique called a
"straddle"). By selling such a call option in this illustration, the Fund gives
up the opportunity to profit without limit from increases in the relative value
of the pound to the dollar. The Manager believes that "straddles" of the type
which may be utilized by the Fund constitute hedging transactions and are
consistent with the policies described above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. Listed options are third-party
contracts (i.e., performance of the parties' obligations is guaranteed by an
exchange or clearing corporation) which are issued by a clearing corporation,
traded on an exchange and have standardized strike prices and expiration dates.
OTC options are two-party contracts and have negotiated strike prices and
expiration dates. A futures contract on a foreign currency is an agreement
between two parties to buy and sell a specified amount of a currency for a set
price on a future date. Futures contracts and options on futures contracts are
traded on boards of trade or futures exchanges. The Fund will not speculate in
foreign currency options, futures or related options. Accordingly, the Fund
will not hedge a currency substantially in excess of the market value of
securities which it has committed or anticipates to purchase which are
denominated in such currency and, in the case of securities which have been
sold by the Fund but not yet delivered, the proceeds thereof in its denominated
currency. Further, the Fund will segregate at its custodian cash, liquid equity
or debt securities having a market value substantially representing any
subsequent decrease in the market value of such hedged security, less any
initial or variation margin held in the account of its broker.
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The Fund may not incur potential net liabilities of more than 33 1/3% of its
total assets from foreign currency options, futures or related options.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Fund provide that the futures
trading activities described herein will not result in the Fund being deemed a
"commodity pool" under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell futures contracts
and options thereon (i) for bona fide hedging purposes, and (ii) for non-
hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options do 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 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.
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Risk Factors in Options, Futures and Currency Transactions. Utilization of
options and futures transactions to hedge the portfolio, including to affect
the Fund's exposure in various markets, involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction. In addition, options and futures
transactions in foreign markets are subject to the risk factors associated with
foreign investments generally. See "Risk Factors and Special Considerations".
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. There can be
no assurance, however, that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions also could have
an adverse impact on the Fund's ability to hedge effectively its portfolio.
There is also the risk of loss by the Fund of margin deposits or collateral in
the event of the bankruptcy of a broker with whom the Fund has an open position
in an option, a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts that any person may trade on a particular trading day. The
Manager does not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
56
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Global SmallCap Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Global SmallCap Fund, Inc.
Authorization Form.
Specify type of account (check one): [_] checking [_] savings
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
57
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[ ][ ][ ][ ][ ][ ][ ][ ][ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global SmallCap Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Global SmallCap
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global SmallCap Fund, Inc. held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
- - - Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the Shareholder's
signature.
.....................................
Dealer Name and Address
- - - By: .................................
Authorized Signature of Dealer
This form when completed should be [ ][ ][ ] [ ][ ][ ][ ]
mailed to:
Branch Code F/C No.
Merrill Lynch Global
SmallCap Fund, Inc. ...............
F/C Last Name
c/o Merrill Lynch Financial [ ][ ][ ] [ ][ ][ ][ ][ ]
Data Services, Inc. Dealer's Customer A/C No.
P.O. Box 45289
Jacksonville, FL 32232-5289
58
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
[ ][ ][ ][ ][ ][ ][ ][ ][ ]
Name................................... Social Security No. or
First Name Initial Last Name Taxpayer Identification
No.
Name of Co-Owner (if any).................
First Name Initial Last Name
Address............................ Account Number ....................
(if existing account)
...................................
(Zip Code)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A or [_] Class D shares in Merrill Lynch Global SmallCap Fund,
Inc. at cost or current offering price. Withdrawals to be made either (check
one) [_] Monthly on the 24th day of each month, or [_] Quarterly on the 24th
day of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawals on or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
59
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Global SmallCap Fund, Inc. subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
You are hereby authorized to draw an DRAWN BY MERRILL LYNCH FINANCIAL
ACH debit each month on my bank DATA SERVICES, INC.
account for investment in Merrill
Lynch Global SmallCap Fund, Inc., as To...............................Bank
indicated below: (Investor's Bank)
Amount of each ACH debit $........ Bank Address.........................
Account No. ...................... City....... State........ Zip.......
Please date and invest ACH debits As a convenience to me, I hereby
on the 20th of each month request and authorize you to pay and
beginning or as soon thereafter charge to my account ACH debits
(month) drawn on my account by and payable
as possible. to Merrill Lynch Financial Data
Services, Inc. I agree that your
I agree that you are drawing these rights in respect to each such debit
ACH debits voluntarily at my request shall be the same as if it were a
and that you shall not be liable for check drawn on you and signed
any loss arising from any delay in personally by me. This authority is
preparing or failure to prepare any to remain in effect until revoked by
such debit. If I change banks or me in writing. Until you receive
desire to terminate or suspend this such notice, you shall be fully
program, I agree to notify you protected in honoring any such
promptly in writing. I hereby debit. I further agree that if any
authorize you to take any action to such debit be dishonored, whether
correct erroneous ACH debits of my with or without cause and whether
bank account or purchases of Fund intentionally or inadvertently, you
shares including liquidating shares shall be under no liability.
of the Fund and crediting my bank
account. I further agree that if a ............ .....................
debit is not honored upon Date Signature of
presentation, Merrill Lynch Financial Depositor
Data Services, Inc. is authorized to
discontinue immediately the Automatic ............ .....................
Investment Plan and to liquidate Bank Signature of Depositor
sufficient shares held in my account Account (If joint account,
to offset the purchase made with the Number both must sign)
dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
60
<PAGE>
[This page is intentionally left blank]
<PAGE>
[This page is intentionally left blank]
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
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 REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Prospectus Summary......................................................... 4
Merrill Lynch Select Pricing SM System..................................... 6
Financial Highlights....................................................... 10
Risk Factors and Special Considerations.................................... 11
Investment Objective and Policies.......................................... 16
Description of Certain Investments........................................ 18
Characteristics of Certain Debt
Securities............................................................... 19
Other Investment Policies
and Practices............................................................ 22
Investment Restrictions................................................... 25
Management of the Fund..................................................... 26
Board of Directors........................................................ 26
Management and Advisory
Arrangements............................................................. 27
Code of Ethics............................................................ 29
Transfer Agency Services.................................................. 29
Purchase of Shares......................................................... 29
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 31
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 34
Distribution Plans........................................................ 37
Limitations on the Payment of Deferred
Sales Charges............................................................ 39
Redemption of Shares....................................................... 39
Redemption................................................................ 40
Repurchase................................................................ 40
Reinstatement Privilege--Class A and
Class D Shares........................................................... 41
Shareholder Services....................................................... 41
Performance Data........................................................... 44
Additional Information..................................................... 45
Dividends and Distributions............................................... 45
Taxes..................................................................... 46
Determination of Net Asset Value.......................................... 48
Organization of the Fund.................................................. 49
Shareholder Reports....................................................... 50
Shareholder Inquiries..................................................... 50
Appendix A................................................................. 51
Authorization Form......................................................... 57
</TABLE>
Code #18187-1095
LOGO MERRILL LYNCH
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
[ART]
PROSPECTUS
October 25, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified,
open-end management investment company seeking long-term growth of capital by
investing primarily in a portfolio of equity securities of issuers with
relatively small market capitalizations ("SmallCap Issuers") located in
various countries and in the United States. Under normal market conditions,
the Fund expects to invest at least 66% of its total assets in equity
securities of SmallCap Issuers. While the Fund expects to invest primarily in
equity securities of SmallCap Issuers, the Fund reserves the right to invest
up to 34% of its total assets, under normal market conditions, in equity
securities of issuers having larger individual market capitalizations and in
debt securities. It is anticipated that a substantial portion of the Fund's
assets will be invested in the developed countries of Europe and the Far East
and that a significant portion of its assets also may be invested in
developing countries. The Fund may employ a variety of investments and
techniques to hedge against market and currency risk. There can be no
assurance that the Fund's investment objective will be achieved.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated October
25, 1995 (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 October 25, 1995.
<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 its
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. During the fiscal period August 5,
1994 (commencement of operations) to June 30, 1995, the Fund's portfolio
turnover rate was 47.96%. 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 the Appendix to the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency options and futures, stock index
options and futures, and options on such futures and forward foreign currency
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of the
Fund's shares will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed in the Prospectus and below), the Manager believes that, because the
Fund will only engage in these transactions for hedging purposes, the options
and futures portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of options and futures
transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against a decline in the price of
the underlying security.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer would realize a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer would realize a gain or loss from the sale of the
underlying security.
3
<PAGE>
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 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
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transaction cost. A closing sale transaction cancels out the Fund's position as
the purchaser of an option by means of an offsetting sale of an identical
option prior to the expiration of the option it has purchased. In certain
circumstances, the Fund may purchase call options on securities held in its
portfolio on which it has written call options or on securities which it
intends to purchase. The Fund may purchase either exchange-traded options or
OTC options. The Fund will not purchase options on securities (including stock
index options discussed below) if as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is typically between 2% and 15% of the value of the
futures contract, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the futures contract. Subsequent
payments to and from the broker, called "variation margin", are required to be
made on a daily basis as the price of the futures contract fluctuates, making
the long and short positions in the futures contract more or less valuable, a
process known as "mark to the market". At any time prior to the settlement date
of the futures contract, the position may be closed out by taking an opposite
position which will operate to terminate the position in the futures contract.
A final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker, and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a futures contract may
be a "senior security" under the Investment Company Act.
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
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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 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
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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 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 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 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.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Diversified Status. The Fund is classified as diversified within the meaning
of the Investment Company Act, which means that the Fund is limited by such Act
in the proportion of its assets that it may invest in securities of a single
issuer. See "Investment Objective and Policies--Investment Restrictions". The
Fund's investment also will be limited in order to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"). See "Dividends, Distributions and Taxes--Taxes".
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To qualify under both the Investment Company Act and the Code, the Fund will
comply with certain requirements, including limiting its investments so that at
the time of investment and at the close of each quarter of the taxable year (i)
not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer and (ii) with respect to 75% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer, and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of its commitment in
connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the agreement
the Fund is paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.50% of the aggregate
purchase price of the security that the Fund has committed to purchase. The
Fund will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price that is considered
advantageous to the Fund. The Fund will not enter into a standby commitment
with a remaining term in excess of 45 days and presently will limit its
investment in such commitment so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% (which presently is further limited by state
law to 10%) of its net assets taken at the time of acquisition of such
commitment or security. The Fund will at all times maintain a segregated
account with its custodian of cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies in an aggregate amount equal to the purchase
price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Because the issuance of the
security underlying the commitment is at the option of the issuer, the Fund may
bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby agreement and the related
commitment fee will be recorded on the date which the security can reasonably
be expected to be issued, and the value of the security will thereafter be
reflected in the calculation of the Fund's net asset value. The cost basis of
the security will be adjusted by the amount of the commitment fee. In the event
the security is not issued, the commitment fee will be recorded as income on
the expiration date of the standby commitment.
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Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities or an
affiliate thereof. 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
repurchase agreements, 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. In the event of a default under such a
repurchase agreement or a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market values of such securities
and the accrued interest on the securities. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform. The Fund may not invest more than 15% (which presently is further
limited to 10% by applicable state law) of its net assets in repurchase
agreements or purchase and sale contracts maturing in more than seven days.
While the substance of purchase and sale contracts is similar to repurchase
agreements, because of the different treatment with respect to accrued interest
and additional collateral, management believes that purchase and sale contracts
are not repurchase agreements as such term is understood in the banking and
brokerage community.
Lending of Portfolio Securities. Subject to investment restriction (4) 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.
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INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities
(which for this purpose and under the Investment Company Act, means the lesser
of (i) 67% of the shares represented at a meeting at which more than 50% of
the outstanding shares are represented or (ii) more than 50% of the
outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value 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. Make investments for the purpose of exercising control or management.
3. 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.
4. 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.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money or pledge its assets, except that the Fund (a) may borrow
from a bank as a temporary measure for extraordinary or emergency purposes
or to meet redemptions in amounts not exceeding 33 1/3% (taken at market
value) of its total assets and pledge its assets to secure such borrowings,
(b) may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities and (c) may purchase
securities on margin to the extent permitted by applicable law. (However,
at the present time, applicable law prohibits the Fund from purchasing
securities on margin.) (The deposit or payment by the Fund of initial or
variation margin in connection with futures contracts or options
transactions is not considered the purchase of a security on margin.)
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in purchasing and selling portfolio
securities.
8. 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.
9. With respect to 75% of its total assets, (a) invest in the securities
of any one issuer if, immediately after and as a result of such investment,
the value of the holdings of the Fund in the securities of such
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issuer exceeds 5% of the Fund's total assets, taken at market value; and
(b) invest in the securities of any one issuer if, immediately after and as
a result of such investment, the Fund owns more than 10% of the outstanding
voting securities of such issuer.
In addition, the Fund has adopted non-fundamental restrictions, which may be
changed by the Board of Directors. Under the non-fundamental investment
restrictions, the Fund may not:
a. Purchase securities of other investment companies except to the extent
that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies 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 has not
determined to be liquid pursuant to applicable law, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities. Notwithstanding the fact that the Board may determine that a
Rule 144A security is liquid and not subject to the 15% restriction on
illiquid securities, the State of Ohio does not recognize Rule 144A
securities as securities which are free of restrictions as to resale. To
the extent required by Ohio law, the Fund will not invest more than 50% of
its total assets in securities of issuers which are restricted as to
disposition, including Rule 144A securities, or in securities described in
(e) below.
d. Invest in warrants if at the time of acquisition its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of 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.
f. 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.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
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h. 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.
i. 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
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
guaranteed 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.
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MANAGEMENT OF THE FUND
The Directors and executive officers of the Fund, their ages 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
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (63)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") since 1990 and a Senior Vice President thereof from 1985 to 1990;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990;
Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor").
Donald Cecil (68)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer (68)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (63)--Director(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Partner, Small
Cities Cablevision, Inc.
Richard R. West (57)--Director(2)--Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, and Dean from 1984 to 1993, of New York University Leonard
N. Stern School of Business Administration; Director of Bowne & Co., Inc.
(financial printers), Vornado, Inc. (real estate holding company), Smith-Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's
Inc. (real estate company).
Edward D. Zinbarg (60)--Director(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. Executive Vice President of the Prudential Insurance Company of
America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
Terry K. Glenn (55)--Executive Vice President(1)(2)--Executive Vice President
of the Manager and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President and Director of the Distributor since
1986.
Norman R. Harvey (62)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
13
<PAGE>
Donald C. Burke (35)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from 1982
to 1990.
Andrew John Bascand (33)--Vice President(1)(2)--Director of Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K.") since 1993 and Director of Merrill
Lynch Global Asset Management Limited ("MLGAM") since 1994; Senior Economist of
A.M.P. Asset Management plc in London from 1992 to 1993 and Chief Economist of
A.M.P. Investments (NZ) in New Zealand from 1989 to 1991; Economic Adviser to
the Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989.
Adrian Holmes (33)--Vice President(1)(2)--Managing Director of MLAM U.K.
since 1993, Vice President from 1990 to 1993 and an employee thereof since
1987; Director of MLGAM since 1993.
Grace Pineda (38)--Vice President(1)(2)--Vice President of the Manager since
1989. Prior to joining the Manager, Ms. Pineda was a portfolio manager with
Clemente Capital, Inc.
Dennis W. Stattman (44)--Vice President(1)(2)--Vice President of the Manager
since 1989; Vice President of Meridian Management Company from 1984 to 1989.
James Russell (43)--Vice President(1)--Vice President of the Manager since
1992. Manager, Foreign Investments, Taylor & Co. from 1990 to 1992; Vice
President, Merrill Lynch Japan, Inc. from 1989 to 1990.
Ken Chiang (34)--Vice President(1)--Employee of the Manager since 1991. Prior
to joining the Manager, Mr. Chiang was employed with Prudential Insurance
Company from 1990 to 1991, and was an employee of Boston Consulting Group in
1989.
Gerald M. Richard (46)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1974; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981 and
Treasurer since 1984.
Robert Harris (43)--Secretary(1)(2)--Vice President of the Manager since
1984; Secretary of the Distributor since 1982.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Manager, or its affiliate FAM, acts as
investment adviser or manager.
At September 30, 1995, the officers and Directors of the Fund as a group (17
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML&Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Manager a fee of $3,500
per year plus $500 per Board meeting attended, together with such Director's
actual out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all of the non-affiliated Directors, at a rate of $500 per
meeting attended. The Chairman of the Committee receives an additional fee of
$250 per meeting attended. Fees and expenses paid to the non-affiliated
Directors for the period from August 5, 1994 (commencement of operations) to
June 30, 1995, aggregated $35,833.
14
<PAGE>
The following table sets forth for the period August 5, 1994 (commencement
of operations) to June 30, 1995, compensation paid by the Fund to the non-
affiliated Directors and for the calendar year ended December 31, 1994, the
aggregate compensation paid by all investment companies advised by the Manager
and its affiliate, FAM ("MLAM/FAM Advised Funds"), to the non-affiliated
Directors:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION FROM
PENSION OR FUND AND OTHER
RETIREMENT BENEFITS MLAM/FAM
COMPENSATION ACCRUED AS PART OF ADVISED FUNDS PAID
NAME OF DIRECTOR FROM FUND(1) FUND'S EXPENSES TO DIRECTOR(2)
- ---------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Donald Cecil................ $9,000 None $276,350
Edward H. Meyer............. $8,000 None $251,600
Charles C. Reilly........... $8,000 None $276,900
Richard R. West............. $8,000 None $300,900
Edward D. Zinbarg........... $4,333 None $125,500(/3/)
</TABLE>
- --------
(1) Compensation to be paid by the Fund to the non-affiliated Directors for
the fiscal year ending June 30, 1996, assuming each Director attends each
of the quarterly meetings of the Board and of the Committee during the
period, would be the following: Mr. Cecil ($8,500); Mr. Meyer ($7,500);
Mr. Reilly ($7,500); Mr. West ($7,500) and Mr. Zinbarg ($7,500).
(2) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Cecil (34 funds); Mr. Meyer (34
funds); Mr. Reilly (53 funds); Mr. West (53 funds) and Mr. Zinbarg (16
funds).
(3) $125,500 represents the amount Mr. Zinbarg would have received if he had
been a Director for the entire calendar year ended December 31, 1994. Mr.
Zinbarg was elected to the Fund's Board of Directors effective October 25,
1994.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives
or other factors, a particular security may be bought for one or more clients
when one or more clients are selling the same security. If purchases or sales
of securities by the Manager or MLAM U.K. for the Fund or other funds for
which they act as investment adviser or for other advisory clients, arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more
than one client of the Manager or its affiliates during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.
The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As described in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the rate of
0.85% of the average daily net assets of the Fund. For the period August 5,
1994 (commencement of operations) to June 30, 1995, the investment advisory
fees paid by the Fund to the Manager aggregated $1,300,660.
The Manager has also entered into a sub-advisory agreement with MLAM U.K., a
wholly-owned, indirect subsidiary of ML & Co. and an affiliate of the Manager,
pursuant to which the Manager pays MLAM U.K. a fee in an amount to be
determined from time to time by the Manager and MLAM U.K. but in no
15
<PAGE>
event in excess of the amount that the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement. For the period
August 5, 1994 (commencement of operations) to June 30, 1995, the sub-advisory
fees paid by the Manager to MLAM U.K. pursuant to such agreement aggregated
$133,021.
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. For the period August 5, 1994 (commencement of operations) through
June 30, 1995, no such reimbursement was necessary.
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,
prospectuses and statements of additional information (except to the extent
paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the period August 5,
1994 (commencement of operations) through June 30, 1995, the Fund made no
reimbursement for such services. The Distributor will pay certain promotional
expenses of the Fund incurred in connection with the offering of its shares.
Certain expenses in connection with the distribution of Class B, Class C and
Class D shares will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares--Distribution Plans".
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management policies.
Duration and Termination. Unless earlier terminated as described herein, 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.
16
<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge alternatives.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Merrill Lynch Select Pricing SM System is used by more than 50 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by the
Manager or FAM which utilize the Merrill Lynch Select Pricing SM System are
referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select Pricing SM
System, Class A shares of the Fund outstanding prior to October 21, 1994 were
redesignated Class D shares. The Class A shares currently being offered differ
from the Class A shares offered prior to October 21, 1994 in many respects,
including sales charges, exchange privilege and the classes of persons to whom
such shares are offered. The Fund sells its Class A and Class D shares through
the Distributor and Merrill Lynch, as dealers. During the period October 21,
1994 (commencement of operations) to June 30, 1995, the Fund sold 940,965
Class A shares for aggregate net proceeds to the Fund of $8,735,463. The gross
sales charges for the sale of Class A shares for that period were $165, of
which $157 was received by Merrill Lynch and $8 was received by the
Distributor. During the period August 5, 1994 (commencement of operations) to
June 30, 1995, the Company sold 3,959,595 Class D shares (including
redesignated Class A shares) for aggregate net proceeds to the Company of
$39,101,204. The gross sales charges for the sale of Class D shares of the
Fund for that period were $1,104,179 of which $1,084,067 was received by
Merrill Lynch and $20,112 was received by the Distributor.
17
<PAGE>
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.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds (the "Eligible Class A Shares") are offered at net
asset value to shareholders of certain closed-end funds advised by MLAM or its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing SM System commenced operation)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994, and wish to reinvest the net
proceeds from a sale of their closed-end fund shares are offered Class A
shares (if eligible to buy Class A shares) or Class D shares of the Fund and
other MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D Shares. Second, the closed-end fund
shares must have been either acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option. Class A
shares of the Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate 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 the Senior Floating Rate Fund in
connection with a tender offer conducted by the 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.
REDUCED INITIAL SALES CHARGES--CLASS A AND CLASS D SHARES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the dollar amount then being purchased plus (b)
an amount equal
18
<PAGE>
to the then current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of all classes of shares of the Fund and of other
MLAM-advised mutual funds. For any such right of accumulation to be made
available, the Distributor must be provided at the time of purchase, by the
purchaser or the purchaser's securities dealer, with sufficient information to
permit confirmation of qualification, and acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time. Shares held in the name of a nominee or custodian under
pension, profit sharing, or other employee benefit plans may not be combined
with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 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 or Class D shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of 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 and Class D shares of the Fund and of other MLAM-advised mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in
the Letter of Intention (minimum of $25,000), the investor will be notified and
must pay, within 20 days of the expiration of such Letter, the difference
between the sales charge on the Class A or Class D shares purchased at the
reduced rate and the sales charge applicable to the shares actually purchased
through the Letter. Class A or Class D shares equal to five percent of the
intended amount will be held in escrow during the thirteen-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the right
of accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to the reduced percentage sales charge which would be applicable to a
single purchase equal to the total dollar value of the Class A or Class D
shares then being purchased under such Letter, but there will be no retroactive
reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-
advised money market fund into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
Employer Sponsored Retirement and Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
plans within the meaning of Sections 403(b) and 457 of the Code, other deferred
compensation arrangements,
19
<PAGE>
Voluntary Employee Benefits Association ("VEBA") plans, and non-qualified
After Tax Savings and Investment programs, maintained on the Merrill Lynch
Group Employee Services system, herein referred to as "Employer Sponsored
Retirement or Savings Plans", provided the plan has accumulated $20 million or
more in MLAM-advised mutual funds (in the case of Class A shares) or $5
million or more in MLAM-advised mutual funds (in the case of Class D shares).
Class D shares may be offered at net asset value to new Employer Sponsored
Retirement or Savings Plans, provided the plan has $3 million or more
initially invested in MLAM-advised mutual funds. Assets of Employer Sponsored
Retirement or Savings Plans sponsored by the same sponsor or an affiliated
sponsor may be aggregated. Class A shares and Class D shares also are offered
at net asset value to Employer Sponsored Retirement or Savings Plans that have
at least 1,000 employees eligible to participate in the plan (in the case of
Class A shares) or between 500 and 999 employees eligible to participate in
the plan (in the case of Class D shares). Employees eligible to participate in
Employer Sponsored Retirement or Savings Plans of the same sponsoring employer
or its affiliates may be aggregated. Any Employer Sponsored Retirement or
Savings Plan which does not meet the above described qualifications to
purchase Class A shares at net asset value has the option of (i) purchasing
Class A shares at the initial sales charge schedule and possible CDSC schedule
disclosed in the Prospectus if it is otherwise eligible to purchase Class A
shares, (ii) purchasing Class D shares at the initial sales charge and
possible CDSC schedule disclosed in the Prospectus, (iii) if the Employer
Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption, or if the
Employer Sponsored Retirement or Savings Plan does not qualify to purchase
Class B shares with a waiver of the CDSC upon redemption, purchasing Class C
shares at the CDSC schedule disclosed in the Prospectus. The minimum initial
and subsequent purchase requirements are waived in connection with all the
above referenced Employer Sponsored Retirement or Savings Plans.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
ML&Co., and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML&Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML&Co.), and 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 D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption must have been maintained in the interim
in cash or a money market fund.
20
<PAGE>
Class D shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund sponsored by a non-
Merrill Lynch company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, such purchase of Class D shares must be made within 90 days
after notice.
Class D 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 Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of the other mutual funds and that such shares have been outstanding for
a period of no less than six months; and second, such purchase of Class D
shares must be made within 60 days after the redemption and the proceeds from
the redemption must be maintained in the interim in cash or a money market
fund.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
21
<PAGE>
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of the Directors, including a majority of the
Independent Directors who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of each Distribution Plan
and any report made pursuant to such plan for a period of not less than six
years from the date of such Distribution Plan or such report, the first two
years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the 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 distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
22
<PAGE>
The following table sets forth comparative information as of June 30, 1995,
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and with respect to Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JUNE 30, 1995
-------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
AMOUNTS DISTRIBUTION
ALLOWABLE PREVIOUSLY FEE AT
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PAID TO AGGREGATE CURRENT NET
GROSS SALES UNPAID AMOUNT DISTRIBUTOR UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE (3) BALANCE LEVEL(4)
-------- --------- ----------- ------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares, for the
period August 5, 1994
(commencement of
operations) to June 30,
1995:
Under NASD Rule as
Adopted............... $149,036 $9,315 $665 $9,980 $1,325 $8,655 $992
Under Distributor's
Voluntary Waiver...... $149,036 $9,315 $665 $9,980 $1,325 $8,655 $992
Class C Shares, for the
period October 21, 1994
(commencement of
operations) to June 30,
1995:
Under NASD Rule as
Adopted............... $ 5,674 $ 355 $ 15 $ 370 $ 21 $ 349 $ 37
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum, or, with respect to
Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended 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.
23
<PAGE>
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a tax-free
distribution following retirement under a tax-deferred retirement plan or
attaining age 59 1/2 in the case of an IRA or other retirement plan or part of
a series of equal periodic payments (not less frequently than annually) made
for the life (or life expectancy), or any redemption resulting from the tax-
free return of an excess contribution to an IRA; or (b) any partial or
complete redemption following the death or disability (as defined in the Code)
of a Class B shareholder (including one who owns the Class B shares as joint
tenant with his or her spouse), provided the redemption is requested within
one year of the death or initial determination of disability. For the fiscal
period August 5, 1994 (commencement of operations) to June 30, 1995, with
respect to redemptions of Class B shares, the Distributor received CDSCs of
$390,517, all of which was paid to Merrill Lynch. Similarly, for the fiscal
period October 21, 1994 (commencement of operations) to June 30, 1995, with
respect to redemptions of Class C shares, the Distributor received CDSCs of
$2,540, all of which was paid to Merrill Lynch.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A or Class D shares at net asset value has the option of
purchasing Class A or Class D 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 CDSC upon redemption.
The CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares.
"Eligible 401(k) Plan" is defined as a retirement plan qualified under Section
401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from
a 401(a) plan qualified under the Code, provided, however, that each such plan
has the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a)
Plan"). Other tax qualified retirement plans within the meaning of Section
401(a) or 403(b) of the Code which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a menu of investments) by independent administration firms contracted
through Merrill Lynch also may purchase Class B shares with a waiver of the
CDSC. The CDSC also 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 Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. The
minimum initial and subsequent purchase requirements are waived in connection
with all the above referenced Retirement Plans. The CDSC is also waived for
any Class B shares that were acquired and held at the time of redemption by
Employee Access Accounts available through employers that provide Eligible
401(k) Plans. The initial minimum for such accounts is $500, except that the
initial minimum for shares purchased for such accounts pursuant to the
Automatic Investment Program is $50.
24
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. In executing such transactions,
the Manager seeks to obtain the best net results for the Fund, taking into
account such factors as price (including the applicable brokerage commission or
dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved and the firm's risk in positioning a block of
securities. While the Manager generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available. The Fund has no obligation to deal with any broker or group of
brokers in execution of transactions in portfolio securities. Subject to
obtaining the best price and execution, brokers who provide supplemental
investment research to the Manager may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Manager under the Management Agreement
and the expenses of the Manager will not necessarily be reduced as a result of
the receipt of such supplemental information. It is possible that certain
supplementary investment research so received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions
effected for such other accounts or investment companies. In addition,
consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and policies established by the Board of Directors of
the Fund, the Manager may consider sales of shares of the Fund as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less government supervision and regulation of foreign stock
exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of ADRs, EDRs,
GDRs or other securities convertible into foreign equity securities. ADRs, EDRs
and GDRs may be listed on stock exchanges or traded in over-the-counter markets
in the United States or Europe, as the case may be. ADRs, like other securities
traded in the United States, as well as GDRs traded in the United States, will
be subject to negotiated commission rates.
The Fund may invest in securities traded in the OTC markets and intends to
deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the
Commission. Since transactions in the OTC market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions. However, affiliated persons of the Fund may
serve as its broker in OTC transactions conducted on an agency basis provided
that, among other things, the fee or commission received by such affiliated
broker is reasonable and fair compared to the fee or commission
25
<PAGE>
received by non-affiliated brokers in connection with comparable transactions.
See "Investment Objective and Policies--Investment Restrictions". For the
fiscal period August 5, 1994 (commencement of operations) to June 30, 1995, the
Fund paid total brokerage commissions of $782,590, of which $17,207 or 2.20%
was paid to Merrill Lynch for effecting 3.30% of the aggregate amount of
transactions on which the Fund paid brokerage commissions.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. Dollars to the
extent necessary to meet anticipated redemptions. Under present conditions, it
is not believed that these considerations will have any significant effect on
its portfolio strategy.
The Board of Directors has considered the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for their affiliates
and institutional accounts which they manage unless the member (i) has obtained
prior express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with the aggregate compensation
received by the member in effecting such transactions, and (iii) complies with
any rules the Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch
acting as a broker for the Fund in any of its portfolio transactions executed
on any such securities exchange of which it is a member, appropriate consents
have been obtained from the Fund and annual statements as to aggregate
compensation will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 p.m., New York time), on each day during which
the New York Stock Exchange is open for trading. The New York Stock Exchange is
not open on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. The Fund also will determine its
net asset value on any day in which there is sufficient trading in its
portfolio securities that the net asset value might be affected materially, but
only if on any such day the Fund is required to sell or redeem shares. Net
asset value is computed by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number
26
<PAGE>
of shares outstanding at such time. Expenses, including the management fees and
any account maintenance and/or distribution fees, are accrued daily. The per
share net asset value of Class B, Class C and Class D shares generally will be
lower than the per share net asset value of Class A shares reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; moreover the per share net asset value of Class B and Class C
shares generally will be lower than the per share net asset value of its Class
D shares reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities, including ADRs, EDRs or GDRs, which are traded on stock
exchanges are valued at the last sale price (regular way) on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Securities traded in the over-
the-counter market are valued at the last available bid price in the over-the-
counter market prior to the time of valuation. Portfolio securities which are
traded both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market. When the Fund writes
a call option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability
is subsequently valued to reflect the current market value of the option
written, based upon the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market, the last
asked price. Options purchased by the Fund are valued at their last sale price
in the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Other investments, including
futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Directors.
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of the New York Stock Exchange. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of the New
York Stock Exchange which will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Directors.
27
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gain distributions. The statements will also show any other
activity in the account since the preceding statement. Shareholders also will
receive separate confirmations for each purchase or sale transaction other than
reinvestment of dividends and 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 or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the transfer
agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the transfer
agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he 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.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. An
investor whose shares of the Fund are held within a CMA(R) or CBA(R) account
may arrange to have periodic investments made in the Fund in amounts of $100 or
more ($1 for retirement accounts) through the CMA(R)/CBA(R) Automatic
Investment Program.
28
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of the shares of the
Fund, as of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make 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 or Class D shares of the Fund having a value, based upon cost or the
current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with Class A or Class D shares with such a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined as of 15
minutes after the close of business on the New York Stock Exchange (generally
4:00 P.M., New York time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the Exchange is not
open for business on such date, the Class A or Class D shares will be redeemed
at the close of business on the following business day. The check for the
withdrawal payment will be mailed or the direct deposit of the withdrawal
payment will be made on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all Class A or Class D shares in the Investment Account are automatically
reinvested in Fund Class A or Class D shares, respectively. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly
accept purchase orders for Class A or Class D shares of the Fund from investors
who maintain a Systematic Withdrawal Plan unless such purchase is equal to at
least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
29
<PAGE>
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the 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 Merrill Lynch financial consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select PricingSM System, Class A shareholders may exchange Class A shares
of the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as
a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of
the shares acquired in the exchange, the holding period for the previously
owned shares of the Fund is "tacked" to the holding period of the newly
acquired shares of the other fund as more fully described below. Class A, Class
B, Class C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class
30
<PAGE>
A or Class D shares in the initial purchase and any subsequent exchange. Class
A or Class D shares issued pursuant to dividend reinvestment are sold on a no-
load basis in each of the funds offering Class A or Class D shares. For
purposes of the exchange privilege, Class A and Class D shares acquired through
dividend reinvestment shall be deemed to have been sold with a sales charge
equal to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D shares
of the Fund generally may be exchanged into the Class A or Class D shares of
the other funds or into shares of the Class A or Class D money market funds
with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales charge that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Fund Class B shares to the three year
holding period for the Special Value Fund Class B shares, the investor will be
deemed to have held the new Class B shares for more than five years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that have
been held for at least one year for Class A shares of the same fund on the
basis of relative net asset value in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the conversion period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired
as a result of an exchange for Class B or Class C shares of the Fund may,
31
<PAGE>
in turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption would not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ............
High current income consistent with a
policy of limiting the degree of fluctu-
ation in net asset value by investing
primarily in a portfolio of adjustable
rate securities, consisting principally
of mortgage-backed and asset-backed se-
curities.
Merrill Lynch Americas Income
Fund, Inc. .......................
A high level of current income, consis-
tent 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 sur-
rounding 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 port-
folio primarily of intermediate-term in-
vestment 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.
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<PAGE>
Merrill Lynch Arkansas Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Arkansas income taxes as is consistent
with prudent investment management.
Merrill Lynch Asset Growth Fund,
Inc. .............................
High total investment return, consistent
with prudent risk, from investment in
United States and foreign equity, debt
and money market securities the combina-
tion of which will be varied both with
respect to types of securities and mar-
kets in response to changing market and
economic trends.
Merrill Lynch Asset Income Fund, A high level of current income through
Inc. ............................. investment primarily in United States
fixed income securities.
Merrill Lynch Balanced Fund for
Investment and Retirement, Inc. ..
As high a level of total investment re-
turn as is consistent with a reasonable
and relatively low level of risk by in-
vesting in common stocks and other types
of securities, including fixed income
securities and convertible securities.
Merrill Lynch Basic Value Fund, Capital appreciation and, secondarily,
Inc. ............................. income through investment in securities,
primarily equities, that are undervalued
and therefore represent basic investment
value.
Merrill Lynch California Insured
Municipal Bond Fund...............
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide sharehold-
ers with as high a level of income ex-
empt from Federal and California income
taxes as is consistent with prudent in-
vestment 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 pri-
marily of intermediate-term investment
grade California Municipal Bonds.
33
<PAGE>
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 con-
sistent with prudent risk through a
fully managed investment policy utiliz-
ing equity, debt and convertible securi-
ties.
Merrill Lynch Colorado Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Colorado income taxes as is consistent
with prudent investment management.
Merrill Lynch Connecticut
Municipal Bond Fund...............
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Connecticut income taxes as is consis-
tent with prudent investment management.
Merrill Lynch Corporate Bond Fund,
Inc. .............................
Current income from three separate diver-
sified portfolios of fixed income secu-
rities.
Merrill Lynch Developing Capital
Markets Fund, Inc. ...............
Long-term capital 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 coun-
tries 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 cor-
porations 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.
34
<PAGE>
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 to
provide as high a level of income exempt
from Federal income taxes as is consis-
tent with prudent investment management
while serving to offer shareholders the
opportunity to own securities exempt
from Florida intangible personal prop-
erty taxes through investment in a port-
folio primarily of intermediate-term in-
vestment grade Florida Municipal Bonds.
Merrill Lynch Florida Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal in-
come taxes as is consistent with prudent
investment management while seeking to
offer shareholders the opportunity to
own securities exempt from Florida in-
tangible personal property taxes.
Merrill Lynch Fund For Tomorrow,
Inc. ........................
Long-term growth through investment in a
quality-oriented portfolio of securi-
ties, primarily common stocks, of is-
suers, 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 securi-
ties placing particular emphasis on com-
panies that have exhibited above-average
growth rates in earnings.
Merrill Lynch Fundamental Value
Portfolio..... (available only for
exchanges by certain individual
retirement accounts for which A portfolio of Merrill Lynch Asset
Merrill Lynch acts as custodian) Builder Program, Inc., a series fund,
whose objective is to provide capital
appreciation and income by investing in
securities, with at least 65% of the
portfolio's assets being invested in eq-
uities.
Merrill Lynch Global Allocation
Fund, Inc. .......................
High total return consistent with prudent
risk, through a fully managed investment
policy utilizing U.S. and foreign equi-
ty, 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.
35
<PAGE>
Merrill Lynch Global Bond Fund for
Investment and Retirement.........
High total investment return from invest-
ment in a global portfolio of debt in-
vestments denominated in various curren-
cies and multinational currency units.
Merrill Lynch Global Convertible
Fund, Inc. .......................
High total return from investment primar-
ily in an internationally diversified
portfolio of convertible debt securi-
ties, convertible preferred stock and
"synthetic" convertible securities con-
sisting of a combination of debt securi-
ties or preferred stock and warrants or
options.
Merrill Lynch Global Holdings,
Inc. .. (residents of Arizona must The highest total investment return con-
meet investor suitability sistent with prudent risk through world-
standards) wide investment in an internationally
diversified portfolio of securities.
Merrill Lynch Global Opportunity
Portfolio..... (available only for A portfolio of Merrill Lynch Asset
exchanges by certain individual Builder Program, Inc., a series fund,
retirement accounts for which whose objective is to provide a high to-
Merrill Lynch acts as custodian) tal investment return through an invest-
ment policy utilizing United States and
foreign equity, debt and money market
securities, the combination of which
will vary depending upon changing market
and economic trends.
Merrill Lynch Global Resources Long-term growth and protection of capi-
Trust............................. tal from investment in securities of do-
mestic and foreign companies that pos-
sess substantial natural resource as-
sets.
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 se-
curities 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 Growth Fund for
Investment and Retirement.........
Growth of capital and, secondarily, in-
come 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, Capital appreciation through worldwide
Inc. ..... (residents of Wisconsin investment in equity securities of com-
must meet investor suitability panies that derive or are expected to
standards) derive a substantial portion of their
sales from products and services in
healthcare.
36
<PAGE>
Merrill Lynch International Equity
Fund..............................
Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of is-
suers located in countries other than
the United States.
Merrill Lynch Latin America Fund,
Inc. .............................
Capital appreciation by investing primar-
ily in Latin American equity and debt
securities.
Merrill Lynch Maryland Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide 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 to
provide as high a level of income exempt
from Federal and Massachusetts income
taxes as is consistent with prudent in-
vestment management through investment
in a portfolio primarily of intermedi-
ate-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 to provide as high a
level of income exempt from Federal and
Massachusetts income taxes as is consis-
tent 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 to
provide as high a level of income exempt
from Federal and Michigan income taxes
as is consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term in-
vestment grade Michigan Municipal Bonds.
Merrill Lynch Michigan Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Michigan income taxes as is consistent
with prudent investment management.
37
<PAGE>
Merrill Lynch Minnesota Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Minnesota personal income taxes as is
consistent with prudent investment man-
agement.
Merrill Lynch Municipal Bond Fund,
Inc. .............................
Tax-exempt income from three separate di-
versified 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 ex-
empt from Federal income taxes by in-
vesting 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 to
provide 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.
Merrill Lynch New Jersey Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
New Jersey income taxes as is consistent
with prudent investment management.
Merrill Lynch New Mexico Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
New Mexico income taxes as is consistent
with prudent investment management.
38
<PAGE>
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 to
provide 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 pri-
marily 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 in-
come taxes as is consistent with prudent
investment management.
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 pru-
dent investment management.
Merrill Lynch Pacific Fund, Inc. .. Capital appreciation by investing in eq-
uity securities of corporations domi-
ciled in Far Eastern and Western Pacific
countries, including Japan, Australia,
Hong Kong, Singapore and the Philip-
pines.
39
<PAGE>
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 in-
vestment management through investment
in a portfolio of intermediate-term in-
vestment 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 Pennsyl-
vania 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 is-
suers in weak financial condition or ex-
periencing poor operating results be-
lieved to be undervalued relative to the
current or prospective condition of such
issuer.
Merrill Lynch Quality Bond
Portfolio..... (available only for A portfolio of Merrill Lynch Asset
exchanges by certain individual Builder Program, Inc., a series fund,
retirement accounts for which whose objective is to provide a high
Merrill Lynch acts as custodian) level of current income through invest-
ment in a diversified portfolio of debt
obligations, such as corporate bonds and
notes, convertible securities, preferred
stocks and governmental obligations.
Merrill Lynch Short-Term Global
Income Fund, Inc. ................
As high a level of current income as is
consistent with prudent investment man-
agement from a global portfolio of high
quality debt securities denominated in
various currencies and multinational
currency units and having remaining ma-
turities not exceeding three years.
Merrill Lynch Special Value Fund,
Inc. .............................
Long-term growth of capital from invest-
ments in securities, primarily common
stocks, of relatively small companies
believed to have special investment
value and emerging growth companies re-
gardless 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.
40
<PAGE>
Merrill Lynch Technology Fund, Capital appreciation through worldwide
Inc. ............................. investment in equity securities of com-
panies 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 Tex-
as, its political subdivisions, agencies
and instrumentalities.
Merrill Lynch U.S. Government
Securities Portfolio... (available A portfolio of Merrill Lynch Asset
only for exchanges by certain Builder Program, Inc., a series fund,
individual retirement accounts whose objective is to provide a high
for which Merrill Lynch acts as current return through investments in
custodian) U.S. Government and government agency
securities, including GNMA mortgage-
backed certificates and other mortgage-
backed governmental securities.
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 securi-
ties denominated in various currencies,
including multinational currencies.
Class A Money Market Funds:
Merrill Lynch Ready Assets Trust... Preservation of capital, liquidity and
the highest possible current income con-
sistent with the foregoing objectives
from the short-term money market securi-
ties in which the Trust invests.
Merrill Lynch Retirement Reserves
Money Fund.... (available only for Currently the only portfolio of Merrill
exchanges within certain Lynch Retirement Series Trust, a series
retirement plans) fund, whose objectives are current in-
come, preservation of capital and li-
quidity available from investing in a
diversified portfolio of short-term
money market securities.
41
<PAGE>
Merrill Lynch U.S.A. Government
Reserves..........................
Preservation of capital, current income
and liquidity available from investing
in direct obligations of the U.S. Gov-
ernment and repurchase agreements relat-
ing to such securities.
Merrill Lynch U.S. Treasury Money
Fund..............................
Preservation of capital, liquidity and
current income through investment exclu-
sively in a diversified portfolio of
short-term marketable securities which
are direct obligations of the U.S. Trea-
sury.
Class B, Class C and Class D Money Market Funds:
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 se-
curity of principal from investment in
securities issued or guaranteed by the
U.S. Government, its agencies and in-
strumentalities and in repurchase agree-
ments secured by such obligations.
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.......................
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversi-
fied portfolio of short-term, high qual-
ity municipal bonds.
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 se-
curity of principal from investment in
direct obligations of the U.S. Treasury
and up to 10% of its total assets in re-
purchase agreements secured by such ob-
ligations.
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.
42
<PAGE>
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds 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
Securities and Exchange Commission. The Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
TAXES
The Fund intends to continue 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, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income 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. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate
dividends eligible for the dividends received deduction among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission's exemptive order permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year, or such other method as the Internal Revenue Service may
prescribe. 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.
43
<PAGE>
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 conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes. For this purpose, the Fund will
allocate foreign taxes and foreign source income among the Class A, Class B,
Class C and Class D shareholders according to a method similar to that
described above for the allocation of dividends eligible for the dividends
received deduction.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
44
<PAGE>
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 in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield/high risk securities may be purchased at a discount
and may therefore cause the Fund to accrue income before amounts due under the
obligations are paid. In addition, a portion of the interest payments on such
high yield/high risk securities may be treated as dividends for federal income
tax purposes; in such case, if the issuer of such high yield/high risk
securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under proposed
regulations the Fund 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.
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
45
<PAGE>
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules
to Section 1256 contracts held by the Fund may alter the timing and character
of distributions to shareholders. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by the Fund solely
to reduce the risk of changes in price or interest or currency exchange rates
with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's 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, futures and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income 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
46
<PAGE>
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, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (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.
47
<PAGE>
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select PricingSM System,
Class A shares of the Fund outstanding prior to October 21, 1994, have been
redesignated Class D shares, and historical performance data pertaining to such
shares is included in the information provided under the caption "Class D
Shares".
<TABLE>
<CAPTION>
CLASS A SHARES CLASS C SHARES
------------------------------------- -----------------------------------
REDEEMABLE VALUE OF REDEEMABLE VALUE
EXPRESSED AS A A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
$1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
----------------- ------------------- ----------------- -----------------
PERIOD AVERAGE ANNUAL TOTAL RETURN
- ------ (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to June 30, 1995. (19.47)% $861.10 (15.05)% $893.50
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to June 30, 1995. (9.11)% $908.90 (9.75)% $902.50
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to June 30, 1995. (13.89)% $861.10 (10.65)% $893.50
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES CLASS D SHARES
------------------------------------- -----------------------------------
REDEEMABLE VALUE OF REDEEMABLE VALUE
EXPRESSED AS A A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
$1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
----------------- ------------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (August 5,
1994) to June 30, 1995. (16.59)% $849.10 (17.08)% $844.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (August 5,
1994) to June 30, 1995. (11.55)% $884.50 (10.85)% $891.50
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (August 5,
1994) to June 30, 1995. (15.09)% $849.10 (15.53)% $844.70
</TABLE>
48
<PAGE>
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
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on April 12, 1994. At the date
of this Statement of Additional Information, the Fund has an authorized capital
of 400,000,000 shares of common stock, par value $0.10 per share, divided into
Class A, Class B, Class C and Class D shares, each of which consists of
100,000,000 shares. Under the Articles of Incorporation of the Fund, the
Directors have the authority to issue separate classes of shares which would
represent interests in the assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions except
that expenses related to the distribution and/or account maintenance of the
shares of a class may be borne solely by such class, and a class may have
exclusive voting rights with respect to matters relating to the expenses being
borne only by such class. The Fund has received an order (the "Order") from the
Commission permitting the issuance and sale of multiple classes of shares. The
Order permits the Fund to issue additional classes of shares if the Board of
Directors deems such issuance to be in the best interest of the Fund. 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 rights. The redemption, conversion and exchange rights are
described elsewhere herein and in the Prospectus. Shares issued 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.
Each share of Common Stock is entitled to participate equally in dividends and
distributions declared by the Fund and in the net assets of the Fund upon
liquidation or dissolution after satisfaction of outstanding liabilities,
except that 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.
49
<PAGE>
The organizational expenses of the Fund (estimated at approximately $88,100)
were paid by the Fund and are being amortized over a period not exceeding five
years. The proceeds realized by the Manager upon the redemption of any of the
shares initially purchased by it will be reduced by the proportional amount of
the unamortized organizational expenses which the number of such initial shares
being redeemed bears to the number of shares initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and shares outstanding as of June 30, 1995, is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net Assets................... $5,992,091 $132,296,170 $4,923,879 $23,927,532
========== ============ ========== ===========
Number of Shares Outstanding. 671,536 14,959,548 556,866 2,686,134
========== ============ ========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 8.92 $ 8.84 $ 8.84 $ 8.91
Sales Charge (for Class A and
Class D shares: 5.25% of
offering price (5.54% of net
asset value per share))*.... .49 ** ** .49
---------- ------------ ---------- -----------
Offering Price............... $ 9.41 $ 8.84 $ 8.84 $ 9.40
========== ============ ========== ===========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus and "Redemption of Shares--Contingent Deferred Sales Charges--
Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the independent directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(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.
50
<PAGE>
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on June 30 of each year. The Fund sends to
its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act, and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on September 30, 1995.
51
<PAGE>
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edged". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
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.
52
<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
--Leading market positions in well established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, in assigning ratings to
such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
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<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols presented below are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be
questionable over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
"caa" An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payments.
"c" This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
54
<PAGE>
DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S RATINGS GROUP
("STANDARD & POOR'S")
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and
C the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
55
<PAGE>
B Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
c The letter c indicates that the holder's option to tender the security
for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L The letter L indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured and interest is adequately
collateralized. In the case of certificates of deposit, the letter L
indicates that the deposit, combined with other deposits being held in
the same right and capacity, will be honored for principal and accrued
pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the
deposit is assumed by a successor insured institution, upon maturity.
p The letter p indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed
by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and
timely 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.
56
<PAGE>
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-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.
57
<PAGE>
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the debt rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated
"AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for a preferred stock in this category than for
issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance,
B as predominately speculative with respect to the issuer's capacity to
CCC pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
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<PAGE>
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
A preferred stock rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors,
Merrill Lynch Global SmallCap Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global SmallCap Fund, Inc. as of
June 30, 1995, and the related statements of operations and changes in net
assets and the financial highlights for the period August 5, 1994 (commencement
of operations) to June 30, 1995. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
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 statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June
30, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Global SmallCap Fund, Inc. as of June 30, 1995, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated period in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 9, 1995
60
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<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Held/ Value Percent of
EUROPE Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Austria Capital Goods 15,000 Bohler Uddeholm A.G. $ 849,543 $ 1,038,254 0.6%
Utilities--Electric 27,400 Oesterreichische Elektrizitats AG
(Verbund) 1,688,207 2,009,099 1.2
Total Investments in Austria 2,537,750 3,047,353 1.8
Belgium Building Materials 20,420 Terca Brick Industries 1,016,106 1,150,018 0.7
Total Investments in Belgium 1,016,106 1,150,018 0.7
</TABLE>
62
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Denmark Engineering & 12,500 FLS Industries A/S 901,389 1,239,114 0.7
Construction
Foreign DKK 8,800,000 Denmark Government Bond,
Government 9% due 11/15/2000 1,694,284 1,688,583 1.0
Obligations
Total Investments in Denmark 2,595,673 2,927,697 1.7
Finland Airlines 225,000 Finnair OY 1,533,951 1,491,392 0.9
Chemicals 140,000 Kemira OY 995,598 1,164,071 0.7
Engineering & 75,000 Valmet Corporation 'A' 1,502,031 1,695,163 1.0
Construction
Holding Company 29,000 Fiskars OY AB 1,479,062 1,290,549 0.8
Total Investments in Finland 5,510,642 5,641,175 3.4
France Advertising 14,500 Euro RSCG Worldwide, S.A. 1,314,199 1,517,024 0.9
Holding Company 3,722 Societe EuraFrance S.A. 1,182,561 1,230,426 0.7
Total Investments in France 2,496,760 2,747,450 1.6
Germany Machinery & 39,100 ++Kloeckner Werke AG 3,734,471 2,615,148 1.6
Engineering
Total Investments in Germany 3,734,471 2,615,148 1.6
Greece Banking 6,970 Ergo Bank S.A. (Registered) 325,290 320,791 0.2
Building & 7,990 Titan Cement Co. S.A. 302,811 303,427 0.2
Construction
Foods 2,776 Delta Dairy S.A. (Ordinary) 56,327 57,772 0.0
Total Investments in Greece 684,428 681,990 0.4
Ireland Banking & Finance 700,000 Anglo Irish Bank Corp. PLC 607,595 595,577 0.4
Foods 314,100 Greencore PLC 2,140,602 2,374,359 1.4
Total Investments in Ireland 2,748,197 2,969,936 1.8
Italy Automotive 45,000 ++Brembo S.p.A. 312,011 310,819 0.2
Building & 434,600 Fochi Filippo S.p.A. (Ordinary) 1,346,030 26,565 0.0
Construction 250,000 Fochi Filippo S.p.A. (Warrants) (b) 138,508 1,528 0.0
------------ ------------ ------
1,484,538 28,093 0.0
Consumer Goods 205,000 Merloni Elettrodomestici S.p.A. 337,062 273,166 0.2
Diversified 1,850,000 Compagnie Industriali Riunite S.p.A. (CIR) 2,071,370 1,413,509 0.8
Companies
Total Investments in Italy 4,204,981 2,025,587 1.2
Netherlands Capital Goods 13,000 Ahrend Groep NV 1,340,569 1,716,601 1.0
Retail Trade 26,250 Deboer Winkelbedrijven 1,044,419 1,330,551 0.8
Total Investments in the Netherlands 2,384,988 3,047,152 1.8
Spain Glass 40,800 ++Cristaleria Espanola S.A. 1,797,393 2,323,731 1.4
Real Estate 98,000 Vallehermoso S.A. 1,603,094 1,678,498 1.0
Textiles 115,000 ++Algodonera de San Antonio 1,269,666 1,262,485 0.8
Total Investments in Spain 4,670,153 5,264,714 3.2
Sweden Engineering & 34,600 Celsius Industrier AB 509,836 525,771 0.3
Construction 72,900 Svedala Industri AB (d) 1,742,255 1,964,906 1.2
Total Investments in Sweden 2,252,091 2,490,677 1.5
</TABLE>
63
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
EUROPE Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Switzerland Engineering & 1,210 Daetwyler Holdings AG $ 2,108,607 $ 2,207,646 1.3%
Construction 1,725 Swheizerische Industrie--Gasellschaft
Holdings AG (SIG) 1,802,127 1,948,306 1.2
------------ ------------ ------
3,910,734 4,155,952 2.5
Metal Fabricating 1,300 George Fisher AG 1,486,977 1,750,652 1.0
Total Investments in Switzerland 5,397,711 5,906,604 3.5
Turkey Beverages 135,975 Erciyas Biracilik Ve Malt Sanayii A.S. 54,354 116,955 0.1
Building & 333,432 Alarko Holdings A.S. 272,405 294,338 0.2
Construction
Insurance 477,000 Aksigorta A.S. 119,250 92,852 0.1
Total Investments in Turkey 446,009 504,145 0.4
United Automobile Parts 195,000 Croda International PLC (Ordinary) 1,118,968 1,106,839 0.7
Kingdom
Brewery 467,000 Boddington Group PLC 1,845,711 1,990,606 1.2
Computers 400,000 ++Acorn Computer Group PLC 569,441 569,399 0.3
89,900 ++Micro Focus Group PLC 1,123,032 1,100,992 0.7
------------ ------------ ------
1,692,473 1,670,391 1.0
Diversified 889,000 Howden Group PLC 1,262,630 1,159,443 0.7
Food & Beverage 667,000 Hazlewood Foods PLC 1,271,988 1,124,515 0.7
Health/ 1,230,000 London International Group (Ordinary) 1,862,069 2,161,728 1.3
Personal Care
Manufacturing 221,500 Low & Bonar PLC (Ordinary) 1,458,747 1,780,855 1.1
Media/Publishing 300,000 International Business Communications
(Ordinary) 1,043,116 1,336,020 0.8
Transportation 230,000 Ocean Group PLC (Ordinary) 977,405 1,137,685 0.7
Total Investments in the United Kingdom 12,533,107 13,468,082 8.2
Total Investments in Europe 53,213,067 54,487,728 32.8
LATIN
AMERICA
Brazil Appliances 3,200,000 Brasmotor Group S.A. (Preferred) 641,325 590,662 0.4
337,400,000 Refrigeracao Parana S.A. (Preferred) 678,464 655,750 0.4
------------ ------------ ------
1,319,789 1,246,412 0.8
Automotive 14,700 Capco Automotive Products Corp.
S.A. (ADR) (a) 124,950 113,925 0.1
Foreign BRL 500,000 Republic of Brazil, 6.687% due 4/15/2024 275,000 285,000 0.2
Government
Obligations
Textiles 2,054,000 Companhia de Tecidos Norte de Minas S.A.
(Preferred) 652,560 646,754 0.4
Total Investments in Brazil 2,372,299 2,292,091 1.5
Chile Banking 49,400 Banco Osorno y La Union S.A. (ADR) (a) 666,900 685,425 0.4
Total Investments in Chile 666,900 685,425 0.4
</TABLE>
64
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Colombia Paper 185,000 ++Papeles Nacionales C.A. (ADR) (a) 3,330,000 1,942,500 1.2
Retail 27,000 Gran Cadena de Almacenes Colombianos S.A.
(CADENALCO) (ADR) (a) 472,500 567,000 0.3
Total Investments in Colombia 3,802,500 2,509,500 1.5
Mexico Broadcasting & 253,000 ++Grupo Fernandez Editores, S.A. de
Publishing C.V.--BCP 404,963 95,456 0.1
Paper & Forest 75,000 Kimberly-Clark de Mexico, S.A. de C.V. 567,404 860,911 0.5
Products
Total Investments in Mexico 972,367 956,367 0.6
Peru Foods 356,300 Companhia Industrial Peru Pacifico S.A. 383,299 399,082 0.2
Total Investments in Peru 383,299 399,082 0.2
Venezuela Building 60,000 Corimon C.A.S.A.C.A. (ADR) (a) 367,200 390,000 0.2
Materials
Total Investments in Venezuela 367,200 390,000 0.2
Total Investments in Latin America 8,564,565 7,232,465 4.4
MIDDLE EAST/
AFRICA
South Africa Diversified 37,616 Morgan Stanley Africa Investment Fund 413,776 432,584 0.3
42,000 New South Africa Fund, Inc. 582,635 603,750 0.4
42,000 Southern Africa Fund, Inc. 592,838 593,250 0.4
Total Investments in South Africa 1,589,249 1,629,584 1.1
Total Investments in the Middle East/Africa 1,589,249 1,629,584 1.1
NORTH
AMERICA
Canada Insurance 67,925 Cambior Inc. 987,616 832,081 0.5
Leisure 116,384 Four Seasons Hotels Ltd. 1,319,172 1,441,025 0.9
Utilities--Gas 131,400 British Columbia Gas Inc. 1,425,996 1,387,691 0.8
Total Investments in Canada 3,732,784 3,660,797 2.2
United Aerospace 110,000 UNC, Inc. 637,625 591,250 0.4
States
Apparel 115,000 Farah, Inc. 1,148,408 747,500 0.4
5,000 Jones Apparel Group, Inc. 110,925 149,375 0.1
15,000 Marisa Christina, Inc. 168,950 210,000 0.1
------------ ------------ ------
1,428,283 1,106,875 0.6
Banking & Finance 7,500 Bankers Corp. 113,738 121,875 0.1
59,000 Charter One Financial, Inc. 1,225,870 1,445,500 0.9
9,200 The Co-Operative Bank of Concord 132,250 154,100 0.1
66,100 Roosevelt Financial Group, Inc. 1,071,451 1,090,650 0.7
------------ ------------ ------
2,543,309 2,812,125 1.8
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
NORTH
AMERICA Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Biotechnology 15,000 ++Cor Therapeutics, Inc. $ 168,375 $ 133,125 0.1%
States 10,000 ++Genetic Therapy, Inc. 100,050 143,750 0.1
(concluded) 15,000 ++Scios Nova, Inc. 74,025 60,938 0.0
------------ ------------ ------
342,450 337,813 0.2
Building & 12,000 Blount, Inc. (Class A) 523,696 535,500 0.3
Building 33,000 Oakwood Homes Corporation 869,607 845,625 0.5
Materials 51,000 ++Redman Industries, Inc. 913,875 1,083,750 0.6
15,300 Ryland Group, Inc. 206,581 246,713 0.1
39,800 Washington Homes, Inc. 199,396 179,100 0.1
------------ ------------ ------
2,713,155 2,890,688 1.6
Business Services 123,300 ++Applied Bioscience International, Inc. 713,757 631,913 0.4
Computers 15,000 ++Storage Technology Corporation 295,425 369,375 0.2
25,000 ++Stratus Computer, Inc. 787,870 775,000 0.5
------------ ------------ ------
1,083,295 1,144,375 0.7
Data Processing 10,000 ++Cognos, Inc. 121,250 285,000 0.2
10,000 ++Landmark Graphics Corp. 181,756 255,000 0.2
25,000 ++SHL Systemhouse, Inc. 125,000 175,000 0.1
20,000 ++Sterling Software, Inc. 639,468 770,000 0.5
25,000 ++Symantec Corp. 432,423 718,750 0.4
------------ ------------ ------
1,499,897 2,203,750 1.4
Electrical 20,000 ++Comptek Research, Inc. 238,700 360,000 0.2
Equipment
Electronics 10,000 Analogic Corporation 171,250 167,500 0.1
5,000 ++VLSI Technology, Inc. 58,750 149,375 0.1
------------ ------------ ------
230,000 316,875 0.2
Healthcare-- 60,000 ++Beverly Enterprises, Inc. 810,553 742,500 0.4
Products/Services 50,000 Charter Medical Corp. 874,658 812,500 0.5
53,800 ++Ramsay Health Care, Inc. 330,777 221,925 0.1
14,038 ++Ramsey Managed Care, Inc. 31,586 50,888 0.0
------------ ------------ ------
2,047,574 1,827,813 1.0
Home Furnishing 30,000 Crown Crafts, Inc. 447,788 495,000 0.3
Insurance 54,000 Ace, Ltd. 1,236,340 1,566,000 0.9
63,700 Capital Guaranty Corp. 957,847 1,146,600 0.7
50,000 First Colony Corp. 1,052,038 1,200,000 0.7
22,500 Harleysville Group, Inc. 459,038 540,000 0.3
73,200 PXRE Corp. 1,684,275 1,711,050 1.0
16,000 PartnerRe Holdings Ltd. 316,750 416,000 0.2
60,000 Security-Connecticut Corp. 1,296,100 1,545,000 0.9
------------ ------------ ------
7,002,388 8,124,650 4.7
Natural Resources 30,000 Brown (Tom), Inc. 364,775 438,750 0.3
100,000 ++Coho Resources, Inc. 466,689 500,000 0.3
35,000 ++Plains Resources, Inc. 218,750 306,250 0.2
50,000 Total Petroleum of North America Ltd. 613,000 550,000 0.3
55,000 ++TransTexas Gas Corp. 605,000 811,250 0.5
------------ ------------ ------
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
2,268,214 2,606,250 1.6
Pharmaceuticals 10,000 ++Vical, Inc. 81,077 97,500 0.1
Real Estate 27,000 Carr Realty Corp. 539,996 465,750 0.3
Investment 50,000 Crown American Realty Trust 726,750 631,250 0.4
Trust ------------ ------------ ------
1,266,746 1,097,000 0.7
Restaurants 67,500 ++TPI Enterprises, Inc. 377,458 282,656 0.2
Retailing 55,000 Baker (J.), Inc. 970,300 543,125 0.3
70,000 ++Catherines Stores Corp. 596,740 735,000 0.4
40,000 Hancock Fabrics, Inc. 371,281 365,000 0.2
8,300 OfficeMax, Inc. 157,700 231,363 0.1
21,000 Pier 1 Imports, Inc. 166,000 194,250 0.1
15,000 ++Rex Stores Corp. 195,900 210,000 0.1
165,000 ++Service Merchandise Co., Inc. 890,012 866,250 0.5
------------ ------------ ------
3,347,933 3,144,988 1.7
Textiles 75,000 ++Burlington Industries, Inc. 873,330 862,500 0.5
Transportation 11,300 ++Kirby Corp. 185,715 179,388 0.1
Utilities--Water 10,000 American Water Works Company, Inc. 276,850 317,500 0.2
Total Investments in the United States 29,605,544 31,430,909 18.6
Total Investments in North America 33,338,328 35,091,706 20.8
PACIFIC
BASIN
Australia Insurance 146,734 QBE Insurance Group 564,034 574,675 0.3
Merchandising 33,300 Amway Asia Pacific Ltd. 1,021,139 1,207,125 0.7
Mining 227,660 QCT Resources Ltd. 225,663 222,904 0.1
Total Investments in Australia 1,810,836 2,004,704 1.1
Hong Kong Broadcasting & 1,347,000 Ming Pao Enterprise Corp. Ltd. 1,015,477 713,776 0.4
Publishing
Financial US$ 920,000 Goldlion Capital Corp., 4.875%
Services due 2/01/1999 698,199 763,600 0.5
2,860,000 Winton Holdings Ltd. 1,040,875 694,919 0.4
------------ ------------ ------
1,739,074 1,458,519 0.9
Machinery 17,000 Beiren Printing Machinery Holdings Ltd.
(Class H) 7,804 3,493 0.0
Packaging 42,700 Sinocan Holdings Ltd. 12,191 12,141 0.0
Total Investments in Hong Kong 2,774,546 2,187,929 1.3
Indonesia Banking-- 163,000 PT Bank Bali 337,016 413,724 0.2
International
Telecommuni- 204,000 ++PT Kabelmetal Indonesia 287,351 343,666 0.2
cations &
Equipment
Total Investments in Indonesia 624,367 757,390 0.4
Japan Apparel 100,000 Goldwin Inc. 1,289,360 714,201 0.4
Automobile Parts 53,300 Murakami Corp. 1,089,531 736,170 0.4
71,000 Sanoh Industrial 963,400 553,181 0.3
110,000 Showa Corp. 1,098,685 727,187 0.4
89,000 Yamakawa Industrial Co. 1,085,484 782,729 0.5
------------ ------------ ------
4,237,100 2,799,267 1.6
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
PACIFIC
BASIN Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Japan Banks 17,000 Bank of the Ryukyus, Ltd. $ 988,951 $ 732,499 0.4%
(concluded)
Beverages 79,000 Hokkaido Coca-Cola Bottling Co., Ltd. 1,298,058 1,156,416 0.7
74,800 Sanyo Coca-Cola Bottling Co., Ltd. 1,130,306 1,218,557 0.7
------------ ------------ ------
2,428,364 2,374,973 1.4
Chemicals 70,000 Katakura Chikkarin Co., Ltd. 830,212 614,803 0.4
Computer Services 42,800 TKC Corp. 1,376,809 1,010,506 0.6
Construction 77,590 Japan Foundation Engineering 1,657,836 1,511,315 0.9
75,920 Tsuchiya Home Co. 1,667,047 1,209,916 0.7
35,200 USK Corp. 597,627 656,546 0.4
133,000 Yondenko Corp. 1,299,139 1,303,152 0.8
------------ ------------ ------
5,221,649 4,680,929 2.8
Consumer 59,000 Roland Corp. 1,429,975 905,442 0.5
Electricals
Electrical 84,000 Energy Support Corp. 642,525 475,977 0.3
Equipment 38,000 Maspro Denkoh Corp. 1,272,483 762,602 0.5
26,000 Shinmei Electric Co. 1,340,491 395,939 0.2
52,000 Sukegawa Electric Co. 682,343 524,849 0.3
------------ ------------ ------
3,937,842 2,159,367 1.3
Engineering & 24,000 Kyowa Engineering Consulting 479,335 283,320 0.2
Construction
Foods/Food 36,000 Ariake Japan Co. Ltd. 1,533,040 1,444,930 0.9
Processing 108,000 Fuji Oil Co., Ltd. 983,191 810,861 0.5
------------ ------------ ------
2,516,231 2,255,791 1.4
Health Services 40,000 Kanto Biomedical Laboratory 845,365 566,639 0.3
62,000 SRL Inc. 1,416,697 922,205 0.6
------------ ------------ ------
2,262,062 1,488,844 0.9
Industrials 27,000 Roki Techno Co., Ltd. 870,024 608,783 0.4
Iron & Steel 197,000 Nippon Chutesukan 1,253,043 918,605 0.6
Leasing 28,000 Marufuji Sheet Piling Co., Ltd. 301,153 177,830 0.1
51,700 Nissho Iwai Steel Leasing Co. 624,366 317,365 0.2
------------ ------------ ------
925,519 495,195 0.3
Machinery 46,640 Giken Seisakusho Co. Inc. 1,454,121 743,289 0.4
Metal Fabrication 115,000 Mory Industries Inc. 953,698 719,514 0.4
124,000 Toyo Kohan Co., Ltd. 1,057,406 933,916 0.6
------------ ------------ ------
2,011,104 1,653,430 1.0
Packaging 45,800 Chuo Kagaku Co. Ltd. 1,931,203 1,081,336 0.6
Paper 109,000 Tomoku Co., Ltd. 859,183 681,974 0.4
Pharmaceuticals 21,600 Towa Pharmaceutical Co. 1,529,792 1,175,493 0.7
Pollution Control 148,000 Organo Corp. 1,642,912 1,380,238 0.8
Real Estate 53,000 Keihanshin Real Estate Co. Ltd. 525,507 356,628 0.2
56,000 TOC Corp. 596,958 509,031 0.3
------------ ------------ ------
1,122,465 865,659 0.5
</TABLE>
68
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Restaurants 47,000 Aim Services Co., Ltd. 1,405,610 904,380 0.5
41,500 Mos Food Services, Inc. 1,468,614 1,053,299 0.6
83,800 Ohsho Food Service Corp. 2,268,651 1,879,589 1.1
------------ ------------ ------
5,142,875 3,837,268 2.2
Retail Specialty 60,000 ADO Electric Industrial Co., Ltd. 1,956,905 1,296,187 0.8
50,000 Arcland Sakamoto 964,197 767,324 0.5
91,000 Daika Corporation 1,444,684 699,339 0.4
53,900 Home Wide Corp. 1,078,769 605,110 0.4
34,800 Nitori Co. 1,257,950 940,763 0.6
------------ ------------ ------
6,702,505 4,308,723 2.7
Retail Stores 119,000 Sotetsu Rosen Co., Ltd. 1,112,252 1,025,499 0.6
Services 63,800 Ichinen Co., Ltd. 1,690,116 1,513,847 0.9
Textiles 92,000 Komatsu Seiren Co., Ltd. 1,364,484 1,162,082 0.7
Trading 31,000 Japan CBM Corp. 1,200,936 706,292 0.4
Trucking 108,000 Nippon Konpo Unyu Soko 1,045,185 988,077 0.6
95,000 Tonami Transportation Co., Ltd. 743,587 695,313 0.4
------------ ------------ ------
1,788,772 1,683,390 1.0
Total Investments in Japan 59,599,196 43,861,045 26.1
Malaysia Broadcasting 158,000 Sistem Televisyen Malaysia BHD 477,231 421,333 0.3
Newspaper/ 266,000 New Straits Times Press BHD 1,090,579 823,918 0.5
Publishing
Total Investments in Malaysia 1,567,810 1,245,251 0.8
New Zealand Broadcasting & 229,000 Independent News Ltd. 711,948 711,213 0.4
Publishing
Electronics 46,500 PDL Industries Ltd. 218,223 232,930 0.1
Foreign NZ$ 2,825,000 New Zealand Government Bonds, 8%
Government due 11/15/1995 1,760,873 1,879,827 1.1
Obligations
Transportation 154,400 Ports of Auckland Ltd. 270,171 304,215 0.2
--Marine
Total Investments in New Zealand 2,961,215 3,128,185 1.8
South Korea Electronics 4,456 Samsung Electronics Co. 435,574 428,890 0.3
Iron/Steel 15,385 Pohang Iron & Steel Company, Ltd. 442,780 453,858 0.3
Total Investments in South Korea 878,354 882,748 0.6
Total Investments in the Pacific Basin 70,216,324 54,067,252 32.1
SOUTHEAST
ASIA
India Hotels 61,000 ++East India Hotels Ltd. 887,000 953,430 0.6
Media 100,000 Videocon International, Ltd. (GDR) (c) 385,000 355,000 0.2
Tobacco 30,500 Indian Tobacco Co. Ltd. (ADR) (a) 392,687 213,500 0.1
Total Investments in India 1,664,687 1,521,930 0.9
Total Investments in Southeast Asia 1,664,687 1,521,930 0.9
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
SHORT-TERM Face Value Percent of
SECURITIES Amount Issue Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Commercial US$ 1,531,000 General Electric Capital Corp., 6.20%
Paper* due 7/03/1995 $ 1,530,473 $ 1,530,473 0.9%
Total Investments in Commercial Paper 1,530,473 1,530,473 0.9
Commercial Pound 1,500,000 General Electric Capital Corp., 6.65%
Paper*-- Sterling due 7/10/1995++++++ 2,381,648 2,373,032 1.4
Foreign ThB 38,294,380 Siam City Bank Ltd., 12.25% due 9/04/1995 1,514,677 1,514,704 0.9
Total Investments in Commercial Paper--
Foreign 3,896,325 3,887,736 2.3
Foreign C$ 2,600,000 Canadian Treasury Bill, 6.540% due
Government 8/17/1995 1,867,538 1,876,505 1.1
Obligations* NZ$ 6,300,000 New Zealand Treasury Bill, 7.3864%
due 9/06/1995++++++ 4,166,504 4,142,550 2.5
Total Investments in Foreign
Government Obligations 6,034,042 6,019,055 3.6
US Government & US Treasury Bills++++:
Agency US$ 600,000 5.51% due 7/27/1995 597,612 597,556 0.4
Obligations* 125,000 5.59% due 7/27/1995 124,495 124,491 0.1
50,000 5.62% due 7/27/1995 49,797 49,796 0.0
Total Investments in US Government &
Agency Obligations 771,904 771,843 0.5
Total Investments in
Short-Term Securities 12,232,744 12,209,107 7.3
<CAPTION>
OPTIONS Number of Contracts/ Premiums
PURCHASED Face Amount Issue Paid
<S> <C> <C> <C> <C> <C> <C>
Call Options 85,839 Topix, 2nd Section, expiring September
Purchased 1995 at YEN 231.31 200,000 0 0.0
Currency Put YEN 17,000,000 Japanese Yen, expiring August 1995
Options at YEN 99 219,250 0 0.0
Purchased YEN 2,000,000 Japanese Yen, expiring January 1996
at YEN 86.15 66,456 38,326 0.0
------------ ------------ ------
285,706 38,326 0.0
Total Options Purchased 485,706 38,326 0.0
Total Investments 181,304,670 166,278,098 99.4
OPTIONS Premiums
WRITTEN Received
Currency Call YEN 7,000,000 Japanese Yen, expiring August 1995
Options at YEN 91.29 (88,550) (597,800) (0.3)
Written YEN 10,000,000 Japanese Yen, expiring August 1995
at YEN 91.38 (130,700) (850,730) (0.5)
YEN 2,000,000 Japanese Yen, expiring January 1996
at YEN 81.75 (66,456) (57,056) (0.0)
Total Options Written (285,706) (1,505,586) (0.8)
Total Investments, Net of Options Written $181,018,964 164,772,512 98.6
============
Variation Margin on Stock Index Futures Contracts** 2,401 0.0
Unrealized Appreciation on Forward Foreign Exchange Contracts*** 153,104 0.1
</TABLE>
70
<PAGE>
<TABLE>
<S> <C> <C> <C>
Other Assets Less Liabilities 2,211,655 1.3
------------ ------
Net Assets $167,139,672 100.0%
============ ======
<FN>
(a)American Depositary Receipt (ADR).
(b)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and the number of
shares are subject to adjustment under certain conditions until
the expiration date.
(c)Global Depositary Receipt (GDR).
(d)Restricted security as to resale. The value of the Fund's
investments in restricted securities was approximately $1,965,000,
representing 1.2% of net assets.
</TABLE>
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Svedala Industri AB 1/01/1994 $1,742,255 $1,964,906
Total $1,742,255 $1,964,906
========== ==========
++Non-income producing security.
++++Security represents collateral in connection with stock index
futures contracts.
++++++Security represents collateral in connection with open options.
*Commercial Paper, certain Foreign Government and US Government &
Agency Obligations are traded on a discount basis; the interest
rates shown are the discount rates paid at the time of purchase
by the Fund.
**Stock index futures contracts purchased as of June 30, 1995 were
as follows:
</TABLE>
<TABLE>
<CAPTION>
Number of Expiration Value
Contracts Issue Exchange Date (Note 1c)
<S> <C> <C> <C> <C>
15 Nikkei 225 CME September 1995 $1,088,250
7 Nikkei 225 SIMEX September 1995 599,309
Total Stock Index Futures Contracts Purchased
(Total Contract Price--$1,804,604) $1,687,559
==========
<CAPTION>
Stock index futures contracts sold as of June 30, 1995 were as follows:
Number of Expiration Value
Contracts Issue Exchange Date (Note 1c)
<S> <C> <C> <C> <C>
11 DAX DTB September 1995 $1,675,054
2 FTSE100 LIFFE September 1995 264,182
Total Stock Index Futures Contracts Sold
(Total Contract Price--$1,981,730) $1,939,236
==========
<CAPTION>
***Forward foreign exchange contracts as of June 30, 1995 were
as follows:
Unrealized
Appreciation
Foreign Currency Expiration (Depreciation)
Purchased Date (Note 1b)
<S> <C> <C> <C>
C$ 2,550,390 July 1995 $ (18,127)
Chf 4,638,762 July 1995 (29,959)
Pound 724,329 September 1995 (17,528)
Sterling
YEN 1,668,321,000 July 1995 7,550
Nlg 4,034,342 July 1995 (77,169)
<CAPTION>
<S> <C>
Total (US$ Commitment--$29,499,469) $(135,233)
---------
<CAPTION>
Foreign Currency Sold
<S> <C> <C> <C>
Ats 21,193,600 July 1995 $(178,364)
Bf 34,000,000 September 1995 (31,903)
Chf 8,252,094 July 1995 (56,047)
DM 2,439,415 July 1995 (65,240)
Fmk 16,044,000 July 1995 (37,388)
Frf 4,956,510 July 1995 (39,232)
Nlg 4,187,470 July 1995 (125,695)
NZ$ 2,815,000 July 1995 (2,747)
YEN 3,229,257,225 July 1995 824,953
<CAPTION>
<S> <C>
Total (US$ Commitment--$60,133,878) $ 288,337
---------
Total Unrealized Appreciation--Net on Forward Foreign
Exchange Contracts $ 153,104
=========
See Notes to Financial Statements.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1995
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$180,818,964) (Note 1a) $166,239,772
Unrealized appreciation on forward foreign exchange contracts (Note 1c) 153,104
Options purchased, at value (cost--$485,706) (Notes 1a & 1c) 38,326
Foreign cash (Note 1c) 2,470,413
Receivables:
Securities sold $ 6,457,078
Dividends 415,772
Capital shares sold 240,271
Interest 137,266
Variation margin on stock index futures contracts (Notes 1a & 1c) 2,401 7,252,788
------------
Deferred organization expenses (Note 1g) 149,700
Prepaid registration fees and other assets (Note 1g) 84,411
------------
Total assets 176,388,514
------------
Liabilities: Options written, at value (premiums received--$285,706) (Notes 1a & 1c) 1,505,586
Payables:
Securities purchased 6,902,125
Capital shares redeemed 360,291
Distributor (Note 2) 119,867
Investment adviser (Note 2) 118,623 7,500,906
------------
Accrued expenses and other liabilities 242,350
------------
Total liabilities 9,248,842
------------
Net Assets: Net assets $167,139,672
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 67,154
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 1,495,955
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 55,687
Class D Common Stock, $0.10 par value, 100,000,000 shares authorized 268,613
Paid-in capital in excess of par 186,984,460
Undistributed investment income--net 387,027
Accumulated realized capital losses on investments and foreign currency
transactions--net (5,854,788)
Accumulated distributions in excess of realized capital gains--net (99,763)
Unrealized depreciation on investments and foreign currency transactions--net (16,164,673)
------------
Net assets $167,139,672
============
Net Asset Class A--Based on net assets of $5,992,091 and 671,536 shares outstanding $ 8.92
Value: ============
Class B--Based on net assets of $132,296,170 and 14,959,548 shares outstanding $ 8.84
============
Class C--Based on net assets of $4,923,879 and 556,866 shares outstanding $ 8.84
============
Class D--Based on net assets of $23,927,532 and 2,686,134 shares outstanding $ 8.91
============
See Notes to Financial Statements.
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Period August 5, 1994++ to June 30, 1995
<S> <C> <C> <C>
Investment Interest and discount earned (net of $1,191 foreign withholding tax) $ 2,291,499
Income Dividends (net of $221,334 foreign withholding tax) 1,807,794
(Notes 1e & 1f): ------------
Total income 4,099,293
------------
Expenses: Investment advisory fees (Note 2) $ 1,300,660
Account maintenance and distribution fees--Class B (Note 2) 1,246,220
Transfer agent fees--Class B (Note 2) 307,627
Printing and shareholder reports 162,017
Registration fees (Note 1g) 153,461
Custodian fees 148,050
Accounting services (Note 2) 111,195
Account maintenance fees--Class D (Note 2) 58,337
Transfer agent fees--Class D (Note 2) 47,476
Directors' fees and expenses 35,833
Amortization of organization expenses (Note 1g) 33,606
Professional fees 32,103
Account maintenance and distribution fees--Class C (Note 2) 24,770
Transfer agent fees--Class C (Note 2) 7,171
Transfer agent fees--Class A (Note 2) 6,058
Pricing fees 5,162
Other 32,520
------------
Total expenses 3,712,266
------------
Investment income--net 387,027
------------
Realized & Realized loss from:
Unrealized Gain Investments--net (1,737,110)
(Loss) on Foreign currency transactions--net (4,117,678) (5,854,788)
Investments & ------------
Foreign Currency Unrealized appreciation (depreciation) on:
Transactions--Net Investments--net (16,321,003)
(Notes 1c, 1d, Foreign currency transactions--net 156,330 (16,164,673)
1f & 3): ------------ ------------
Net realized and unrealized loss on investments and foreign currency transactions (22,019,461)
------------
Net Decrease in Net Assets Resulting from Operations $(21,632,434)
============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
August 5, 1994++ to
Increase (Decrease) in Net Assets: June 30, 1995
<S> <C> <C>
Operations: Investment income--net $ 387,027
Realized loss on investments and foreign currency transactions--net (5,854,788)
Change in unrealized depreciation on investments and foreign currency transactions--net (16,164,673)
------------
Net decrease in net assets resulting from operations (21,632,434)
------------
Distributions to In excess of realized gain on investments--net:
Shareholders Class A (1,696)
(Note 1h): Class B (81,949)
Class C (1,158)
Class D (14,960)
------------
Net decrease in net assets resulting from distributions to shareholders (99,763)
------------
Capital Share Net increase in net assets derived from capital share transactions 188,771,869
Transactions ------------
(Note 4):
Net Assets: Total increase in net assets 167,039,672
Beginning of period 100,000
------------
End of period* $167,139,672
============
<FN>
*Undistributed investment income--net $ 387,027
============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
<S> <C> <C> <C> <C> <C>
For the For the For the For the
Period Period Period Period
October 21, August 5, October 21, August 5,
The following per share data and ratios 1994++ 1994++ 1994++ 1994
have been derived from information to June 30, to June 30, to June 30, to June 30,
provided in the financial statements. 1995 1995 1995 1995
Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
Per Share Net asset value, beginning of period $ 9.82 $ 10.00 $ 9.80 $ 10.00
Operating --------- --------- --------- ---------
Performance: Investment income--net .04 .01 .01 .08
Realized and unrealized loss on investments and
foreign currency transactions--net (.93) (1.16) (.96) (1.16)
--------- --------- --------- ---------
Total from investment operations (.89) (1.15) (.95) (1.08)
--------- --------- --------- ---------
Less distributions in excess of realized gain on
investments--net (.01) (.01) (.01) (.01)
--------- --------- --------- ---------
Net asset value, end of period $ 8.92 $ 8.84 $ 8.84 $ 8.91
========= ========= ========= =========
</TABLE>
74
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Based on net asset value per share (9.11%)+++ (11.55%)+++ (9.75%)+++ (10.85%)+++
Investment ========= ========= ========= =========
Return:**
Ratios to Expenses, excluding account maintenance and
Average distribution fees 1.62%* 1.56%* 1.66%* 1.52%*
Net Assets: ========= ========= ========= =========
Expenses 1.62%* 2.56%* 2.66%* 1.77%*
========= ========= ========= =========
Investment income--net 1.06%* .10%* .20%* .90%*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 5,992 $ 132,296 $ 4,924 $ 23,928
Data: ========= ========= ========= =========
Portfolio turnover 47.96% 47.96% 47.96% 47.96%
========= ========= ========= =========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. Prior to commencement of
operations on August 5, 1994, the Fund had no operations other
than those relating to organizational matters and the issue of 5,000
Class B capital shares and 5,000 Class D capital shares of the Fund to
Merrill Lynch Asset Management, L.P. ("MLAM") for $100,000. The
Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. Shares of Class A and Class D are sold with a
front-end sales charge. Shares of Class B and Class C may be subject
to a contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the same
terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter
market are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary
market. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broad-
est and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or,
in the case of options traded in the over-the-counter market, the
last asked price. Options purchased are valued at the last sale price
in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the direction
of the Fund's Board of Directors.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank
of the Federal Reserve System or a primary dealer in US Govern-
ment securities. Under such agreements, the bank or primary dealer
agrees to repurchase the security at a mutually agreed upon time
and price. The Fund takes possession of the underlying securities,
marks to market such securities and, if necessary, receives addi-
tions to such securities daily to ensure that the contract is fully
collateralized.
75
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
*Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on opera-
tions is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
*Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign exchange
rates. Such transactions may be effected with respect to hedges on
non-US dollar denominated securities owned by the Fund, sold by
the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
*Options--The Fund is authorized to purchase and write call and
put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted
from (or added to) the proceeds of the security sold. When an
option expires (or the Fund enters into a closing transaction), the
Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost
of the closing transactions exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
*Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures con-
tracts for the purpose of hedging the market risk on existing securi-
ties or the intended purchase of securities. Futures contracts are
contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time
it was closed.
(d) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing
when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the period.
Foreign currency transactions are the result of settling (realized)
or valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(f) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
date, except that if the ex-dividend date has passed, certain divi-
dends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income (including amor-
tization of discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. The general partner of MLAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
76
<PAGE>
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For
such services, the Fund pays a monthly fee of 0.85%, on an annual
basis, of the average daily net assets of the Fund. MLAM has entered
into a Sub-Advisory Agreement with Merrill Lynch Asset Management
U.K., Ltd. ("MLAM U.K."), an affiliate of MLAM, pursuant to which
MLAM pays MLAM U.K. a fee in an amount to be determined from
time to time by the Investment Adviser and MLAM U.K. but in no
event in excess of the amount that the Investment Adviser actually
receives. For the period August 5, 1994 to June 30, 1995, MLAM
paid MLAM U.K. a fee of $133,021 pursuant to such Agreement.
Certain of the states in which the shares of the Fund are qualified
for sale impose limitations on the expenses of the Fund. The most
restrictive annual expense limitation requires that the Investment
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. MLAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment will
be made to MLAM during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation at the
time of such payment.
Pursuant to the distribution plans ("the Distribution Plans") adopted
by the Fund in accordance with Rule 12b-1 under the Investment
Company Act of 1940, the Fund pays the Distributor ongoing account
maintenance and distribution fees. The fees are accrued daily and
paid monthly at annual rates based upon the average daily net
assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to
the Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance
services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the period August 5, 1994 to June 30, 1995, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on
sales of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 8 $ 157
Class D $20,112 $1,084,067
For the period August 5, 1994 to June 30, 1995, MLPF&S received
contingent deferred sales charges of $390,517 and $2,540 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $17,207 in commissions on the execu-
tion of portfolio security transactions for the period ended June 30,
1995.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLAM U.K., MLPF&S, MLFD, MLFDS and/
or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period ended June 30, 1995 were $237,582,805 and
$67,556,451, respectively.
Net realized and unrealized gains (losses) as of June 30, 1995
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Investments:
Long-term $ (1,652,993) $(14,555,555)
Short-term (2,139) (23,637)
Stock index futures contracts (124,119) (74,551)
Options purchased -- (447,380)
Option written 42,141 (1,219,880)
------------ ------------
Total investments (1,737,110) (16,321,003)
------------ ------------
Currency transactions:
Options written 409,100 --
Options purchased (429,100) --
Foreign currency transactions (1,229,663) 3,226
Forward foreign exchange contracts (2,868,015) 153,104
------------ ------------
Total currency transactions (4,117,678) 156,330
------------ ------------
Total $ (5,854,788) $(16,164,673)
============ ============
77
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
As of June 30, 1995, net unrealized depreciation for Federal income
tax purposes aggregated $14,934,493, of which $10,019,705 related
to appreciated securities and $24,954,198 related to depreciated
securities. The aggregate cost of investments, including options
purchased, at June 30, 1995 for Federal income tax purposes was
$181,174,266.
Transactions in call options written for the period ended June 30,
1995 were as follows:
Par Value Covered By Premiums
Written Options Received
Outstanding call options written at
beginning of period -- --
Options written 40,000,000 $ 694,806
Options closed (17,000,000) (346,300)
Options expired (4,000,000) (62,800)
------------ ------------
Outstanding call options written at
end of period 19,000,000 $ 285,706
============ ============
Transactions in put options written for the period ended June 30,
1995 were as follows:
Par Value
Covered By Premiums
Written Options Paid
Outstanding put options written at
beginning of period -- --
Options written 1,000 $ 42,141
Options expired (1,000) (42,141)
------------ ------------
Outstanding put options written at
end of period -- $ --
============ ============
4. Capital Share Transactions:
Net increase in net assets derived from capital share trans-
actions was $188,771,869 for the period ended June 30, 1995.
Transactions in capital shares for each class were as follows:
Class A Shares for the Period Dollar
October 21, 1994++ to June 30, 1995 Shares Amount
Shares sold 940,965 $ 8,735,463
Shares issued to shareholders in
reinvestment of distributions 173 1,602
------------ ------------
Total issued 941,138 8,737,065
Shares redeemed (269,602) (2,410,041)
------------ ------------
Net increase 671,536 $ 6,327,024
------------ ------------
[FN]
++Commencement of Operations.
Class B Shares for the Period Dollar
August 5, 1994++ to June 30, 1995 Shares Amount
Shares sold 19,401,309 $190,346,473
Shares issued to shareholders in
reinvestment of distributions 3,965 36,674
------------ ------------
Total issued 19,405,274 190,383,147
Automatic conversion of shares (120,766) (1,112,657)
Shares redeemed (4,329,960) (39,053,042)
------------ ------------
Net increase 14,954,548 $150,217,448
============ ============
[FN]
++Prior to August 5, 1994 (commencement of operations), the Fund
issued 5,000 shares to MLAM for $50,000.
Class C Shares for the Period Dollar
October 21, 1994++ to June 30, 1995 Shares Amount
Shares sold 688,727 $ 6,332,720
Shares issued to shareholders in
reinvestment of distributions 118 1,096
------------ ------------
Total issued 688,845 6,333,816
Shares redeemed (131,979) (1,171,764)
------------ ------------
Net increase 556,866 $ 5,162,052
============ ============
[FN]
++Commencement of Operations.
Class D Shares for the Period Dollar
August 5, 1994++ to June 30, 1995 Shares Amount
Shares sold 3,959,595 $ 39,101,204
Automatic conversion of shares 120,315 1,112,657
Shares issued to shareholders in
reinvestment of distributions 573 5,319
------------ ------------
Total issued 4,080,483 40,219,180
Shares redeemed (1,399,349) (13,153,835)
------------ ------------
Net increase 2,681,134 $ 27,065,345
============ ============
[FN]
++Prior to August 5, 1994 (commencement of operations), the Fund
issued 5,000 shares to MLAM for $50,000.
As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Fund outstanding prior to
October 21, 1994 have been redesignated Class D Shares. There
were 2,992,993 shares redesignated amounting to $29,891,279.
5. Commitments:
On June 30, 1995, the Fund had entered into foreign exchange
contracts under which it had agreed to purchase and sell various
foreign currencies with approximate values of $2,498,000, and
$3,834,000, respectively.
78
<PAGE>
[This page is intentionally left blank.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Hedging Techniques........................................................ 3
Other Investment Policies and Practices................................... 7
Investment Restrictions................................................... 10
Management of the Fund..................................................... 13
Compensation of Directors................................................. 14
Management and Advisory Arrangements...................................... 15
Purchase of Shares......................................................... 17
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 17
Reduced Initial Sales Charges--
Class A and Class D Shares............................................... 18
Distribution Plans........................................................ 21
Limitations on the Payment of Deferred Sales Charges...................... 22
Redemption of Shares....................................................... 23
Deferred Sales Charges--
Class B and Class C Shares............................................... 24
Portfolio Transactions and Brokerage....................................... 25
Determination of Net Asset Value........................................... 26
Shareholder Services....................................................... 28
Investment Account........................................................ 28
Automatic Investment Plans................................................ 28
Automatic Reinvestment of Dividends
and Capital Gains Distributions.......................................... 29
Systematic Withdrawal Plans--
Class A and Class D Shares............................................... 29
Exchange Privilege........................................................ 30
Taxes...................................................................... 43
Tax Treatment of Options, Futures and
Forward Foreign Exchange Transactions.................................... 45
Special Rules for Certain Foreign
Currency Transactions.................................................... 46
Performance Data........................................................... 47
General Information........................................................ 49
Description of Shares..................................................... 49
Computation of Offering Price
Per Share................................................................ 50
Independent Auditors...................................................... 50
Custodian................................................................. 50
Transfer Agent............................................................ 51
Legal Counsel............................................................. 51
Reports to Shareholders................................................... 51
Additional Information.................................................... 51
Appendix................................................................... 52
Independent Auditors' Report............................................... 60
Financial Statements....................................................... 62
</TABLE>
Code #18186-1095
LOGO MERRILL LYNCH
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
October 25, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for the period August 5, 1994 (commencement of
operations) to June 30, 1995.
Contained in Part B:
Schedule of Investments as of June 30, 1995.
Statement of Assets and Liabilities as of June 30, 1995.
Statement of Operations for the period August 5, 1994 (commencement of
operations) to June 30, 1995.
Statement of Changes in Net Assets for the period August 5, 1994
(commencement of operations) to June 30, 1995.
Financial Highlights for the period August 5, 1994 (commencement of
operations) to June 30, 1995.
(B)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Incorporation of Registrant, filed on April 12, 1994.(a)
(b) --Articles of Amendment to the Articles of Incorporation of the
Registrant, filed on May 19, 1994.(b)
(c) --Articles of Amendment to the Articles of Incorporation of the
Registrant, filed on July 27, 1994.(c)
(d) --Articles of Amendment to the Articles of Incorporation of the
Registrant, filed on August 8, 1994.
(e) --Articles of Amendment to the Articles of Incorporation of the
Registrant, filed on October 19, 1994.
(f) --Articles Supplementary to Articles of Incorporation of the
Registrant, filed on October 21, 1994.
2 --By-Laws of the Registrant.(a)
3 --None.
4 --Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of shareholders.(d)
5(a) --Form of Management Agreement between the Registrant and Merrill
Lynch Asset Management, L.P.(b)
(b) --Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited.(b)
6(a) --Form of Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(e)
(b) --Form of Class B Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(b)
(c) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(e)
(d) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(e)
7 --None.
8 --Form of Custody Agreement between the Registrant and Brown Brothers
Harriman & Co.(b)
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Financial Data
Services, Inc. (now known as Merrill Lynch Financial Data Services,
Inc.)(b)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(b) --Form of License Agreement between Merrill Lynch & Co., Inc. and the
Registrant relating to the Registrant's use of the "Merrill Lynch"
name.(b)
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, L.P.(b)
14 --None.
15(a) --Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(b)
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.(e)
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(e)
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
Shares.
(b) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
Shares.
(c) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
Shares.
(d) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
Shares (formerly designated Class A Shares).
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --None.
</TABLE>
- --------
(a) Filed on April 29, 1994 as an Exhibit to Registrant's Registration
Statement on Form N-1A (File No. 33-53399) ("Registration Statement").
(b) Filed on June 23, 1994 as an Exhibit to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement.
(c) Filed on July 28, 1994 as an Exhibit to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement.
(d) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7),
Articles VI, VII and IX of the Registrant's Articles of Incorporation, as
amended and supplemented, filed as Exhibits 1(a),(b),(c),(d),(e) and (f) 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 as Exhibit 2 to the Registration Statement on
Form N-1A.
(e) Filed on October 19, 1994 as an Exhibit to Post-Effective Amendment No. 1
to Registrant's Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1995*
-------------- -------------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per
share.............................................. 693
Class B Shares of Common Stock, par value $0.10 per
share.............................................. 16,842
Class C Shares of Common Stock, par value $0.10 per
share.............................................. 866
Class D Shares of Common Stock, par value $0.10 per
share.............................................. 2,739
</TABLE>
* Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch, Pierce,
Fenner and Smith Incorporated.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may
be concerned, Article VI of the Registrant's By-Laws provides that such
payments will be made only on the following conditions: (i) the advances must
be limited to amounts used, or to be used, for the preparation or presentation
of a defense to the action, including costs connected with the preparation of
a settlement; (ii) advances may be made only on receipt of a written promise
by, or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount which it is ultimately determined he 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 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.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE MANAGER
(a) Merrill Lynch Asset Management, L.P. (the "Manager") acts as the
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Balanced Fund for Investment and Retirement, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch Institutional Intermediate Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch
C-3
<PAGE>
Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill
Lynch Variable Series Funds, Inc.; and for the following closed-end investment
companies: Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end investment companies: Apex Municipal Fund, Inc., Corporate
High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers
Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund,
Inc., MuniVest Fund, Inc., MuniVest Fund II Inc., MuniVest California Insured
Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., 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 P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, FAM, Princeton Services, Inc. ("Princeton Services")
and Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of Merrill Lynch Financial Data Services,
Inc. ("FDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
July 1, 1993, 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 paragraphs, and Messrs.
Giordano, Harvey, Hewitt, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------- ---------------------------------------
<C> <C> <S>
ML & Co................. Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services...... General Partner General Partner of FAM
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------- ---------------------------------------
<C> <C> <S>
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 Executive Vice President of FAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of FDS; President of Princeton
Administrators, L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel and
President, General Secretary of FAM; Senior Vice President,
Counsel and General Counsel, Director and Secretary of
Secretary Princeton Services; Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller of FAM;
and Controller Senior Vice President and Controller of
Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Richard L. Reller....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch International Equity Fund and Merrill Lynch
Short-Term Global Income Fund, Inc. The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
C-5
<PAGE>
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since July 1, 1993, for his
own account or in the capacity of director, officer, partner or trustee. In
addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard and Yardley are
officers of one or more of the registered investment companies listed in the
preceding paragraphs:
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME MLAM U.K. VOCATION OR EMPLOYMENT
---- ---------------- ---------------------------------------
<C> <C> <S>
Arthur Zeikel........... Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services; Director of MLFD;
Executive Vice President of ML &
Co.; Executive Vice President of
Merrill Lynch
Alan J. Albert.......... Senior Managing Vice President of the Manager
Director
Terry K. Glenn.......... Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of Princeton
Services; President and Director of
MLFD; Director of FDS; President of
Princeton Administrators, L.P.
Adrian Holmes........... Managing Director Director of Merrill Lynch Global
Asset Management
Andrew John Bascand..... Director Director of Merrill Lynch Global
Asset Management
Edward Gobora........... Director Director of Merrill Lynch Global
Asset Management
Richard Kilbride........ Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan.......... Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerard M. Richard....... Senior Vice President Senior Vice President and Treasurer
of the Manager and FAM; Senior Vice
President and Treasurer of
Princeton Services; Vice President
and Treasurer of MLFD
Stephen J. Yardley...... Director Director of Merrill Lynch Global
Asset Management
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
C-6
<PAGE>
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Program, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, Graczyk, 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
Kevin P. Boman.......... Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and Assistant None
Treasurer
Mark A. Desario......... Vice President None
James T. Fatseas........ Vice President None
Stanley Graczyk......... Vice President None
Michelle T. Lau......... Vice President None
Debra W. Landsman-Yaros. Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary Secretary
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the rules thereunder are maintained at the offices of
the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and its
transfer agent, Merrill Lynch Financial Data Services, Inc. (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484).
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management related service contract.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of Plainsboro and
the State of New Jersey, on the day of October 1995.
Merrill Lynch Global SmallCap Fund,
Inc.
(Registrant)
/s/ Terry K. Glenn
By:__________________________________
(TERRY K. GLENN, EXECUTIVE VICE
PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
TITLE DATE(S)
SIGNATURE
Arthur Zeikel* President (Principal
- ------------------------------------- Executive Officer)
(ARTHUR ZEIKEL) and Director
Gerald M. Richard* Treasurer (Principal
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
Donald Cecil* Director
- -------------------------------------
(DONALD CECIL)
Edward H. Meyer* Director
- -------------------------------------
(EDWARD H. MEYER)
Charles C. Reilly* Director
- -------------------------------------
(CHARLES C. REILLY)
Richard R. West* Director
- -------------------------------------
(RICHARD R. WEST)
Edward D. Zinbarg* Director
- -------------------------------------
(EDWARD D. ZINBARG)
/s/ Terry K. Glenn October , 1995
*By:_________________________________
(TERRY K. GLENN, ATTORNEY-IN-FACT)
C-8
<PAGE>
POWER OF ATTORNEY
I, Edward D. Zinbarg, hereby authorize Arthur Zeikel, Terry K. Glenn, Gerald
M. Richard, Mark B. Goldfus, Robert Harris or Michael J. Hennewinkel, or any of
them, as attorney-in-fact, to sign on my behalf any amendments to the
Registration Statement for each of the following registered investment
companies and to file the same, with all exhibits thereto, with the Securities
and Exchange Commission: Emerging Tigers Fund, Inc.; Merrill Lynch Americas
Income Fund, Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.; Merrill
Lynch Dragon Fund, Inc.; Merrill Lynch EuroFund; Merrill Lynch Global
Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for Investment and
Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch Global SmallCap
Fund, Inc.; Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International
Equity Fund; Merrill Lynch Latin America Fund, Inc.; Merrill Lynch Middle
East/Africa Fund, Inc.; Merrill Lynch Pacific Fund, Inc.; Merrill Lynch Short-
Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.; and
Worldwide DollarVest Fund, Inc.
SIGNATURE TITLE DATE
/s/ Edward D. Zinbarg Director of each February 21,
- ------------------------------------- above referenced 1995
(EDWARD D. ZINBARG) Maryland
corporation and
Trustee of each
above referenced
Massachusetts
business trust)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(d) --Articles of Amendment to the Articles of Incorporation of the
Registrant, filed on August 8, 1994.
(e) --Articles of Amendment to the Articles of Incorporation of the
Registrant, filed on October 19, 1994.
(f) --Articles Supplementary to Articles of Incorporation of the
Registrant, filed on October 21, 1994.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
16(a) --Schedule of computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating
to Class A Shares.
(b) --Schedule of computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating
to Class B Shares.
(c) --Schedule of computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating
to Class C Shares.
(d) --Schedule of computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating
to Class D Shares (formerly designated Class A Shares).
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHICS AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. CLASS A
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 181018964
<INVESTMENTS-AT-VALUE> 164772512
<RECEIVABLES> 7252788
<ASSETS-OTHER> 2857628
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 174882928
<PAYABLE-FOR-SECURITIES> 6902125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 841131
<TOTAL-LIABILITIES> 7743256
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188871869
<SHARES-COMMON-STOCK> 671536
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 387027
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5854788)
<OVERDISTRIBUTION-GAINS> 99763
<ACCUM-APPREC-OR-DEPREC> (16164673)
<NET-ASSETS> 5992091
<DIVIDEND-INCOME> 1807794
<INTEREST-INCOME> 2291499
<OTHER-INCOME> 0
<EXPENSES-NET> 3712266
<NET-INVESTMENT-INCOME> 387027
<REALIZED-GAINS-CURRENT> (5854788)
<APPREC-INCREASE-CURRENT> (16164673)
<NET-CHANGE-FROM-OPS> (21632434)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1696
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 940965
<NUMBER-OF-SHARES-REDEEMED> 269602
<SHARES-REINVESTED> 173
<NET-CHANGE-IN-ASSETS> 167039672
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1300660
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3712266
<AVERAGE-NET-ASSETS> 3744566
<PER-SHARE-NAV-BEGIN> 9.82
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> (.93)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.92
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> AUG-05-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 181018964
<INVESTMENTS-AT-VALUE> 164772512
<RECEIVABLES> 7252788
<ASSETS-OTHER> 2857628
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 174882928
<PAYABLE-FOR-SECURITIES> 6902125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 841131
<TOTAL-LIABILITIES> 7743256
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188871869
<SHARES-COMMON-STOCK> 14959548
<SHARES-COMMON-PRIOR> 5000
<ACCUMULATED-NII-CURRENT> 387027
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5854788)
<OVERDISTRIBUTION-GAINS> 99763
<ACCUM-APPREC-OR-DEPREC> (16164673)
<NET-ASSETS> 132296170
<DIVIDEND-INCOME> 1807794
<INTEREST-INCOME> 2291499
<OTHER-INCOME> 0
<EXPENSES-NET> 3712266
<NET-INVESTMENT-INCOME> 387027
<REALIZED-GAINS-CURRENT> (5854788)
<APPREC-INCREASE-CURRENT> (16164673)
<NET-CHANGE-FROM-OPS> (21632434)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 81949
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19401309
<NUMBER-OF-SHARES-REDEEMED> 4450726
<SHARES-REINVESTED> 3965
<NET-CHANGE-IN-ASSETS> 167039672
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1300660
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3712266
<AVERAGE-NET-ASSETS> 137839626
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> (1.16)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.84
<EXPENSE-RATIO> 2.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. CLASS C
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 181018964
<INVESTMENTS-AT-VALUE> 164772512
<RECEIVABLES> 7252788
<ASSETS-OTHER> 2857628
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 174882928
<PAYABLE-FOR-SECURITIES> 6902125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 841131
<TOTAL-LIABILITIES> 7743256
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188871869
<SHARES-COMMON-STOCK> 556866
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 387027
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5854788)
<OVERDISTRIBUTION-GAINS> 99763
<ACCUM-APPREC-OR-DEPREC> (16164673)
<NET-ASSETS> 4923879
<DIVIDEND-INCOME> 1807794
<INTEREST-INCOME> 2291499
<OTHER-INCOME> 0
<EXPENSES-NET> 3712266
<NET-INVESTMENT-INCOME> 387027
<REALIZED-GAINS-CURRENT> (5854788)
<APPREC-INCREASE-CURRENT> (16164673)
<NET-CHANGE-FROM-OPS> (21632434)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1158
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 688727
<NUMBER-OF-SHARES-REDEEMED> 131979
<SHARES-REINVESTED> 118
<NET-CHANGE-IN-ASSETS> 167039672
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1300660
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3712266
<AVERAGE-NET-ASSETS> 3587767
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> (.96)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.84
<EXPENSE-RATIO> 2.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. CLASS D
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> AUG-05-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 181018964
<INVESTMENTS-AT-VALUE> 164772512
<RECEIVABLES> 7252788
<ASSETS-OTHER> 2857628
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 174882928
<PAYABLE-FOR-SECURITIES> 6902125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 841131
<TOTAL-LIABILITIES> 7743256
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188871869
<SHARES-COMMON-STOCK> 2686134
<SHARES-COMMON-PRIOR> 5000
<ACCUMULATED-NII-CURRENT> 387027
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5854788)
<OVERDISTRIBUTION-GAINS> 99763
<ACCUM-APPREC-OR-DEPREC> (16164673)
<NET-ASSETS> 23927532
<DIVIDEND-INCOME> 1807794
<INTEREST-INCOME> 2291499
<OTHER-INCOME> 0
<EXPENSES-NET> 3712266
<NET-INVESTMENT-INCOME> 387027
<REALIZED-GAINS-CURRENT> (5854788)
<APPREC-INCREASE-CURRENT> (16164673)
<NET-CHANGE-FROM-OPS> (21632434)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 14960
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4079910
<NUMBER-OF-SHARES-REDEEMED> 1399349
<SHARES-REINVESTED> 573
<NET-CHANGE-IN-ASSETS> 167039672
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1300660
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3712266
<AVERAGE-NET-ASSETS> 25809672
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> (1.16)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.91
<EXPENSE-RATIO> 1.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.1(d)
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. (the "Corporation"), a Maryland
corporation having its principal office c/o The Corporation Trust Incorporated,
32 South Street, Baltimore, Maryland 21202, does hereby certify to the State
Department of Assessments and Taxation of Maryland as follows:
FIRST: The charter of the Corporation is hereby amended by striking out
Article IV (3) of the Articles of Incorporation in its entirety and inserting in
lieu thereof the following:
"Article IV
CAPITAL STOCK
-------------
(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. The Board's authority pursuant to this paragraph shall include, but
not be limited to, the power to vary among all the holders of a particular
class or series (a) the length of time shares must be held prior to
reclassification to shares of another class or series (the "Holding
Period(s)"), (b) the manner in which the time for such Holding Period(s) is
determined and (c) the class or series into which the particular class or
series is being reclassified; provided, however, that, subject to the first
sentence
<PAGE>
of this section, with respect to holders of the Corporation's shares issued
on or after the date of the Corporation's first effective prospectus which
sets forth Holding Period(s) (the "First Holding Period Prospectus"), the
Holding Period(s), the manner in which the time for such Holding Period(s)
is determined and the class or series into which the particular class or
series is being reclassified shall be disclosed in the Corporation's
prospectus or statement of additional information in effect at the time
such shares, which are the subject of the reclassification, were issued;
and provided, further, that, subject to the first sentence of this section,
with respect to holders of the Corporation's Class B shares issued prior to
the date of the Corporation's First Holding Period Prospectus, the Holding
Period shall be ten (10) years for retirement plan (as recognized by the
Internal Revenue Code of 1986, as amended from time to time) holders of
issued Class B shares purchased without a contingent deferred sales charge
(a "CDSC-Waived Retirement Plan") and shall be the Holding Period set forth
in the Corporation's First Holding Period Prospectus for all other holders
of issued Class B shares; Class B shares held by a CDSC-Waived Retirement
Plan shall be reclassified to Class D shares in the month following the
month in which the first Class B share of any mutual fund advised by
Merrill Lynch Asset Management, L.P., Fund Asset Management, L.P., or their
affiliates or successors, held by such CDSC-Waived Retirement Plan has been
held for the ten (10) year Holding Period established by the Corporation's
Board of Directors for such CDSC-Waived Retirement Plan Class B
shareholder; and the Class B shares of every shareholder other than CDSC-
Waived Retirement Plans shall be reclassified to Class D shares in the
month following the month in which such shares have been held for the
Holding Period established by the Corporation's Board of Directors for
shareholders other than CDSC-Waived Retirement Plans in the Corporation's
First Holding Period Prospectus."
SECOND: The foregoing Articles of Amendment have been effected in the
manner and by the vote required by the Corporation's charter and the laws of the
State of Maryland. Pursuant to Section 2-604 of the Maryland Corporations and
2
<PAGE>
Associations Code, the amendment was advised by the Board of Directors of
the Corporation and approved by the sole stockholder.
THIRD: Except as amended hereby, the Corporation's charter shall remain in
full force and effect.
FOURTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.
The President acknowledges these Articles of Amendment to be the corporate
act of the Corporation and states that to the best of his knowledge, information
and belief, the matters set forth in these Articles of Amendment with respect to
the authorization and approval of the amendment of the Corporation's charter are
true in all material respects, and that this statement is made under the
penalties for perjury.
3
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
has caused these Articles of Amendment to be signed in its name and on its
behalf by its President, a duly authorized officer of the Corporation, and
attested by its Secretary as of the 3rd day of August, 1994.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
/s/ Arthur Zeikel
----------------------------------------
Arthur Zeikel
President
Attest:
/s/ Robert Harris
- -----------------------
Robert Harris
Secretary
4
<PAGE>
EXHIBIT 99.1(e)
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION
APPROVED FOR RECORD
10-19-94 at 3:14 p.m.
-------- ---------
Effective 10-21-94
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. a Maryland corporation having its
principal Maryland office c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended by substituting
the words "Class D" in each place where the words "Class A" appear.
SECOND: The foregoing amendment has been effected in the manner and by the
vote required by the Corporation's charter and the laws of the State of
Maryland. The amendment is limited to a change expressly permitted by Section
2-605(a) (4) of the Maryland Corporations and Associations Code to be made
without action by the stockholders and was approved by a majority of the entire
Board of Directors of the Corporation. The Corporation is registered as an open-
end company under the Investment Company Act of 1940, as amended.
THIRD: Except as amended hereby, the Corporation's charter shall remain in
full force and effect.
FOURTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.
FIFTH: These Articles of Amendment shall be effective at the very
---------
beginning of the day on October 21, 1994.
----------------
The President acknowledges these Articles of Amendment to be the corporate
act of the Corporation and states that to the best of his knowledge, information
and belief, the matters set forth in these Articles of Amendment with respect to
the authorization and approval of the amendment of the Corporation's charter are
true in all material respects, and that this statement is made under the
penalties for perjury.
STATE OF MARYLAND
-----------------
I hereby certify that this is a true and complete copy of the 3 page
-----
document on file in this office. DATED: 10-20-94.
----------
STATE DEPARTMENT OF ASSESSMENTS AND TAXATION
BY: /s/ Gloria J. Watson
- ----------------------------------------------------------------------
This stamp replaces our pervious certification system. Effective 10/84
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. has caused
these Articles of Amendment to be signed in its name and on behalf by its
President, a duly authorized officer of the Corporation, and attested by its
Secretary as of the 17th day of October, 1994.
----
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
/s/ Arthur Zeikel
--------------------------------------
Arthur Zeikel
President
Attest:
/s/ Robert Harris
- ---------------------------
Robert Harris, Secretary
<PAGE>
EXHIBIT 99.1(f)
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION
APPROVED FOR RECORD
10-21-94 at 8:30 p.m.
-------- ---------
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION AND CREATING TWO ADDITIONAL CLASSES
OF COMMON STOCK
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC., a Maryland corporation having its
principal office c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202, does (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940, as amended, with authority to issue TWO HUNDRED
MILLION (200,000,000) shares of capital stock. The Corporation has two classes
of capital stock consisting of ONE HUNDRED MILLION (100,000,000) shares of Class
D Common Stock and ONE HUNDRED MILLION (100,000,000) shares of Class B Common
Stock. All shares of all classes and series of the Corporation's capital stock
have a par value of Ten Cents ($.10) per share and an aggregate par value of
TWENTY MILLION Dollars ($20,000,000).
SECOND: The Board of Directors of the Corporation, acting in accordance
with Section 2-105(c) of the Maryland Corporations and Association Code, hereby
increases the total number of authorized shares of Class B Common Stock of the
Corporation by TWO HUNDRED MILLION (200,000,000) shares.
THIRD: After this increase in the number of authorized shares of capital
stock of the Corporation, the Corporation will have authority to issue FOUR
HUNDRED MILLION (400,000,000) shares of capital stock and the capital stock will
consist of ONE HUNDRED MILLION (100,000,000) shares of Class D Common Stock and
THREE HUNDRED MILLION (300,000,000) shares of Class B Common Stock.
FOURTH: After this increase in the number of authorized shares of capital
stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of FORTY MILLION Dollars ($40,000,000).
FIFTH: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by its charter, the Board of Directors has reclassified ONE
HUNDRED MILLION (100,000,000) authorized and unissued shares of the Class B
Stock of the Corporation as Class C Common Stock of par value of Ten Cents
STATE OF MARYLAND
-----------------
I hereby certify that this is a true and complete copy of the 5 page
-----
document on file in this office. DATED: 10-21-94.
----------
STATE DEPARTMENT OF ASSESSMENTS AND TAXATION
BY: /s/ Gloria J. Watson
- ----------------------------------------------------------------------
This stamp replaces our pervious certification system. Effective 10/84
<PAGE>
($.10) per share and of the aggregate par value of TEN MILLION Dollars
(S10,000,000).
SIXTH: The preferences, designations, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of Class C Common Stock are as follows:
The Class C Common Stock of the Corporation shall represent the same interest
in the Corporation and have identical preferences, designations, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as the Class B Common Stock
as of the date of these Articles Supplementary, except as otherwise set forth in
the Corporation's charter and further except that:
(i) Expenses related to the distribution of the Class C Common Stock shall be
borne solely by such class and such class shall have exclusive voting rights
with respect to matters relating to the expenses being borne solely by such
class;
(ii) Such distribution expenses borne solely by Class C Common Stock shall be
appropriately reflected (in the manner determined by the Board of Directors) in
the net asset value, dividends, distribution and liquidation rights of the
shares of such class: and
(iii) Class C Common Stock shall not be reclassified into Class D shares.
SEVENTH: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by its charter, the Board of Directors has reclassified ONE
HUNDRED MILLION (100,000,000) authorized and unissued shares of the Class B
Common Stock of the Corporation as Class A Common Stock of par value of Ten
Cents ($.10) per share and of the aggregate par value of TEN MILLION Dollars
($10,000,000).
EIGHTH: The preferences, designations, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of Class A Common Stock are as follows:
The Class A Common Stock of the Corporation shall represent the same interest
in the Corporation and have identical preferences, designations, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as the Class B Common Stock
as of the date of these Articles Supplementary,
2
<PAGE>
except as otherwise set forth in the Corporation's charter and further except
that:
(i) Expenses related to the distribution of the Class A
Common Stock shall be borne solely by such class and such class shall have
exclusive voting rights with respect to matters relating to the expenses being
borne solely by such class;
(ii) Such distribution expenses borne solely by Class A Common Stock shall be
appropriately reflected (in the manner determined by the Board of Directors) in
the net asset value, dividends, distribution and liquidation rights of the
shares of such class; and
(iii) Class A Common Stock shall not be reclassified into Class D shares.
3
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. has caused these
Articles Supplementary to be signed in its name and on its behalf by its
President and attested by its Secretary on October 17th, 1994.
----
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
By /s/ Arthur Zeikel
-----------------------------------------
Arthur Zeikel
President
Attest
/s/ Robert Harris
- ------------------------
Robert Harris, Secretary
THE UNDERSIGNED, President of MERRILL LYNCH GLOBAL SMALLCAP FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said Corporation, the foregoing Articles Supplementary TO BE THE
corporate act of said Corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects, and that this statement is made under the penalties for perjury.
/s/ Arthur Zeikel
---------------------------
Arthur Zeikel
President
4
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global SmallCap Fund, Inc.
We consent to the use in Post-Effective Amendment No. 2 to Registration
Statement No. 33-53399 of our report dated August 9, 1995 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 25, 1995
<PAGE>
EXHIBIT 16
Global SmallCap Fund - Class A
10/21/94 - 06/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 10.36
---------
Divided by Net Asset Value 9.82
---------
Equals Shares Purchased 96.487 101.833
Plus Shares Acquired through
Dividend Reinvestment 0.053 0.056
--------- ---------
Equals Shares Held at 06/30/95 96.540 101.889
Multiplied by Net Asset at 06/30/95 8.92 8.92
--------- ---------
Equals Ending Redeemable Value at
$1,000 Investment (ERV) at 06/30/95 861.14 908.85
Divided by $1,000 (P) 0.8611 0.9089
Subtract 1 -0.1389 -0.0911
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -13.89%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -9.11%
=========
ERV divided by P 0.8611
Raise to the power of 1.4484
Equals 0.8053
Subtract 1 -0.1947
Expressed as a percentage equals the
Average Annualized Total Return -19.47%
=========
</TABLE>
* Does not include sales charge for the period.
<PAGE>
EXHIBIT 16
Global SmallCap Fund - Class B
08/05/94 - 06/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.00 10.00
--------- ---------
Equals Shares Purchased 100.000 100.000
Plus Shares Acquired through
Dividend Reinvestment 0.056 0.056
--------- ---------
Equals Shares Held at 06/30/95 100.056 100.056
Multiplied by Net Asset Value at 06/30/95 8.84 8.84
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 884.50 884.50
Less deferred sales charge (35.36) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1,000 Investment (ERV) at 06/30/95 849.14 884.50
--------- ---------
Divided by $1,000 (P) 0.8491 0.8845
Subtract 1 -0.1509 -0.1155
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -15.09%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -11.55%
=========
ERV divided by P 0.8491
Raise to the power of 1.1094
Equals 0.8341
Subtract 1 -0.1659
Expressed as a percentage equals the
Average Annualized Total Return -16.59%
=========
</TABLE>
* Does not include sales charge for the period.
<PAGE>
EXHIBIT 16
Global SmallCap Fund - Class C
10/21/94 - 06/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 9.80 9.80
--------- ---------
Equals Shares Purchased 102.041 102.041
Plus Shares Acquired through
Dividend Reinvestment 0.057 0.057
--------- ---------
Equals Shares Held at 06/30/95 102.097 102.097
Multiplied by Net Asset Value at 06/30/95 8.84 8.84
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 902.54 902.54
Less deferred sales charge (9.02) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1,000 Investment (ERV) at 06/30/95 893.52 902.54
--------- ---------
Divided by $1,000 (P) 0.8935 0.9025
Subtract 1 -0.1065 -0.0975
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -10.65%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -9.75%
=========
ERV divided by P 0.8935
Raise to the power of 1.4484
Equals 0.9495
Subtract 1 -0.1505
Expressed as a percentage equals the
Average Annualized Total Return -15.05%
=========
</TABLE>
* Does not include sales charge for the period.
<PAGE>
EXHIBIT 16
Global SmallCap Fund - Class D
08/05/94 - 06/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 10.55
---------
Divided by Net Asset Value 10.00
---------
Equals Shares Purchased 94.750 100.000
Plus Shares Acquired through
Dividend Reinvestment 0.052 0.055
--------- ---------
Equals Shares Held at 06/30/95 94.802 100.055
Multiplied by Net Asset Value at 06/30/95 8.91 8.91
--------- ---------
Equals Ending Redeemable Value at
$1,000 Investment (ERV) at 06/30/95 844.69 891.49
--------- ---------
Divided by $1,000 (P) 0.8447 0.8915
Subtract 1 -0.1553 -0.1085
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -15.53%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -10.85%
=========
ERV divided by P 0.8447
Raise to the power of 1.1094
Equals 0.8292
Subtract 1 -0.1708
Expressed as a percentage equals the
Average Annualized Total Return -17.08%
=========
</TABLE>
* Does not include sales charge for the period.
