As filed with the Securities and Exchange Commission on October 28, 1996
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. 3 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [x]
Amendment No. 5 [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 LLP MERRILL LYNCH ASSET MANAGEMENT
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey 08543-9011
Attention: Thomas R. Smith, Jr., Esq.
Brian M. Kaplowitz, Esq.
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 23, 1996.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
=======================================================================================================
Amount of Proposed maximum Proposed maximum
Title of securities shares being offering price aggregate Amount of
being registered registered per unit offering price Registration Fee
- ----------------------------------- -------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Shares of Common Stock (par value
$.10 per share) 3,705,344 $11.15 $329,995* $100
=================================== ============== ================ ================ =================
</TABLE>
*(1) The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 8,967,615 shares of Common Stock.
(3) 5,291,867 of the shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act
of 1940 in previous filings during Registrant's current fiscal year.
(4) 3,675,748 of the shares redeemed during Registrant's previous fiscal year
are being used for the reduction of the registration fee in this amendment
to the Registration Statement.
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
Item No. Location
--------- ------------------------------------ ------------------------------------------------------
<S> <C> <C>
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis 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 Management of the Fund; Additional
Securities Information
Item 16. Investment Advisory and Other Management of the Fund; Purchase of Shares; General
Services 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 28, 1996
Merrill Lynch Global SmallCap Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
(bullet) 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 12, 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 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 28, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission
(the "Commission") and is available, without charge, by calling or by writing
the Fund at the above telephone number or address. The Statement of
Additional Information is hereby incorporated by reference into this
Prospectus.
Merrill Lynch Asset Management -- Manager
Merrill Lynch Funds Distributor, Inc. -- Distributor
<PAGE>
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 4.0% during the first year,
original purchase price or redemption decreasing 1.0% annually
proceeds, whichever is lower) thereafter to 0.0%
None(d) after the fourth year(e) 1.0% for one year(f) None(d)
Exchange Fee None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets):
Management Fees(g) 0.85% 0.85% 0.85% 0.85%
Rule 12b-l Fees(h):
Account Maintenance Fees None 0.25% 0.25% 0.25%
Distribution Fees None 0.75% 0.75% None
(Class B shares convert to
Class D
shares automatically after
approximately
eight years and cease being
subject to
distribution fees)
Other Expenses:
Custodial Fees .11% .11% .11% .11%
Shareholder Servicing Costs(i) .22% .28% .30% .25%
Other .37% .37% .37% .37%
------------- ------------------------ ------------------------- -------------
Total Other Expenses .70% .76% .78% .73%
------------- ------------------------ ------------------------- -------------
Total Fund Operating Expenses 1.55% 2.61% 2.63% 1.83%
============= ======================== ========================= =============
</TABLE>
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, certain retirement plans and certain
participants in fee-based programs. See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares"--page 28 and
"Shareholder Services"--page 36.
(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 30.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 28.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more
which are not subject to an initial sales charge may instead be subject
to a CDSC of 1.0% of amounts redeemed within the first year after
purchase. Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder
Services"--page 36.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder
Services"--page 36.
(f) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services"
--page 36.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
24.
(h) See "Purchase of Shares--Distribution Plans"--page 33.
(i) See "Management of the Fund--Transfer Agency Services"--page 26.
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 on page 2, (2) a 5% annual return
throughout the periods, and (3) redemption at the end of the
period:
Class A $67 $ 99 $133 $ 227
Class B $66 $101 $139 $276*
Class C $37 $ 82 $140 $ 296
Class D $70 $107 $146 $ 256
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 $ 99 $133 $ 227
Class B $26 $ 81 $139 $276*
Class C $27 $ 82 $140 $ 296
Class D $70 $107 $146 $ 256
</TABLE>
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. The example should not be considered a representation
of past or future expenses or annual rates of return, and actual expenses or
annual rates of return may be more or less than those assumed for purposes of
the example. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under
the Conduct Rules of the National Association of Securities Dealers, Inc.
(the "NASD"). Merrill Lynch may charge its customers a processing fee
(presently $4.85) 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
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 130 registered investment companies. The Manager and FAM
also offer portfolio management and portfolio analysis services to
individuals and institutions. As of September 30, 1996, the Manager and FAM
had a total of approximately $214.1 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates
of the Manager. See "Management of the Fund--Management and Advisory
Arrangements".
Purchase and Redemption of Shares
Shares of the Fund may be purchased at a price equal to the next
determined net asset value per share subject to the sales charges and ongoing
fee arrangements described below. See "Merrill Lynch Select Pricing(SM) System"
and "Purchase of Shares".
Dividends and Distributions
It is the Fund's intention to distribute 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 (the
"NYSE") (generally 4:00 p.m., New York time), on each day during which the
NYSE is open for trading. See "Additional Information--Determination of Net
Asset Value".
5
<PAGE>
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing(SM) System is used
by more than 50 registered investment companies advised by MLAM or FAM, an
affiliate of MLAM. Funds advised by MLAM or FAM which utilize the Merrill
Lynch Select Pricing(SM) System 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
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges 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 Pricing(SM) 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 Pricing(SM) System that the
investor believes is most beneficial under his or her particular
circumstances. More detailed information as to each class of shares is set
forth under "Purchase of Shares".
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
sales charge(2)(3) No No No
B CDSC for a period of four years, at a rate B shares convert to
of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) 0.25% 0.75% eight years(5)
C 1.0% CDSC for one year(6) 0.25% 0.75% No
D Maximum 5.25% initial
sales charge(3) 0.25% No No
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and other participants in
connection with certain fee-based programs. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC if redeemed within one
year. Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. A 0.75% sales charge for
401(k) purchases over $1,000,000 will apply. See "Class A" and "Class D"
below.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans and fee-based programs may be modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges
may be made have a ten year conversion period. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class
A shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors who currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Other eligible investors
include certain retirement plans and participants in certain
fee-based programs. In addition, Class A shares will be offered at
net asset value to ML & Co. and its subsidiaries (the term
"subsidiaries", when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and
employees and to members of the Boards of MLAM-advised mutual funds.
The maximum initial sales charge of 5.25% is reduced for purchases
of $25,000 and over and waived for purchases by certain retirement
plans and participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain
7
<PAGE>
fee-based programs. 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 average net
assets attributable to Class B shares and a CDSC if they are
redeemed within four years of purchase. The CDSC may be modified in
connection with redemptions to fund certain fee-based programs.
Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are
subject to an account maintenance fee but no distribution fee; Class
B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert into Class D shares automatically
after approximately ten years. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund,
the conversion period applicable to the Class B shares acquired in
the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once 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 1.0% CDSC if they are redeemed within one year after
purchase. Such CDSC may be waived in connection with redemptions to
fund participation in certain fee-based programs. Although Class C
shares are subject to a CDSC for only one year (as compared to four
years for Class B), Class C shares have no conversion feature and,
accordingly, an investor 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 may be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with redemptions to fund participation in
certain fee-based programs. The schedule of initial sales charges
and reductions for Class D shares is the same as the schedule for
Class A shares, except that there is no waiver for purchases by
retirement plans in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares
as described above under "Class B". See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares".
8
<PAGE>
The following is a discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select Pricing(SM) System that the investor believes is most beneficial
under his or her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection
with purchases of Class B or Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time also may elect to purchase Class A or Class D shares,
because over time the accumulated ongoing account maintenance and
distribution fees on Class B or Class C shares may exceed the initial sales
charge and, in the case of Class D shares, the account maintenance fee.
Although some investors that previously purchased Class A shares may no
longer be eligible to purchase Class A shares of other MLAM-advised mutual
funds, those previously purchased Class A shares, together with Class B,
Class C and Class D share holdings, will count toward a right of accumulation
which may qualify the investor for reduced initial sales charges on new
initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C
shares to have higher expense ratios, pay lower dividends and have lower
total returns 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 audits of the financial statements of the Fund by
Deloitte & Touche llp, independent auditors. Financial statements and the
independent auditors' report thereon for the fiscal year ended June 30, 1996,
are included in the Statement of Additional Information. Further information
about the performance of the Fund is contained in the Fund's most recent
annual report to shareholders which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the
front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
Class A Class B
------------------------------ ----------------------------
For the For the Period For the For the Period
Year Ended October 21, 1994+ Year Ended August 5, 1994+
June 30, to June 30, June 30, to June 30,
1996 1995 1996 1995
------------ ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period $ 8.92 $ 9.82 $ 8.84 $ 10.00
------------ ----------------- ------------ ---------------
Investment income (loss)--net .13 .04 (.06) .01
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net 1.97 (.93) 2.04 (1.16)
------------ ----------------- ------------ ---------------
Total from investment operations 2.10 (.89) 1.98 (1.15)
------------ ----------------- ------------ ---------------
Less dividends and distributions:
Investment income--net (.10) -- (.05) --
Realized gain on investments--net (.06) -- (.06) --
In excess of realized gain on investments--net -- (.01) -- (.01)
------------ ----------------- ------------ ---------------
Total dividends and distributions (.16) (.01) (.11) (.01)
------------ ----------------- ------------ ---------------
Net asset value, end of period $10.86 $ 8.92 $ 10.71 $ 8.84
============ ================= ============ ===============
Total Investment Return:**
Based on net asset value per share 23.87% (9.11)%# 22.57% (11.55)%#
============ ================= ============ ===============
Ratios to Average Net Assets:
Expenses 1.55% 1.62%* 2.61% 2.56%*
============ ================= ============ ===============
Investment income (loss)--net .46% 1.06%* (.66)% .10%*
============ ================= ============ ===============
Supplemental Data:
Net assets, end of period (in thousands) $3,083 $5,992 $131,656 $132,296
============ ================= ============ ===============
Portfolio turnover 60.33% 47.96% 60.33% 47.96%
============ ================= ============ ===============
Average commission rate paid## $.0011 -- $ .0011 --
============ ================= ============ ===============
</TABLE>
+Commencement of Operations.
#Aggregate total investment return.
##For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
*Annualized.
**Total investment returns exclude the effects of sales loads.
10
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------ ----------------------------
For the For the Period For the For the Period
Year Ended October 21, 1994+ Year Ended August 5, 1994+
June 30, to June 30, June 30, to June 30,
1996 1995 1996 1995
------------ ----------------------------- ---------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period $ 8.84 $ 9.80 $ 8.91 $ 10.00
------------ ----------------------------- ---------------
Investment income (loss)--net (.05) .01 .02 .08
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net 2.03 (.96) 2.05 (1.16)
------------ ----------------------------- ---------------
Total from investment operations 1.98 (.95) 2.07 (1.08)
------------ ----------------------------- ---------------
Less dividends and distributions:
Investment income--net (.05) -- (.09) --
Realized gain on investments--net (.06) -- (.06) --
In excess of realized gain on investments--net -- (.01) -- (.01)
------------ ----------------------------- ---------------
Total dividends and distributions (.11) (.01) (.15) (.01)
------------ ----------------------------- ---------------
Net asset value, end of period $10.71 $ 8.84 $ 10.83 $ 8.91
============ ============================= ===============
Total Investment Return:**
Based on net asset value per share 22.56% (9.75)%# 23.50% (10.85)%#
============ ============================= ===============
Ratios to Average Net Assets:
Expenses 2.63% 2.66%* 1.83% 1.77%*
============ ============================= ===============
Investment income (loss)--net (.64)% .20%* .10% .90%*
============ ============================= ===============
Supplemental Data:
Net assets, end of period (in thousands) $5,753 $4,924 $22,593 $23,928
============ ============================= ===============
Portfolio turnover 60.33% 47.96% 60.33% 47.96%
============ ============================= ===============
Average commission rate paid## $.0011 -- $ .0011 --
============ ============================= ===============
</TABLE>
+Commencement of Operations.
#Aggregate total investment return.
##For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
*Annualized.
**Total investment returns exclude the effects of sales loads.
11
<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. International investments involve certain risks
not involved in domestic investments, 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.
Most of the securities held by the Fund will not be registered with the
Commission, nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which U.S.
companies are subject. Moreover, because the Fund emphasizes the stocks of
issuers with smaller market capitalizations (by U.S. standards), the Fund can
be expected to have more difficulty obtaining information about the issuers
or valuing or disposing of its securities than it would if it were to
concentrate on more widely held stocks.
Foreign financial markets often 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
12
<PAGE>
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.
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. Trading in debt
obligations ("sovereign debt obligations") issued or guaranteed by developing
governments or their agencies and instrumentalities ("foreign governmental
entities") involves a high degree of risk. The foreign 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 foreign 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 foreign
governmental entity's dependence on expected disbursements from third
parties, the foreign governmental entity's policy toward the International
Monetary Fund and the political constraints to which a foreign governmental
entity may be subject. As a result, foreign 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 foreign governmental entities. In
the event of a default by a foreign governmental entity, the Fund may have
few or no effective legal remedies.
The Fund may purchase sponsored or unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts") or other
securities convertible into securities of foreign issuers. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the
issuers of the securities underlying unsponsored Depositary Receipts may not
be obligated to report financial information comparable to domestic issuers
in the United States and, therefore, there may be less information available
regarding such issuers. 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
13
<PAGE>
class of securities which may have less advantageous terms than securities of
the company available for purchase by nationals. Certain countries may
restrict investment opportunities in issuers or industries deemed important
to national interests.
The manner in which foreign investors may invest in companies in certain
countries, as well as limitations on such investments, may have an adverse
impact on the operations of the Fund. For example, the Fund may be required
in certain of such countries to invest initially through a local broker or
other entity and then have the shares purchased re-registered in the name of
the Fund. Re-registration may in some instances not be able to occur on a
timely basis, resulting in a delay during which the Fund may be denied
certain of its rights as an investor, including rights as to dividends or to
be made aware of certain corporate actions. There also may be instances where
the Fund places a purchase order but is subsequently informed, at the time of
re-registration, that the permissible allocation of the investment to foreign
investors has been filled, depriving the Fund of the ability to make its
desired investment at that time.
Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or the proceeds of
sales of securities by foreign investors. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental
approval for repatriation of capital, as well as by the application to the
Fund of any restrictions on investments. No more than 15% of the Fund's net
assets may be comprised, in the aggregate, of assets which are (i) subject to
material legal restrictions on repatriation or (ii) invested in illiquid
securities. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of the
operations of the Fund.
A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their
capital markets. In accordance with the Investment Company Act 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) 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
14
<PAGE>
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--Other Investment Policies and Practices--Portfolio Strategies
Involving Options, Futures and Forward Foreign Exchange Transactions" and
"Appendix A--Investment Practices Involving the Use of Indexed Securities
Options, Futures, Swaps and Foreign Exchange". Management of the Fund
believes the above investments are appropriate for the Fund.
Borrowing. The Fund may borrow up to 33-1/3% of its total assets, taken at
market value, but only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed
5% of its total assets, except (a) to honor prior commitments or (b) to
exercise subscription rights when outstanding borrowings have been obtained
exclusively for settlements of other securities transactions. The purchase of
securities while borrowings are outstanding will have the effect of
leveraging the Fund. Such leveraging increases the Fund's exposure to capital
risk, and borrowed funds are subject to interest costs which will reduce net
income.
Fees and Expenses. The management fee (at the annual rate of 0.85% of the
Fund's average daily net assets) and other operating expenses of the Fund may
be higher than the management fees and operating expenses of other mutual
funds managed by the Manager and other investment advisers or of investment
companies investing exclusively in the U.S. securities market.
Other Special Considerations. The Fund may invest up to 15% of its net
assets in illiquid investments which includes securities for which there is
no readily available market.
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 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 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 (collectively "equity securities"). 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 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.
16
<PAGE>
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 and
international banking institutions and related government agencies
("supranational entities").
As a result of its global investment focus, the Fund may invest in securities
denominated in any currency or multinational currency unit. An illustration
of a multinational currency unit is the European Currency Unit ("ECU") which
is a "basket" consisting of specified amounts of the currencies of certain of
the twelve member states of the European Community, a Western European
economic cooperative association including France, Germany, the Netherlands
and the United Kingdom. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community to
reflect changes in relative values of the underlying currencies. The Manager
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities (described further below), in particular, issue
ECU-denominated obligations. The Fund may invest in securities denominated in
the currency of one nation although issued by a governmental entity,
corporation or financial institution of another nation. For
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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. The Board of
Directors has determined to treat as liquid Rule 144A securities which are
freely tradeable in their primary markets offshore. The Board of Directors
may adopt guidelines and delegate to the Manager the daily function of
determining and monitoring liquidity of restricted securities. The Board of
Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity
and availability of information. This investment practice could have the
effect of increasing the level of illiquidity in the Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these securities.
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. 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
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rely on the Manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Manager will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund is not
authorized to purchase debt securities that are in default, except for
sovereign debt obligations (discussed below). The Fund may invest no more
than 5% of its total assets in sovereign debt obligations which are in
default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of
such issuers generally is greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of high yield/high risk securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During such periods, such issuers may not have sufficient revenues
to meet their interest payment obligations. The issuer's ability to service
its debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss
due to default by the issuer is significantly greater for the holders of high
yield/high risk securities because such securities may be unsecured and may
be subordinated to other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and
dividends to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk
securities does exist, it is generally not as liquid as the secondary market
for higher rated securities. Reduced secondary market liquidity may have an
adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event 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
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or willing to repay the principal and/or interest when due in accordance with
the terms of such debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves,
the availability of sufficient foreign exchange on the date a payment is due,
the relative size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest arrearages on their debt. The commitment on the part
of these governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt obligations.
Holders of sovereign debt obligations, including the Fund, may be
requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. 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 as defined above. Examples include the International
Bank for Reconstruction and Development (the World Bank), the European Steel
and Coal Community, the Asian Development Bank and the Inter-American
Development Bank. The government members, or "stockholders", usually make
initial capital contributions to the supranational entity and in many cases
are committed to make additional capital contributions if the supranational
entity is unable to repay its borrowings.
United States Government Obligations. United States Government Obligations
in which the Fund may invest include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times
of issuance, all of which are backed by the full faith and credit of the
United States; and (ii) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, including government guaranteed mortgage-
related or asset-backed securities, some of which are backed by the full
faith and credit of the U.S. Treasury (e.g., direct pass-through certificates
of the Government National Mortgage Association), some of which are supported
by the right of the issuer to borrow from the U.S. Government (e.g.,
obligations of Federal Home Loan Banks) and some of which are backed only by
the credit of the issuer itself (e.g., obligations of the Student Loan
Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of the mortgage-related
securities. (Asset-backed securities, other than those backed by home equity
loans, generally do not prepay in response to changes in interest rates but
may be subject to prepayment in response to
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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 may use certain derivative instruments,
including indexed and inverse securities, options, futures and swaps, and
engage in foreign exchange transactions. Transactions involving such
instruments expose the Fund to certain risks. The Fund's use of these
instruments and the associated risks are described in detail in Appendix A
attached to this Prospectus.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Risk Factors and Special Considerations". In
executing portfolio transactions, the Manager seeks to obtain the best net
results for the Fund, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved and
the firm's risk in positioning a block of securities. The Fund may invest in
certain securities traded in the OTC market and, where possible, will deal
directly with the dealers who make a market in the securities involved except
in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly from the issuer.
Such portfolio securities are generally traded on a net basis and do not
normally involve either brokerage commissions or transfer taxes. Securities
firms may receive brokerage commissions on certain portfolio transactions,
including options, futures and options on futures transactions and the
purchase and sale of underlying securities upon exercise of options. The Fund
has no obligation to deal with any broker or group of brokers in the
execution of transactions in portfolio securities. Under the Investment
Company Act, persons affiliated with the Fund and persons who are affiliated
with such affiliated persons, including Merrill Lynch, are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the
Commission. Affiliated persons of the Fund, and affiliated persons of such
affiliated persons, may serve as the Fund's broker in transactions conducted
on an exchange and in OTC transactions conducted on an agency basis and may
receive brokerage commissions from the Fund. In addition, consistent with the
Conduct Rules of the NASD, the Fund may consider sales of shares of the Fund
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund. It is expected that the majority of the shares of
the Fund will be sold by Merrill Lynch. Costs associated with transactions in
foreign securities are generally higher than 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
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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.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when- issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the
Fund at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed
in connection with such transactions, the Fund will maintain a segregated
account with its custodian of cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies in an aggregate amount equal to the amount of
its commitments in connection with such purchase transactions.
There can be no assurance that the securities purchased on a when-issued
basis or purchased or sold for delayed delivery will be issued, and the value
of the security, if issued, on the delivery date may be more or less than its
purchase price. The Fund may bear the risk of a decline in the value of such
security and may not benefit from an appreciation in the value of the
security during the commitment period.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the
agreement the Fund is paid a commitment fee, regardless of whether or not 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 liquid securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the purchase price of
the securities underlying a commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
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
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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 insulates the
Fund from market fluctuations during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return
may be affected by currency fluctuations. Repurchase agreements may be
entered into only with financial institutions which (i) have, in the opinion
of the Manager, substantial capital relative to the Fund's exposure, or (ii)
have provided the Fund with a third-party guaranty or other credit
enhancement. 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. The Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. If the seller were to
default on its obligation to repurchase a security under a repurchase
agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the
seller, the Fund would realize a loss. The Fund may not invest more than 15%
of its 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 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).
As another non-fundamental policy, the Fund will not invest in securities
which are (a) subject to material legal restrictions on repatriation of
assets or (b) cannot be readily resold because of legal or contractual
restrictions or which are not otherwise readily marketable, including
repurchase agreements and purchase and sale contracts maturing in more than
seven days, if, regarding all such securities, more than 15% of its net
assets, taken at market value would be invested in such securities.
Nothing in the foregoing investment restrictions shall be deemed to
prohibit the Fund from purchasing the securities of any issuer pursuant to
the exercise of 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, 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. Since it is not possible to predict with
assurance exactly how the market for restricted securities sold and offered
under Rule 144A will develop, the Board of Directors will carefully monitor
the Fund's investments in these securities, focusing on such factors, among
others, as valuation, liquidity and availability of information. This
investment practice could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these restricted securities. The
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
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<PAGE>
in their primary market offshore should be deemed liquid. The Board, however,
will retain sufficient oversight and be ultimately responsible for the
determinations.
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 its affiliate, FAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); Executive
Vice President of ML & Co.; and Director of the Distributor.
Donald Cecil--Special Limited Partner of Cumberland Partners (an
investment partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
* Interested person, as defined in the Investment Company Act, of the Fund.
Management and Advisory Arrangements
The Manager acts as the 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 its affiliate, FAM, acts as the
investment adviser to more than 130 registered investment companies and
provides investment advisory services to individual and institutional
accounts. As of September 30, 1996, the Manager and FAM had a total of
approximately $214.1 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 provided 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 fiscal
year ended June 30, 1996, the fee paid by the Fund to the Manager was
$1,285,653 (based upon average net assets of approximately $152.1 million).
At September 30, 1996, the assets of the Fund aggregated approximately $156.3
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
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<PAGE>
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 fiscal year ended June 30, 1996, MLAM paid MLAM
U.K. a fee of $150,719 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 Fund by
the Manager, and the Fund reimburses the Manager for its costs in connection
with such services on a semi-annual basis. For the fiscal year ended June 30,
1996, the Fund reimbursed the Manager $105,306 for accounting services. For
the same fiscal year the ratio of total expenses to average net assets was
1.55%, 2.61%, 2.63% and 1.83% for Class A, Class B, Class C and Class D
shares, respectively.
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 investment 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.
Daniel V. Szemis--Vice President of the Fund--Vice President of the
Manager since 1996; Senior Portfolio Manager and Analyst with Prudential
Mutual Fund Investment Management from 1990 to 1996. Mr. Szemis 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.
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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.
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. In addition, 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 fiscal year ended
June 30, 1996, the Fund paid the Transfer Agent $405,237 pursuant to the
Transfer Agency Agreement. At September 30, 1996, the Fund had 1,443 Class A
shareholder accounts, 15,568 Class B shareholder accounts, 1,026 Class C
shareholder accounts and 2,421 Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $274,820 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 upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) 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
26
<PAGE>
to the close of business on the NYSE (generally, 4:00 P.M., New York time),
which includes orders received after the close of business on the previous
day, the applicable offering price will be based on the net asset value
determined as of 15 minutes after the close of business on the NYSE on that
day provided the Distributor in turn receives the order from the securities
dealer prior to 30 minutes after the close of business on the NYSE on that
day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the NYSE, 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
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares
of Class B and Class C are sold to investors choosing the deferred sales
charge alternatives. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund with
the investment thereafter being subject to a CDSC and ongoing distribution
fees. A discussion of the factors that investors should consider in
determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System is set forth under "Merrill Lynch Select Pricing(SM) 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 CDSCs, distribution and account maintenance fees that
are imposed on Class B and Class C shares, as well as the account maintenance
fees that are imposed on Class D shares, will be imposed directly against
those classes and not against all assets of the Fund and, accordingly, such
charges will not affect the net asset value of any other class or have any
impact on investors choosing another sales charge option. Dividends paid by
the Fund for each class of shares will be calculated in the same manner at
the same time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule
12b-1 distribution plan adopted with respect to such class pursuant to which
account maintenance and/or distribution fees are paid. See "Distribution
Plans" below. Each class has different exchange privileges. See "Shareholder
Services-- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as
those of the deferred sales charges 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 Pricing(SM) System.
27
<PAGE>
<TABLE>
<CAPTION>
Account
Maintenance Distribution
Class Sales Charge(1) Fee Fee Conversion Feature
<S> <C> <C> <C> <C>
- ---------- ------------------------------------- --------------- ---------------- ---------------------------
A Maximum 5.25% initial sales
charge(2)(3) No No No
B CDSC for a period of four years, 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%(4) 0.25% 0.75% eight years(5)
C 1.0% CDSC for one year(6) 0.25% 0.75% No
D Maximum 5.25% initial
sales charge(3) 0.25% No No
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. CDSCs may be imposed if the redemption
occurs within the applicable CDSC time period. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption
or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. 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 may be subject to a 1.0% CDSC if redeemed within one
year. Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. A 0.75% sales charge for
401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans and fee-based programs may be modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges
may be made have a ten year conversion period. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
Initial Sales Charge Alternatives--Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
Sales Load as Discount to
Sales Load as Percentage* of Selected Dealers
Percentage of the Net Amount as Percentage of
Amount of Purchase Offering 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>
28
<PAGE>
* 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 and on Class A purchases in connection with certain
fee-based programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases may be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain
employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
During the fiscal year ended June 30, 1996, the Fund sold 296,811 Class A
shares for aggregate net proceeds to the Fund of $2,900,817. The gross sales
charges for the sale of its Class A shares for the year were $576, of which
$46 and $530 were received by the Distributor and Merrill Lynch,
respectively. During the fiscal year ended June 30, 1996, the Distributor
received no CDSCs with respect to redemptions within one year after purchase
of Class A shares purchased subject to a front-end sales charge waiver.
During the fiscal year ended June 30, 1996, the Fund sold 1,341,253 Class
D shares for aggregate net proceeds to the Fund of $13,808,237. The gross
sales charges for the sale of its Class D shares for the year were $61,135,
of which $4,093 and $57,042 were received by the Distributor and Merrill
Lynch, respectively. During the fiscal year ended June 30, 1996, the
Distributor received no CDSCs with respect to redemptions within one year
after purchase of Class D shares purchased subject to a front-end sales
charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors 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 TMA(SM) Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. Class A shares
are also offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares
of certain MLAM-advised closed-end funds in their initial offerings who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional
Information are met. In addition, Class A shares of the Fund and certain
other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds in shares of the Fund and certain other MLAM-
advised mutual funds.
29
<PAGE>
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment
of dividends or capital gains distributions. Class A and Class D sales
charges also may be reduced under a Right of Accumulation and a Letter of
Intention. Class A shares are offered at net asset value to certain eligible
Class A investors as set forth above under "Eligible Class A investors." See
"Shareholder Services".
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 qualified employers which provide such plans.
Class A and Class D shares are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest in shares of the Fund the net
proceeds from a sale of certain of their shares of common stock, pursuant to
tender offers conducted by those funds.
Class D shares are 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 employer-sponsored retirement
and savings plans, is set forth in the Statement of Additional Information.
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
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 the ongoing
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
30
<PAGE>
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. 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 after purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
Class B CDSC
as a Percentage
Year Since Purchase of Dollar Amount
Payment Made Subject to Charge
- -------------------- ------------------
<S> <C>
0-1 4.00%
1-2 3.00
2-3 2.00
3-4 1.00
4 and thereafter 0.00
</TABLE>
For the fiscal year ended June 30, 1996, the Distributor received CDSCs of
$492,135 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).
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 Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans.
The CDSC also is waived for any Class B shares 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
31
<PAGE>
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 Account(SM) 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. The terms of the CDSC may be modified in connection
with redemptions to fund participation in certain fee-based programs. See
"Shareholder Services".
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. No Class C CDSC will be assessed in connection
with redemptions to fund participation in certain fee-based programs. See
"Shareholder Services". For the fiscal year ended June 30, 1996, the Distributor
received CDSCs of $2,470 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. 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, all of the Class B shares
of the Fund held in the account on the Conversion Date will be converted to
Class D shares of the Fund.
In general, Class B shares of equity MLAM-advised mutual funds will
convert approximately eight years after initial purchase, and Class B shares
of taxable and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice
32
<PAGE>
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 may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services".
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 payments to financial consultants for selling Class B and
Class C shares of the Fund. The Distribution Plans relating to Class B and
Class C shares are designed to permit an investor to purchase Class B and
Class C shares through dealers without the assessment of an initial sales
charge and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of the Class B and Class C shares. In
this regard, the purpose and function of the ongoing distribution fees and
the CDSC are the same as those of the initial sales charge with respect to
the Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and Class
C shares.
For the fiscal year ended June 30, 1996, the Fund paid the Distributor
$1,213,070 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $122.0
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities
33
<PAGE>
and services in connection with Class B shares. For the fiscal year ended
June 30, 1996, the Fund paid the Distributor $45,789 pursuant to the Class C
Distribution Plan (based on average net assets subject to such Class C
Distribution Plan of approximately $4.6 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 fiscal
year ended June 30, 1996, the Fund paid the Distributor $56,605 pursuant to
the Class D Distribution Plan (based on average net assets subject to such
Class D Distribution Plan of approximately $22.8 million), all of which was
paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares. At September 30, 1996, the net assets of the
Fund subject to the Class B Distribution Plan aggregated approximately $125.7
million. At this asset level, the annual fees payable pursuant to such Class
B Distribution Plan would aggregate approximately $1.3 million. At September
30, 1996, the net assets of the Fund subject to the Class C Distribution Plan
aggregated approximately $5.7 million. At this asset level, the annual fees
payable pursuant to such Class C Distribution Plan would aggregate
approximately $56,921. At September 30, 1996, the net assets of the Fund
subject to the Class D Distribution Plan aggregated approximately $21.6
million. At this asset level, the annual fees payable pursuant to such Class
D Distribution Plan would aggregate approximately $54,056.
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, 1996, direct cash revenues for the period since the
commencement of operations of Class B shares exceeded direct cash expenses
by $751,706 (.57% of Class B net assets at that date). At December 31, 1995,
the fully allocated accrual expenses incurred by the Distributor and Merrill
Lynch for the period since the commencement of operations of Class B shares
exceeded fully allocated accrual revenues by approximately $3,154,000 (2.82%
of Class B net assets at that date). Similar fully allocated accrual data for
Class C shares is not presented because such revenues and expenses for the
period October 21, 1994 (commencement of operations) to December 31, 1995 are
de minimus. As of June 30, 1996, direct cash revenues for the period since the
commencement of operations of Class C shares exceeded direct cash expenses by
$39,693 (.69% 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 Conduct Rules of the NASD imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by
the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable
to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed
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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 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 redemption request 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.
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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 NYSE (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 NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on the NYSE, in
order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms which do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge on
the shareholder for transmitting the notice of repurchase to the Fund.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a repurchase of shares to such customers. Repurchases 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. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
Reinstatement Privilege--Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares
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.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services
are available only to U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at
least quarterly, from the Transfer Agent. These statements will serve as
transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends
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and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders
will receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long- term capital gain distributions. A
shareholder may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent. Shareholders also may
maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically without charge,
at the Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or Class D
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account
at the new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained
for such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage
firm for the benefit of the shareholder at the Transfer Agent. 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 or her Investment Account in
the form of payments by check or through automatic payment by direct deposit
to his or her bank account on either a monthly or quarterly basis. A Class A
or Class D shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the 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 NYSE on the
ex-dividend date of such dividend or distribution. A shareholder may at any
time, by written notification to Merrill Lynch if the shareholder's account
is maintained with Merrill Lynch or by written notification or telephone call
(1-800-MER-FUND) to the Transfer Agent if the shareholder's account is
maintained with the Transfer Agent, elect to have subsequent 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
CDSC will be imposed on redemptions of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds.
There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Commission.
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Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of the
second fund in his or her account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares for
shares of a second MLAM-advised mutual fund, and the shareholder does not
hold Class A shares of the second fund in his or her account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the
time of the exchange, the shareholder holds Class A shares of the second fund
in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period for the newly acquired
shares of the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of
the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class
B shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
Fee-Based Programs. Certain Merrill Lynch fee-based programs, including
pricing alternatives for securities transactions, (each referred to in this
paragraph as a "Program") may permit the purchase of Class A shares at net
asset value. Under specified circumstances, participants in certain Programs
may deposit other classes of shares which will be exchanged for Class A
shares. Initial or deferred sales charges otherwise due in connection with
such exchanges may be waived or modified, as may the Conversion Period
applicable to the deposited shares. Termination of participation in a Program
may result in the redemption of shares held therein or the automatic exchange
thereof to another class at net asset value, which may be shares of a money
market fund. In addition, upon termination of participation in a Program,
shares that have been held for less than specified periods within such
Program may
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be subject to a fee based upon the current value of such shares. These
Programs also generally prohibit such shares from being transferred to
another account at Merrill Lynch, to another broker-dealer or to the Transfer
Agent. Except in limited circumstances (which may also involve an exchange as
described above), such shares must be redeemed and another class of shares
purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information
regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND or (800) 637-3863.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified 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 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
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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 "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.
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) all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, rather
than as an ordinary income dividend, 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".
Taxes
The Fund will 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 or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-
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term capital losses (including gains or losses from certain transactions in
futures and options) ("capital gain dividends") are taxable to shareholders
as long-term capital gains, regardless of the length of time the shareholder
has owned Fund shares. Any loss upon the sale or exchange of Fund shares held
for six months or less, however, will be treated as long-term capital loss to
the extent of any capital gain dividends received by the shareholder.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares, and after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. 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 to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under
existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may
be able to claim U.S. foreign tax credits with respect to such taxes, subject
to certain conditions and limitations contained in the Code. For example,
certain retirement accounts cannot claim foreign tax credits on investments
in foreign securities held in the Fund. If more than 50% in value of the
Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which shareholders of
the Fund will be required to include their proportionate shares of such
withholding taxes in their U.S. income tax returns as gross income, treat
such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively,
use them as foreign tax credits against their U.S. income taxes. No
deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against
such U.S. tax for the foreign taxes treated as having been paid by such
shareholder. The Fund will report annually to its shareholders the amount per
share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to
a 31% withholding tax on ordinary income dividends, capital gain dividends
and redemption payments ("backup withholding"). Generally, shareholders
subject to backup withholding will be those for whom no certified taxpayer
identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company
(or similar investment entity) organized under foreign law, the Fund
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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 all or a
portion of distributions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital to shareholders,
thereby reducing the basis of each shareholder's Fund shares and resulting in
a capital gain for any shareholder who received a distribution greater than
the shareholder's 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 for the acquired
Class D shares will include the holding period for the converted Class B
shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed
of. In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state
and local taxes.
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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 NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is open
for trading. 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 any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and
higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fees
applicable with respect to Class D shares; in addition, the per share net
asset value of Class D shares generally will be higher than the per share net
asset value of Class B and Class C shares, reflecting the daily expense
accruals of the distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares. It is expected, however, that the per
share net asset value of the classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or
distributions, which will differ by approximately the amount of the expense
accrual differentials between the classes.
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 ("OTC")
market are valued at the last available bid price in the OTC market prior to
the time of valuation. Portfolio securities which are traded both in the OTC
market and on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange- traded options
or, in the case of options traded in the OTC market, the last bid price. Any
assets or liabilities expressed in terms of foreign currencies are translated
into U.S. dollars at the prevailing market rates as obtained from one or more
dealers. Other investments, including futures contracts and related options,
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
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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 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. In
addition, 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 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
INVESTMENT PRACTICES INVOLVING THE USE OF INDEXED SECURITIES, OPTIONS,
FUTURES, SWAPS AND FOREIGN EXCHANGE
The Fund is authorized to use certain derivative instruments, including
indexed and inverse securities, options, futures, and swaps, and to purchase
and sell foreign exchange, as described below. Such instruments are referred
to collectively herein as "Strategic Instruments".
Indexed and Inverse Securities
The Fund may invest in securities the potential return of which is based
on the change in particular measurements of value or rate (an "index"). As an
illustration, the Fund may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities, or based on the relative changes of two indices. In
addition, the Fund may invest in securities the potential return of which is
based inversely on the change in an index. For example, the Fund may invest
in securities that pay a higher rate of interest when a particular index
decreases and pay a lower rate of interest (or do not fully return principal)
when the value of the index increases. If the Fund invests in such
securities, it may be subject to reduced or eliminated interest payments or
loss of principal in the event of an adverse movement in the relevant index
or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal
payable increases or decreases at a rate that is a multiple of the changes in
the relevant index. As a consequence, the market value of such securities may
be substantially more volatile than the market values of other debt
securities. The Fund believes that indexed and inverse securities may provide
portfolio management flexibility that permits the Fund to seek enhanced
returns, hedge other portfolio positions or vary the degree of portfolio
leverage with greater efficiency than would otherwise be possible under
certain market conditions.
Options on Securities and Securities Indices
Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of
which is substantially replicated by securities held in its portfolio. When
the Fund purchases a put option, in consideration for making an upfront
payment (the "option premium") the Fund acquires a right to sell to another
party specified securities owned by the Fund at a specified price (the
"exercise price") on or before a specified date (the "expiration date"), in
the case of an option on securities, or to receive from another party a
payment based on the amount a specified securities index declines below a
specified level on or before the expiration date, in the case of an option on
a securities index. The purchase of a put option limits the Fund's risk of
loss in the event of a decline in the market value of the portfolio holdings
underlying the put option prior to the option's expiration date. If the
market value of the portfolio holdings associated with the put option
increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio
holdings than would have been realized without the purchase of the put.
The Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices the performance of which
substantially replicates the performance of the types of securities it
intends to purchase. When the Fund purchases a call option, in consideration
for the option premium the Fund acquires a right to purchase from another
party specified securities at the exercise price on or before the expiration
date, in the case of an option on securities, or to receive from another
party a payment based on the amount a specified securities index increases
beyond a specified level on or before the expiration date, in the case of an
option on a securities index. The purchase of a call option may protect the
Fund from having to pay more for a security as a consequence of increases in
the market value for the security during a period when the Fund is
contemplating its purchase, in the case of an option
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on a security, or attempting to identify specific securities in which to
invest in a market the Fund believes to be attractive, in the case of an
option on an index (an "anticipatory hedge"). In the event the Fund
determines not to purchase a security underlying a call option, however, the
Fund may lose the entire option premium.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. The Fund is authorized to write (i.e., sell) call options
on securities held in its portfolio or securities indices the performance of
which is substantially replicated by securities held in its portfolio. When
the Fund writes a call option, in return for receiving an option premium the
Fund gives another party the right to buy specified securities owned by the
Fund at the exercise price on or before the expiration date, in the case of
an option on securities, or agrees to pay to another party an amount based on
any gain in a specified securities index beyond a specified level on or
before the expiration date, in the case of an option on a securities index.
The Fund may write call options to earn income, through the receipt of option
premiums. In the event the party to which the Fund has written an option
fails to exercise its rights under the option because the value of the
underlying securities is less than the exercise price, the Fund will
partially offset any decline in the value of the underlying securities
through the receipt of the option premium. By writing a call option, however,
the Fund limits its ability to sell the underlying securities, and gives up
the opportunity to profit from any increase in the value of the underlying
securities beyond the exercise price, while the option remains outstanding.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on
a security, or agrees to pay to another party an amount based on any decline
in a specified securities index below a specified level on or before the
expiration date, in the case of an option on a securities index. The Fund may
write put options to earn income, through the receipt of option premiums. In
the event the party to which the Fund has written an option fails to exercise
its rights under the option because the value of the underlying securities is
greater than the exercise price, the Fund will profit by the amount of the
option premium. By writing a put option, however, the Fund will be obligated
to purchase the underlying security at a price that may be higher than the
market value of the security at the time of exercise as long as the put
option is outstanding, in the case of an option on a security, or make a cash
payment reflecting any decline in the index, in the case of an option on an
index. Accordingly, when the Fund writes a put option it is exposed to a risk
of loss in the event the value of the underlying securities falls below the
exercise price, which loss potentially may substantially exceed the amount of
option premium received by the Fund for writing the put option. The Fund will
write a put option on a security or a securities index only if the Fund would
be willing to purchase the security at the exercise price for investment
purposes (in the case of an option on a security) or is writing the put in
connection with trading strategies involving combinations of options--for
example, the sale and purchase of options with identical expiration dates on
the same security or index but different exercise prices (a technique called
a "spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be
considered covered if the Fund has segregated assets with respect to such
option in the manner described in "Risk Factors in Options, Futures, Swaps
and Currency Instruments" below. A call option will also be considered
covered if the Fund owns the securities it would be required to deliver upon
exercise of the option (or, in the case of an option on a securities index,
securities which substantially replicate the performance
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of such index) or owns a call option, warrant or convertible instrument which
is immediately exercisable for, or convertible into, such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized
exercise prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. See
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments" below.
Futures
The Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts which obligate a
purchaser to take delivery, and a seller to make delivery, of a specific
amount of a commodity at a specified future date at a specified price. No
price is paid upon entering into a futures contract. Rather, upon purchasing
or selling a futures contract the Fund is required to deposit collateral
("margin") equal to a percentage (generally less than 10%) of the contract
value. Each day thereafter until the futures position is closed, the Fund
will pay additional margin representing any loss experienced as a result of
the futures position the prior day or be entitled to a payment representing
any profit experienced as a result of the futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for
such securities during a period when the Fund was attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive. In the event that such securities decline in value or the Fund
determines not to complete an anticipatory hedge transaction relating to a
futures contract, however, the Fund may realize a loss relating to the
futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying
commodity is a currency or securities or interest rate index) purchased or
sold for hedging purposes (including anticipatory hedges). The Fund will
further limit transactions in futures and options on futures to the extent
necessary to prevent the Fund from being deemed a "commodity pool" under
regulations of the Commodity Futures Trading Commission.
Swaps
The Fund is authorized to enter into equity swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a fixed
or variable interest rate or the change in market value of a different equity
security, basket of equity securities or equity index. Swap agreements may be
used to obtain exposure to an equity or market without owning or taking
physical custody of securities in circumstances in which direct investment is
restricted by local law or is otherwise impractical.
The Fund will enter into a swap transaction only if, immediately following
the time the Fund enters into the transaction, the aggregate notional
principal amount of swap transactions to which the Fund is a party would not
exceed 5% of the Fund's net assets.
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Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the US
dollar.
Forward foreign exchange transactions are OTC contracts to purchase or
sell a specified amount of a specified currency or multinational currency
unit at a price and future date set at the time of the contract. Spot foreign
exchange transactions are similar but require current, rather than future,
settlement. The Fund will enter into foreign exchange transactions only for
purposes of hedging either a specific transaction or a portfolio position.
The Fund may enter into a foreign exchange transaction for purposes of
hedging a specific transaction by, for example, purchasing a currency needed
to settle a security transaction or selling a currency in which the Fund has
received or anticipates receiving a dividend or distribution. The Fund may
enter into a foreign exchange transaction for purposes of hedging a portfolio
position by selling forward a currency in which a portfolio position of the
Fund is denominated or by purchasing a currency in which the Fund anticipates
acquiring a portfolio position in the near future. The Fund may also hedge
portfolio positions through currency swaps, which are transactions in which
one currency is simultaneously bought for a second currency on a spot basis
and sold for the second currency on a forward basis.
The Fund may also hedge against the decline in the value of a currency
against the US dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures"
above.
The Fund may also hedge against the decline in the value of a currency
against the US dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option
premium the writer of a currency option is obligated to sell (in the case of
a call option) or purchase (in the case of a put option) a specified amount
of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Types of Options" above
and "Additional Risk Factors of OTC Transactions; Limitations on the Use of
OTC Strategic Instruments" below.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated
in such currency. The Fund may, however, hedge a currency by entering into a
transaction in a Currency Instrument denominated in a currency other than the
currency being hedged (a "cross-hedge"). The Fund will only enter into a
cross-hedge if the Investment Adviser believes that (i) there is a
demonstrable high correlation between the currency in which the cross-hedge
is denominated and the currency being hedged, and (ii) executing a
cross-hedge through the currency in which the cross-hedge is denominated will
be significantly more cost-effective or provide substantially greater
liquidity than executing a similar hedging transaction by means of the
currency being hedged.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value
of the Fund's shares will fluctuate. Moreover, although Currency Instruments
will be used with the intention of hedging against adverse currency
movements, transactions in Currency Instruments involve the risk that
anticipated currency movements will not be accurately predicted and that the
Fund's hedging strategies will be ineffective. To the extent that the Fund
hedges against anticipated currency movements which do not occur, the Fund
may realize losses, and decrease its total return, as the result of its
hedging transactions. Furthermore, the Fund will only engage
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in hedging activities from time to time and may not be engaging in hedging
activities when movements in currency exchange rates occur. It may not be
possible for the Fund to hedge against currency exchange rate movements, even
if correctly anticipated, in the event that (i) the currency exchange rate
movement is so generally anticipated that the Fund is not able to enter into
a hedging transaction at an effective price, or (ii) the currency exchange
rate movement relates to a market with respect to which Currency Instruments
are not available (such as certain developing markets) and it is not possible
to engage in effective foreign currency hedging.
Risk Factors in Options, Futures, Swaps and Currency Instruments
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the
Fund will experience a gain or loss which will not be completely offset by
movements in the value of the hedged instruments.
The Fund intends to enter into transactions involving Strategic
Instruments only if there appears to be a liquid secondary market for such
instruments or, in the case of illiquid instruments traded in OTC
transactions, such instruments satisfy the criteria set forth below under
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments." However, there can be no assurance that, at any
specific time, either a liquid secondary market will exist for a Strategic
Instrument or the Fund will otherwise be able to sell such instrument at an
acceptable price. It may therefore not be possible to close a position in a
Strategic Instrument without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose
the Fund to potential losses which exceed the amount originally invested by
the Fund in such instruments. When the Fund engages in such a transaction,
the Fund will deposit in a segregated account at its custodian liquid
securities with a value at least equal to the Fund's exposure, on a
mark-to-market basis, to the transaction (as calculated pursuant to
requirements of the Securities and Exchange Commission). Such segregation
will ensure that the Fund has assets available to satisfy its obligations
with respect to the transaction, but will not limit the Fund's exposure to
loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments
Certain Strategic Instruments traded in OTC markets, including indexed
securities, swaps and OTC options, may be substantially less liquid than
other instruments in which the Fund may invest. The absence of liquidity may
make it difficult or impossible for the Fund to sell such instruments
promptly at an acceptable price. The absence of liquidity may also make it
more difficult for the Fund to ascertain a market value for such instruments.
The Fund will therefore acquire illiquid OTC instruments (i) if the agreement
pursuant to which the instrument is purchased contains a formula price at
which the instrument may be terminated or sold, or (ii) for which the
Investment Adviser anticipates the Fund can receive on each business day at
least two independent bids or offers, unless a quotation from only one dealer
is available, in which case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore 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 transactions, the sum
of the market value of OTC options currently outstanding which are held by
the Fund, the market value of the securities underlying OTC call options
currently outstanding which have been sold by the Fund and margin deposits on
the Fund's outstanding OTC options exceeds 15% of the total assets of the
Fund, taken at market value, together with all other assets of the Fund which
are deemed to be illiquid or are otherwise not readily marketable. However,
if an OTC option is sold by the Fund to a dealer in U.S. government
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securities recognized as a "primary dealer" by the Federal Reserve Bank of
New York and the Fund has the unconditional contractual right to repurchase
such OTC option 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 exercise
price).
Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments
or has deposited collateral with its counterparty the Fund is at risk that
its counterparty will become bankrupt or otherwise fail to honor its
obligations. The Fund will attempt to minimize the risk that a counterparty
will become bankrupt or otherwise fail to honor its obligations by engaging
in transactions in Strategic Instruments traded in OTC markets only with
financial institutions which (i) have, in the opinion of the Investment
Adviser, substantial capital relative to the Fund's exposure, or (ii) have
provided the Fund with a third-party guaranty or other credit enhancement.
Additional Limitations on the Use of Strategic Instruments
The Fund may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited by its investment restrictions
from purchasing directly.
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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: [open
box] Check or [open box] 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.
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MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.--
AUTHORIZATION FORM (PART 1)--(Continued)
3. Social Security Number or Taxpayer Identification Number
[open box approximately three inches wide]
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 (the "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....
Date of Initial Purchase
Dear Sir/Madam:
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
This form when completed should be mailed to:
Merrill Lynch Global SmallCap Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
............................................................................
Dealer Name and Address
By: .......................................................................
Authorized Signature of Dealer
[3 open boxes] [4 open boxes] ............................
Branch-Code F/C No. F/C Last Name
[3 open boxes] [4 open boxes]
Dealer's Customer A/C No.
52
<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)
<TABLE>
<S> <C>
Name ................................................. [box approx. 2 inches long]
First Name Initial Last Name Social Security Number
or Taxpayer Identification No.
Name of Co-Owner (if any) ............................ Account Number .........................................
First Name Initial Last Name (if existing account)
Address ..............................................
......................................................
(Zip Code)
</TABLE>
2. Systematic Withdrawal Plan--Class A and D Shares Only (See terms and
conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch 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.
53
<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.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Global SmallCap Fund, Inc., as indicated below:
Amount of each ACH debit $ ............................................
Account No. ............................................................
Please date and invest ACH debits on the 20th of each month beginning
______________________________ or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and that
you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
......................... ................................................
Date Signature of Depositor
...........................................................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To .................................................................... Bank
(Investor's Bank)
Bank Address ...............................................................
City ..................... State ..................... Zip .................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
..................................... ......................................
Date Signature of Depositor
..................................... ......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this application.
54
<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 LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such
other information or representations must not be relied upon as having been
authorized by the Fund, the Manager or the Distributor. This Prospectus does
not constitute an offering in any state in which such offering may not
lawfully be made.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
---------
Fee Table 2
Prospectus Summary 4
Merrill Lynch Select Pricing(SM) System 6
Financial Highlights 10
Risk Factors and Special Considerations 12
Investment Objective and Policies 16
Description of Certain Investments 18
Characteristics of Certain Debt Securities 18
Other Investment Policies and Practices 21
Investment Restrictions 23
Management of the Fund 24
Board of Directors 24
Management and Advisory Arrangements 24
Code of Ethics 26
Transfer Agency Services 26
Purchase of Shares 26
Initial Sales Charge Alternatives--Class A and Class
D Shares 28
Deferred Sales Charge Alternatives--Class B and Class
C Shares 30
Distribution Plans 33
Limitations on the Payment of Deferred Sales Charges 34
Redemption of Shares 35
Redemption 35
Repurchase 36
Reinstatement Privilege--Class A and Class D Shares 36
Shareholder Services 36
Performance Data 39
Additional Information 40
Dividends and Distributions 40
Taxes 40
Determination of Net Asset Value 43
Organization of the Fund 43
Shareholder Reports 44
Shareholder Inquiries 44
Appendix A 45
Authorization Form 51
</TABLE>
Code # 18187-1096
[MERRILL LYNCH LOGO]
Merrill Lynch
Global SmallCap
Fund, Inc.
[GRAPHIC OF TWO COMPASSES--ONE ON TOP OF EACH OTHER]
Prospectus
October 28, 1996
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
(bullet) Phone No. (609) 282-2800
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified,
open-end 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 28, 1996 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "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 28, 1996.
<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 Small
Cap Issuers 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. For the
fiscal period August 5, 1994 (commencement of operations) to June 30, 1995,
and for the fiscal year ended June 30, 1996, the Fund's portfolio turnover
rate was 47.96% and 60.33%, respectively. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. The Fund is
subject to the Federal income tax requirement that less than 30% of the
Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") (collectively, the "Depositary Receipts")
or other securities convertible into securities of foreign issuers. The
Depositary Receipts may not necessarily be denominated in the same currency
as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs are
receipts issued in Europe which evidence a similar ownership arrangement.
GDRs are receipts issued throughout the world which evidence a similar
ownership arrangement. Generally, ADRs, in registered form, are designed for
use in the U.S. securities markets, and EDRs, in bearer form, are designed
for use in European securities markets. GDRs are tradeable both in the U.S.
and Europe and are designed for use throughout the world. The Fund may invest
in unsponsored Depositary Receipts. The issuers of unsponsored Depositary
Receipts are not obligated to disclose material information in the United
States, and therefore, there may not be a correlation between such
information and the market value of such securities.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are 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.
2
<PAGE>
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.
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 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
options or futures. However, there can be no assurance that a liquid
secondary market will exist for any particular call or put option or futures
contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only OTC 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
3
<PAGE>
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 OTC option agreement. In the case of a
futures position or an option on a futures position written by the Fund, in
the event of adverse price movements, the Fund would continue to be required
to make daily cash payments of variation margin. In such situations, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous
to do so. In addition, the Fund may be required to take or make delivery of
the 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 its portfolio effectively. 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.
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 Code. See "Dividends,
Distributions and Taxes--Taxes". To qualify under both the Investment Company
Act and the Code, the Fund will comply with certain requirements, including
limiting its investments so that at the time of investment and at the close
of each quarter of the taxable year (i) not more than 25% of the market value
of the Fund's total assets will be invested in the securities of a single
issuer and (ii) with respect to 75% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer, and the Fund will not own more than 10% of
the outstanding voting securities of a single issuer.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when- issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when 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
4
<PAGE>
entering into the agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued, which is typically
approximately 0.50% of the aggregate purchase price of the security that the
Fund has committed to purchase. The Fund will enter into such agreements only
for the purpose of investing in the security underlying the commitment at a
yield and price that is considered advantageous to the Fund. The Fund will
not enter into a standby commitment with a remaining term in excess of 45
days and presently will limit its investment in such commitment so that the
aggregate purchase price of the securities subject to such commitments,
together with the value of portfolio securities subject to legal restrictions
on resale that affect their marketability, will not exceed 15% (which
presently is further limited by state law to 10%) of its net assets taken at
the time of acquisition of such commitment or security. The Fund will at all
times maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other high grade liquid debt
securities denominated in U.S. dollars or non-U.S. currencies in an aggregate
amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Because the
issuance of the security underlying the commitment is at the option of the
issuer, the Fund may bear the risk of a decline in the value of such security
and may not benefit from an appreciation in the value of the security during
the commitment period.
The purchase of a security subject to a standby agreement and the related
commitment fee will be recorded on the date which the security can reasonably
be expected to be issued, and the value of the security will thereafter be
reflected in the calculation of the Fund's net asset value. The cost basis of
the security will be adjusted by the amount of the commitment fee. In the
event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements and purchase and sale
contracts. Repurchase agreements may be entered into only with financial
institutions which (i) have, in the opinion of the Manager, substantial
capital relative to the Fund's exposure, or (ii) have provided the Fund with
a third-party guaranty or other credit enhancement. Under a repurchase
agreement or a purchase and sale contract, the counterparty agrees, upon
entering into the contract, 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. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral
if the market value of the securities falls below the repurchase price at any
time during the term of the repurchase agreement; the Fund does not have the
right to seek additional collateral in the case of purchase and sale
contracts. In the event of default by the seller under a repurchase agreement
construed to be a collaterlized 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
under a purchase and sale contract, instead of the contractual fixed rate of
return, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such securities and the accrued interest
on the securities. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform.
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.
5
<PAGE>
Government which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The purpose of
such loans is to permit the borrowers to use such securities for delivery to
purchasers when such borrowers have sold short. If cash collateral is
received by the Fund, it is invested in short- term money market securities,
and a portion of the yield received in respect of such investment is retained
by the Fund. Alternatively, if securities are delivered to the Fund as
collateral, the Fund and the borrower negotiate a rate for the loan premium
to be received by the Fund for lending its portfolio securities. In either
event, the total return on the Fund's portfolio is increased by loans of its
portfolio securities. The Fund will have the right to regain record ownership
of loaned securities to exercise beneficial rights such as voting rights,
subscription rights and rights to dividends, interest or other distributions.
Such loans are terminable at any time, and the borrower, after notice, will
be required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, administrative and custodial fees in connection
with such loans. With respect to the lending of portfolio securities, there
is the risk of failure by the borrower to return the securities involved in
such transactions.
Investment Restrictions
In addition to the investment restrictions set forth in the Prospectus,
the Fund has adopted 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, as
they may be amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money or pledge its assets, except that the Fund (a) may
borrow from a bank as a temporary measure for extraordinary or emergency
purposes or to meet redemptions in amounts not exceeding 33-1/3% (taken at
market value) of its total assets and pledge its assets to secure such
borrowings, (b) may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of portfolio securities and (c) may
purchase securities on margin to the extent permitted by applicable law.
(However, at the present time, applicable law prohibits the Fund from
purchasing securities on margin.) (The deposit or payment by the Fund of
initial or variation margin in connection with futures contracts or
options transactions is not considered the purchase of a security on
margin.)
6
<PAGE>
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, as they
may be amended from time to time, 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 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 permits the Fund to purchase 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. Securities purchased in accordance with Rule 144A under the
Securities Act (a "Rule 144A Security") and determined to be liquid by the
Fund's Board of Directors are not subject to the limitations set forth in
this investment restriction (c).
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 (the "NYSE") 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.
7
<PAGE>
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.
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 Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
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 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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act
involving only usual and customary commissions or transactions pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage". Without such an exemptive order, the Fund would be prohibited
from engaging in portfolio transactions with Merrill Lynch or any of its
affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such
firms or any of their affiliates participate as an underwriter or dealer.
8
<PAGE>
MANAGEMENT OF THE FUND
Information about the Directors and executive officers of the Fund, their
ages and their principal occupations for at least the last five years, is set
forth below. Unless otherwise noted, the address of each executive officer
and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (64)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
Donald Cecil (69)--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 (69)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (65)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
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 (58)--Director(2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984, Dean from 1984 to 1993, and currently Dean Emeritus of
New York University Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real
estate holding company), Smith-Corona Corporation (manufacturer of
typewriters and word processors) and Alexander's Inc. (real estate company).
Edward D. Zinbarg (61)--Director(2)--5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of the Prudential Insurance
Company of America from 1988 to 1994; former Director of Prudential
Reinsurance Company and former Trustee of the Prudential Foundation.
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
Norman R. Harvey (63)--Senior Vice President(1)(2)--Senior Vice President
of the Manager and FAM since 1982.
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990.
Andrew John Bascand (34)--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
9
<PAGE>
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 (34)--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 (39)--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.
Daniel V. Szemis (37)--Vice President(1)--Vice President of the Manager
since 1996. Senior Portfolio Manager and Analyst with Prudential Mutual Fund
Investment Management from 1990 to 1996.
James Russell (44)--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 (35)--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 (47)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer since 1984.
Robert Harris (44)--Secretary(1)(2)--Vice President of the Manager since
1984 and attorney associated with the Manager since 1980; 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, 1996, 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 (each, a
"non-affiliated Director") 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 Committee meeting
attended. The Chairman of the Committee receives an additional fee of $250
per Committee meeting attended. Fees and expenses paid to the non-affiliated
Directors for the fiscal year ended June 30, 1996, aggregated $38,828.
The following table sets forth for the fiscal year ended June 30, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM Advised Funds"), to the non-affiliated Directors:
10
<PAGE>
<TABLE>
<CAPTION>
Pension or Aggregate
Retirement Compensation from
Benefits Fund and Other
Accrued as MLAM/FAM
Compensation Part of Advised Funds Paid
Name of Director from Fund Fund's Expenses to Director(1)
- -------------------- -------------- ------------------ ------------------
<S> <C> <C> <C>
Donald Cecil $8,500 None $271,850
Edward H. Meyer $7,500 None $239,225
Charles C. Reilly $7,500 None $269,600
Richard R. West $7,500 None $294,600
Edward D. Zinbarg $7,500 None $155,063
</TABLE>
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Cecil (36 registered investment companies consisting of 36
portfolios); Mr. Meyer (36 registered investment companies consisting of
36 portfolios); Mr. Reilly (41 registered investment companies consisting
of 54 portfolios); Mr. West (41 registered investment companies
consisting of 54 portfolios) and Mr. Zinbarg (18 registered investment
companies consisting of 18 portfolios).
Management and Advisory Arrangements
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which
the Manager or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Manager 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 fiscal period
August 5, 1994 (commencement of operations) to June 30, 1995 and for the
fiscal year ended June 30, 1996, the investment advisory fees paid by the
Fund to the Manager aggregated $1,300,660 and $1,285,653, respectively.
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 event
in excess of the amount that the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement. For the fiscal
period August 5, 1994 (commencement of operations) to June 30, 1995 and for
the fiscal year ended June 30, 1996, the sub-advisory fees paid by the
Manager to MLAM U.K. pursuant to such agreement aggregated $133,021 and
$150,719, respectively.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees
of all Directors of the Fund who are affiliated persons of the Manager or its
affiliates. The Fund pays all other expenses incurred in the operation
11
<PAGE>
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 fiscal period ended August 5,
1994 (commencement of operations) to June 30, 1995 the Fund reimbursed the
manager $111,195 for accounting services. For the fiscal year ended June 30,
1996, the Fund reimbursed the Manager $105,306 for accounting 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 contract is
not assignable and may be terminated without penalty on 60 days' written
notice at the option of either party thereto or by the vote of a majority of
the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
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
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM which utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds".
12
<PAGE>
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. The gross
sales charges for the sale of Class A shares for the period October 21, 1994
(commencement of operations) to June 30, 1995, were $165, of which $157 was
received by Merrill Lynch and $8 was received by the Distributor. The gross
sales charges for the sale of Class A shares for the fiscal year ended June
30, 1996, were $576, of which $530 was received by Merrill Lynch and $46 was
received by the Distributor. The gross sales charges for the sale of Class D
shares of the Fund (including redesignated Class A shares) for the period
August 5, 1994 (commencement of operations) to June 30, 1995, were
$1,104,179, of which $1,084,067 was received by Merrill Lynch and $20,112 was
received by the Distributor. The gross sales charges for the sale of Class D
shares of the Fund for the fiscal year ended June 30, 1996, were $61,135 of
which $57,042 was received by Merrill Lynch and $4,093 was received by the
Distributor.
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 or her spouse and their children
under the age of 21 years purchasing shares for his, her 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.
The term "purchase" shall not include purchases by any group of individuals
whose sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.
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
13
<PAGE>
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.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain
shares of common stock of such funds in shares of the Fund. Upon exercise of
this investment option, shareholders of Merrill Lynch Senior Floating Rate
Fund, Inc. will receive Class A shares of the Fund and shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. will receive Class D shares of the Fund, except
that shareholders already owning Class A shares of the Fund will be eligible
to purchase additional Class A shares pursuant to this option, if such
additional Class A shares will be held in the same account as the existing
Class A shares and the other requirements pertaining to the reinvestment
privilege are met. In order to exercise this investment option, a shareholder
of one of the above- referenced continuously offered closed-end funds (an
"eligible fund") must sell his or her shares of common stock of the eligible
fund (the "eligible shares") back to the eligible fund in connection with a
tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or Contingent Deferred Sales Charge (each as defined in the
eligible fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at
the net asset value of the designated class of the Fund on such day.
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 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, but its execution will result in the purchaser paying a lower
sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included under a
subsequent Letter 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
14
<PAGE>
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 or Savings Plans and Certain Other
Arrangements. Certain employer- sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net
asset value, based on the number of employees or number of employees eligible
to participate in the plan, the aggregate amount invested by the plan in
specified investments and/or the services provided by Merrill Lynch to the
plan. Certain other plans may purchase Class B shares with a waiver of the
contingent deferred sales charge ("CDSC") upon redemption, based on similar
criteria. Such Class B shares will convert into Class D shares approximately
ten years after the plan purchases the first share of any MLAM-advised mutual
fund. Minimum purchase requirements may be waived or varied for such plans.
Additional information regarding purchases by employer-sponsored retirement
or savings plans and certain other arrangements is available toll-free from
Merrill Lynch Business Financial Services at (800) 237-7777.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through qualified 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, ML & Co., and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees
and any trust, pension, profit-sharing or other benefit plan for such persons
may purchase Class A shares of the Fund at net asset value.
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.
15
<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.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
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.
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
16
<PAGE>
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 Conduct Rules 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.
The following table sets forth comparative information as of June 30,
1996, 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.
17
<PAGE>
<TABLE>
<CAPTION>
Data Calculated as of June 30, 1996
----------------------------------------------------------------------------------------
(in thousands)
Annual
Allowable Allowable Amounts Distribution
Eligible Aggregate Interest Maximum Previously Aggregate Fee at
Gross Sales on Unpaid Amount Paid to Unpaid Current Net
Sales(1) Charges Balance(2) Payable Distributor(3) Balance Asset 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, 1996:
Under NASD Rule
as Adopted $165,748 $10,359 $1,495 $11,854 $2,727 $9,127 $988
Under Distributor's
Voluntary Waiver $165,748 $10,359 $ 829 $11,188 $2,727 $8,461 $988
Class C Shares, for the
period October 21, 1994
(commencement of
operations) to
June 30, 1996:
Under NASD Rule
as Adopted $ 7,792 $ 487 $ 54 $ 541 $ 58 $ 483 $ 43
</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 NYSE is restricted as determined by the Commission or
the NYSE is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists, as defined by the Commission, as
a result of which disposal of portfolio securities or determination of the
net asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
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<PAGE>
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.
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,
and for the fiscal year ended June 30, 1996, the Distributor received CDSCs
of $390,517 and $492,135, respectively, with respect to redemptions of Class
B shares, all of which were paid to Merrill Lynch. For the fiscal period
October 21, 1994 (commencement of operations) to June 30, 1995, and for the
fiscal year ended June 30, 1996, the Distributor received CDSCs of $2,540 and
$2,470, respectively, with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.
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 Conduct Rules of the NASD 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
19
<PAGE>
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 OTC markets
in the United States or Europe, as the case may be. ADRs, like other
securities traded in the United States, as well as GDRs traded in the United
States, will be subject to negotiated commission rates.
The Fund may invest in securities traded in the OTC markets and intends to
deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons are prohibited
from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own account, the Fund
will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, affiliated persons
of the Fund may serve as its broker in OTC transactions conducted on an
agency basis provided that, among other things, the fee or commission
received by such affiliated broker is reasonable and fair compared to the fee
or commission received by non-affiliated brokers in connection with
comparable transactions. See "Investment Objective and Policies--Investment
Restrictions". 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. For the fiscal year ended June 30, 1996, the Fund paid
total brokerage commissions of $482,165, of which $42,982 or 8.9% was paid to
Merrill Lynch for effecting 9.0% 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 possibility of seeking to
recapture for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio
transactions through affiliated entities. For example, brokerage commissions
received by affiliated brokers could be offset against the advisory fee paid
by the Fund. After considering all factors deemed relevant, the 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.
20
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the
NYSE (generally, 4:00 p.m., New York time), on each day during which the NYSE
is open for trading. The NYSE is not open on New Year's Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of
valuation. The Fund also will determine its net asset value on any day in
which there is sufficient trading in its portfolio securities that the net
asset value might be affected materially, but only if on any such day the
Fund is required to sell or redeem shares. Net asset value is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus
all liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the management fees and any
account maintenance and/or distribution fees, are accrued daily. The per
share net asset value of Class B, Class C and Class D shares generally will
be lower than the per share net asset value of Class A shares reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable
with respect to Class D shares; moreover the per share net asset value of
Class B and Class C shares generally will be lower than the per share net
asset value of Class D shares reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or
distributions, which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities, 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 OTC market are valued at the last available bid price in the
OTC market prior to the time of valuation. Portfolio securities which are
traded both in the OTC market and on a stock exchange are valued according to
the broadest and most representative market. When the Fund writes an option,
the amount of the premium received is recorded on the books of the Fund as an
asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option
written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last bid price. Other investments, including futures
contracts and related options, 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 business on the NYSE. The values of
such securities used in computing the net asset value of the Fund's shares
are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which they are determined and
the close of business on the NYSE which will not be reflected in the
computation of the Fund's
21
<PAGE>
net asset value. If events materially affecting the value of such securities
occur during such period, then these securities will be valued at their fair
value as determined in good faith by the Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services, 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. A shareholder
may make additions to his or her investment account at any time by mailing a
check directly to the Fund's Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing
all or only part of the full shares in an Investment Account may be requested
by a shareholder directly from the Fund's Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm
or such shareholder must continue to maintain an Investment Account at the
transfer agent for those Class A or Class D shares. Shareholders interested
in transferring their Class B or Class C shares from Merrill Lynch and who do
not wish to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent. If the new brokerage firm is willing
to accommodate the shareholder in this manner, the shareholder must request
that he or she be issued certificates for his or her shares and then must
turn the certificates over to the new firm for re-registration as described
in the preceding sentence. Shareholders considering transferring a
tax-deferred retirement account such as an IRA from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account
at the new firm, or such shareholder must continue to maintain a retirement
account at Merrill Lynch for those shares.
Automatic Investment Plans
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by 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
22
<PAGE>
automated clearing house debits of $50 or more to charge the regular bank
account of the shareholder on a regular basis to provide systematic additions
to the Investment Account of such shareholder. An investor whose shares of
the Fund are held within a CMA(R) or CBA(R) account may arrange to have
periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R) or CBA(R) Automated Investment
Program.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of 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 NYSE
(generally 4:00 P.M., New York time) on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on such date, the Class A or Class D shares
will be redeemed at the close of business on the following business day. The
check for the withdrawal payment will be mailed or the direct deposit of the
withdrawal payment will be made on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends
and distributions on all Class A or Class D shares in the Investment Account
are 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.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R)
23
<PAGE>
or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to
the shareholder's account five business days after the date the shares are
redeemed. Monthly systematic redemptions will be made at net asset value on
the first Monday of each month; bimonthly systematic redemptions will be made
at net asset value on the first Monday of every other month; and quarterly,
semiannual or annual redemptions are made at net asset value on the first
Monday of months selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net asset value
on the next business day. The Systematic Redemption Program is not available
if Fund shares are being purchased within the account pursuant to the
Automatic Investment Program. For more information on the CMA(R) or CBA(R)
Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch Financial Consultant.
Exchange Privilege
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 Pricing(SM) System, Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second MLAM-advised mutual
fund if the shareholder holds any Class A shares of the second fund in his or
her account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund but does not hold Class A shares of the second fund
in his or her account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class
D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the
shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of
the second fund. Class B, Class C and Class D shares 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 as follows: Class A shares may be exchanged
for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Reserves Money Fund (available only for exchanges within certain retirement
plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S.
Treasury Money Fund; Class B, Class C and Class D shares may be exchanged for
shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for
the exchange privilege, and any shares utilized in an exchange must have been
held by the shareholder for at least 15 days. It is contemplated that the
exchange privilege may be applicable to other new mutual funds whose shares
may be distributed by the Distributor.
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 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
24
<PAGE>
reinvestment shall be deemed to have been sold with a sales charge equal to
the sales charge previously paid on the Class A or Class D shares on which
the dividend was paid. Based on this formula, Class A and Class D shares of
the Fund generally may be exchanged into the Class A or Class D shares of the
other funds or into shares of certain money market funds with a reduced or
without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through
use of the exchange privilege. In addition, Class B shares of the Fund
acquired through use of the exchange privilege will be subject to the Fund's
CDSC schedule if such schedule is higher than the CDSC schedule relating to
the Class B shares of the fund from which the exchange has been made. For
purposes of computing the sales charge that may be payable on a disposition
of the new Class B or Class C shares, the holding period for the outstanding
Class B or Class C shares is "tacked" to the holding period of the new Class
B or Class C shares. For example, an investor may exchange Class B shares of
the Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value
Fund") after having held the Fund Class B shares for two and a half years.
The 2% CDSC that generally would apply to a redemption would not apply to the
exchange. Three years later the investor may decide to redeem the Class B
shares of Special Value Fund and receive cash. There will be no CDSC due on
this redemption, since by "tacking" the two and a half year holding period of
Fund Class B shares to the three year holding period for the Special Value
Fund Class B shares, the investor will be deemed to have held the new Class B
shares for more than five years.
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, 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 that 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.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described
above, with shares for which certificates have not been issued may exercise
the exchange privilege by wire through their securities dealers. The Fund
reserves the right to require a properly completed Exchange Application. This
exchange privilege may be modified or terminated in accordance with the rules
of the Commission. The Fund reserves the right to limit the number of times
an investor may exercise the exchange privilege. Certain funds may suspend
the
25
<PAGE>
continuous offering of their shares at any time and may thereafter resume
such offering from time to time. The exchange privilege is available only to
U.S. shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund will 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 or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short- term capital losses (including gains
or losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Any
loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis
of a holder's shares, and after such adjusted tax basis is reduced to zero,
will constitute capital gains to such holder (assuming the shares are held as
a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. 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 rule permitting the issuance and
sale of multiple classes of stock) that is based on the gross income
allocable to Class A, Class B, Class C and Class D shareholders during the
taxable year, or such other method as the Internal Revenue Service may
prescribe. If the Fund pays a dividend in January that was declared in the
previous October, November or December to shareholders of record on a
specified date in one of such months, then such dividend will be treated for
tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to
a 31% withholding tax on ordinary income dividends, capital gain dividends,
and redemption payments ("backup withholding"). Generally, shareholders
subject to backup withholding will be those for whom no certified taxpayer
identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
26
<PAGE>
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 for the acquired
Class D shares will include the holding period for the converted Class B
shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed
of. In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income determined on a calendar year basis and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the
Prospectus. Some of these high yield/high risk securities may be purchased at
a discount and may therefore cause the Fund to accrue and distribute income
before amounts due under the obligations are paid. In addition, a portion of
the interest payments on such high yield/high risk securities may be treated
as dividends for Federal income tax purposes; in
27
<PAGE>
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 elects to have gain or loss treated as ordinary gain or
loss under Code Section 988 (as described below), gain or loss from Section
1256 contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may
alter the timing and character of distributions to shareholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will
be marked to market, as described above. However, the character of gain or
loss from such a contract will generally be ordinary under Code Section 988.
The Fund may, nonetheless, elect to treat the gain or loss from certain
forward foreign exchange contracts as capital. In this case, gain or loss
realized in connection with a forward foreign exchange contract that is a
Section 1256 contract will be characterized as 60% long-term and 40%
short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options,
futures and forward foreign exchange contracts. Under Section 1092, the Fund
may be required to postpone recognition for tax purposes of losses incurred
in certain sales of securities and 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.
28
<PAGE>
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 all or a portion of distributions made before the losses
were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares, and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's 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 advisors 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.
29
<PAGE>
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.
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As
a result of the implementation of the Merrill Lynch Select Pricing(SM) System,
Class A shares of the Fund outstanding prior to October 21, 1994, 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 Redeemable value
Expressed as a of 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
Period $1,000 investment of the period $1,000 investment of the period
----------------------------- ------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charges)
Year ended June 30, 1996 17.37% $1,173.70 21.56% $1,215.60
Inception (October 21, 1994)
to June 30, 1996 3.89% $1,066.70 6.14% $1,106.20
Annual Total Return
(excluding maximum applicable sales charges)
Year ended June 30, 1996 23.87% $1,238.70 22.56% $1,225.60
Inception (October 21, 1994)
to June 30, 1995 (9.11)% $ 908.90 (9.75)% $ 902.50
Aggregate Total Return
(including maximum applicable sales charges)
Inception (October 21, 1994)
to June 30, 1996 6.67% $1,066.70 10.62% $1,106.20
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Class D Shares
------------------------------------ -------------------------------------
Redeemable value Redeemable value
Expressed as a of 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
Period $1,000 investment of the period $1,000 investment of the period
--------------------------- ------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charges)
Year ended June 30, 1996 18.57% $1,185.70 17.02% $1,170.20
Inception (August 5, 1994)
to June 30, 1996 2.81% $1,054.20 2.25% $1,043.20
Annual Total Return
(excluding maximum applicable sales charges)
Year ended June 30, 1996 22.57% $1,225.70 23.50% $1,235.00
Inception (August 5, 1994)
to June 30, 1995 (11.55)% $ 884.50 (10.85)% $ 891.50
Aggregate Total Return
(including maximum applicable sales charges)
Inception (August 5, 1994)
to June 30, 1996 5.42% $1,054.20 4.32% $1,043.20
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC, in the case of Class B or Class C
shares, applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares", respectively, the total return data
quoted by the Fund in advertisements directed to such investors may take into
account 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. 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. In addition, 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
31
<PAGE>
Fund entitled to vote at such meeting, if such request is in compliance 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. The organizational
expenses of the Fund 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, 1996, is set forth
below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Assets $3,083,348 $131,655,570 $5,752,849 $22,593,310
============= =============== ============= ==============
Number of Shares Outstanding 283,838 12,290,380 537,194 2,086,565
============= =============== ============= ==============
Net Asset Value Per Share (net assets divided by
number of shares outstanding) $ 10.86 $ 10.71 $ 10.71 $ 10.83
Sales Charge (for Class A and Class D shares: 5.25% of
offering price (5.54% of net asset value per share))* .60 ** ** .60
------------- --------------- ------------- --------------
Offering Price $ 11.46 $ 10.71 $ 10.71 $ 11.43
============= =============== ============= ==============
</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.
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
32
<PAGE>
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 LLP, One World Trade Center, New York, New York 10048-0557,
is counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on June 30 of each year. The Fund sends
to its shareholders at least semiannually 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, 1996.
33
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate
Ratings
<TABLE>
<CAPTION>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged". Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term 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.
</TABLE>
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.
34
<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.
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.
35
<PAGE>
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<CAPTION>
<S> <C>
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection
and the least risk of dividend impairment within the universe
of preferred stocks.
aa An issue which is rated "aa" is considered 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.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
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.
36
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C>
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.
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.
37
<PAGE>
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.
</TABLE>
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
<TABLE>
<CAPTION>
<S> <C>
c The letter "c" indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated
conditions enumerated in the tender option documents.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured and interest is adequately
collateralized. In the case of certificates of deposit, the letter "L"
indicates that the deposit, combined with other deposits being held in
the same right and capacity, will be honored for principal and accrued
pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the
deposit is assumed by a successor insured institution, upon maturity.
p The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed
by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project,
makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
N.R. Not rated.
</TABLE>
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment
Grade" ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments impose
certain rating or other standards for obligations eligible for investment by
savings banks, trust companies, insurance companies and fiduciaries
generally.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for
the highest quality obligations to "D" for the lowest. These categories are
as follows:
<TABLE>
<CAPTION>
<S> <C>
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".
38
<PAGE>
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.
</TABLE>
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by
Standard & Poor's from other sources it considers reliable. Standard & Poor's
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and
any applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue, which 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' righs.
<TABLE>
<CAPTION>
<S> <C>
AAA This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely
strong capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a
high-quality fixed income security. The capacity to pay
preferred stock obligations is very strong, although not as
overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the "A"
category.
39
<PAGE>
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on
B balance, as predominately speculative with respect to the
CCC issuer's capacity to pay preferred stock obligations. "BB"
indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is
currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the
issuer in default on debt instruments.
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.
</TABLE>
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.
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
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, 1996, the related statements of operations for the year
then ended, and changes in net assets and the financial highlights for the
year then ended and 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 the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at June 30, 1996, 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 audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Global SmallCap Fund, Inc. as of June 30, 1996, 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 20, 1996
41
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Value Percent of
EUROPE Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Denmark Textiles 21,674 ++Carli Grey International A/S $ 592,344 $ 709,896 0.4%
Total Investments in Denmark 592,344 709,896 0.4
Finland Holding Company 60,000 ++America Group Ltd. 1,079,450 1,008,338 0.6
19,300 Fiskars OY AB 989,408 1,081,163 0.7
Total Investments in Finland 2,068,858 2,089,501 1.3
France Advertising 10,440 Havas Advertising S.A. (h) 946,224 1,176,910 0.7
Computer Software 2,157 ++Altran Technologies S.A. 561,773 667,852 0.4
Holding Company 2,978 Societe EuraFrance S.A. 901,134 1,151,841 0.7
Industrials 4,575 Ecco S.A. 884,235 1,151,531 0.7
Insurance 2,868 Cardif S.A. 282,878 400,795 0.3
Manufacturing 3,500 Sommer Allibert S.A. 1,037,025 889,796 0.5
Total Investments in France 4,613,269 5,438,725 3.3
Germany Machine Tools & 3,850 ++Walter AG 977,454 1,113,741 0.7
Machinery
Machinery & 39,100 ++Kloeckner Werke AG 3,734,471 1,375,312 0.8
Engineering
Retail Specialty 27,000 ++Moebel Walther AG 1,155,318 1,153,846 0.7
Total Investments in Germany 5,867,243 3,642,899 2.2
Greece Building & 7,990 Titan Cement Co. S.A. 302,811 394,933 0.2
Construction
Total Investments in Greece 302,811 394,933 0.2
Ireland Transportation 130,000 Irish Continental Group PLC 1,035,119 1,136,494 0.7
Total Investments in Ireland 1,035,119 1,136,494 0.7
Italy Building & 434,600 ++Fochi Filippo S.p.A. (Ordinary) 1,346,030 99,340 0.1
Construction
Diversified 1,850,000 ++Compagnie Industriali Riunite
S.p.A. (CIR) 2,071,370 1,171,957 0.7
Total Investments in Italy 3,417,400 1,271,297 0.8
Netherlands Electrical Equipment 25,109 Twentsche Kabel Holding NV 988,513 1,077,362 0.7
Electronics 46,200 Otra NV 979,112 1,064,279 0.7
Engineering & 20,806 ++Kondor Wessels Group NV 780,063 714,673 0.4
Construction
Holding Company 51,480 Internatio-Muller NV 1,026,843 1,134,612 0.7
Total Investments in the Netherlands 3,774,531 3,990,926 2.5
Poland Engineering & 131,800 Elektrim Towarzystwo Handlowe S.A. 462,537 1,081,361 0.7
Construction
Tire & Rubber 30,000 ++T.C. Debica S.A. 399,679 728,477 0.4
Total Investments in Poland 862,216 1,809,838 1.1
Portugal Retail Sales 12,600 Establecimentos Jeronimo Martins
& Filho S.A. 644,835 1,135,208 0.7
Total Investments in Portugal 644,835 1,135,208 0.7
42
<PAGE>
Spain Glass 15,835 ++Cristaleria Espanola S.A. 697,591 994,481 0.6
Real Estate 47,946 Vallehermoso S.A. 815,741 947,535 0.6
Steel 7,800 Acerinox S.A. 802,944 815,826 0.5
Textiles 115,000 ++Algodonera de San Antonio 1,269,666 929,738 0.6
Total Investments in Spain 3,585,942 3,687,580 2.3
Sweden Automotive Parts 76,800 Garphyttan Industrier AB 988,225 1,179,404 0.7
Engineering 60,000 Kalmar Industries AB 1,022,006 1,264,679 0.8
Engineering & 38,878 Svedala Industri AB 510,552 734,596 0.4
Construction
Forest Products 1,153,500 Rottneros Bruks AB Free 1,779,027 1,337,240 0.8
/Paper &
Packaging
Investment 133,620 ++Bure Investment AB 1,139,371 1,227,164 0.8
Management
Manufacturing 74,643 Getinge Industrier AB (B Shares) 995,805 1,404,754 0.9
Medical Supplies 30,000 ++Nobel Biocare AB 543,150 555,556 0.3
Total Investments in Sweden 6,978,136 7,703,393 4.7
Switzerland Engineering & 400 Daetwyler Holdings AG 679,000 713,030 0.4
Construction
Industrials 9,175 ++Oerlikon-Buehrle Holdings AG 989,278 953,437 0.6
Medical Supplies 507 ++Disetronic Holdings AG 942,645 948,345 0.6
Photography 3,082 Fotolabo S.A. 1,034,207 1,278,624 0.8
Retailing 1,560 Grands Magasins Jelmoli S.A. 959,600 885,372 0.5
Total Investments in Switzerland 4,604,730 4,778,808 2.9
Turkey Beverages 871,475 Erciyas Biracilik Ve Malt Sanayi A.S. 566,377 494,190 0.3
Metal Fabricating 5,100,000 Eregli Demir Ve Celik Fabrikalari A.S. 570,786 565,976 0.4
Total Investments in Turkey 1,137,163 1,060,166 0.7
United Beverages 95,000 Matthew Clark PLC 1,000,663 1,137,348 0.7
Kingdom
Broadcasting 78,000 ++Flextech PLC 630,757 608,014 0.4
Chemicals 260,000 Inspec Group PLC 1,478,306 1,031,525 0.7
Computer Services 124,500 Misys PLC 1,248,027 1,502,124 0.9
Computers 349,600 ++Acorn Computer Group PLC 499,614 1,357,147 0.8
Diversified 889,000 Howden Group PLC 1,262,630 1,021,525 0.6
Food & Beverage 667,000 Hazlewood Foods PLC 1,271,988 1,025,360 0.6
Hotels 188,000 Jurys Hotel Group PLC 830,317 831,990 0.5
Manufacturing 120,500 Low & Bonar PLC (Ordinary) 792,075 989,825 0.6
Media/Publishing 300,000 International Business Communications
PLC (Ordinary) 1,043,116 1,458,079 0.9
Pharmaceuticals 55,300 ++Celltech Group PLC 549,111 540,980 0.3
105,300 ++Oxford Molecular Group PLC 552,110 503,610 0.3
------------ ------------ ------
1,101,221 1,044,590 0.6
Textiles 310,500 Dewhirst Group PLC 865,987 930,539 0.6
Total Investments in the United
Kingdom 12,024,701 12,938,066 7.9
Total Investments in Europe 51,509,298 51,787,730 31.7
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
(in US dollars)
LATIN Value Percent of
AMERICA Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Argentina Retail 24,889 Grimoldi S.A. $ 95,150 $ 138,196 0.1%
Steel 36,000 ++Siderar S.A. (ADR) (a) (f) 612,000 729,000 0.4
Total Investments in Argentina 707,150 867,196 0.5
Brazil Telecommunications 7,100,000 Telecomunicacoes de Minas Gerais
S.A.--TELEMIG (Class B) (Preferred) 512,690 731,993 0.4
Textiles 2,054,000 Companhia de Tecidos Norte de Minas
S.A. (Preferred) 652,560 808,098 0.5
Total Investments in Brazil 1,165,250 1,540,091 0.9
Colombia Banking 41,300 Banco Ganadero S.A. (ADR) (a) 811,698 805,350 0.5
Total Investments in Colombia 811,698 805,350 0.5
Mexico Banking 565,000 ++Grupo Financiero Banorte, S.A. de C.V. 616,420 545,352 0.3
Building Materials 70,000 ++Internacional de Ceramica S.A de C.V.
(ADR) (a) 516,474 385,000 0.2
Total Investments in Mexico 1,132,894 930,352 0.5
Peru Foods 356,300 ++Consorcio Alimentos Fabril Pacifico
S.A. (g) 383,299 477,500 0.3
Total Investments in Peru 383,299 477,500 0.3
Total Investments in Latin America 4,200,291 4,620,489 2.7
MIDDLE EAST/
AFRICA
South Entertainment 625,800 Sun International (South Africa) Ltd. 815,854 672,359 0.4
Africa
Mining 124,500 Elandsrand Gold Mining Company Ltd. 741,968 704,771 0.4
38,000 Kinross Mines Ltd. 407,226 403,882 0.3
------------ ------------ ------
1,149,194 1,108,653 0.7
Total Investments in South Africa 1,965,048 1,781,012 1.1
Zimbabwe Beverages 249,000 Delta Corporation Ltd. 396,017 630,699 0.4
Total Investments in Zimbabwe 396,017 630,699 0.4
Total Investments in Middle
East/Africa 2,361,065 2,411,711 1.5
NORTH
AMERICA
Canada Data Processing 7,000 Cognos, Inc. 28,292 159,250 0.1
Insurance 6,500 Arbatax International Inc. 40,311 31,200 0.0
Leisure 42,384 Four Seasons Hotels Ltd. 495,789 667,489 0.4
Mining 32,925 Cambior Inc. 457,703 440,372 0.3
44
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
Natural Resources 30,000 Total Petroleum of North America Ltd. 295,925 292,500 0.2
Total Investments in Canada 1,318,020 1,590,811 1.0
United Aerospace 6,300 ++BE Aerospace Inc. 83,258 81,900 0.0
States 110,000 ++UNC, Inc. 637,625 921,250 0.6
------------ ------------ ------
720,883 1,003,150 0.6
Apparel 115,000 ++Farah, Inc. 1,148,408 848,125 0.5
70,100 ++Norton McNaughton, Inc. 850,711 473,175 0.3
------------ ------------ ------
1,999,119 1,321,300 0.8
Automotive 8,500 Smith (A.O.) Corporation 175,822 212,500 0.1
Banking & Finance 17,000 Charter One Financial, Inc. 327,995 590,750 0.4
15,000 Roosevelt Financial Group, Inc. 242,463 288,750 0.2
9,200 Walden Bancorp Inc. (c) 132,250 186,300 0.1
------------ ------------ ------
702,708 1,065,800 0.7
Biotechnology 15,000 ++COR Therapeutics, Inc. 168,375 170,625 0.1
4,400 ++Ostex International Inc. 63,900 46,200 0.0
15,000 ++Scios, Inc. (d) 74,025 98,438 0.1
------------ ------------ ------
306,300 315,263 0.2
Building & Building 22,000 ++Giant Cement Holding, Inc. 293,938 277,750 0.2
Materials 58,600 ++Redman Industries, Inc. 525,988 1,172,000 0.7
15,300 Ryland Group, Inc. 206,581 229,500 0.1
------------ ------------ ------
1,026,507 1,679,250 1.0
Business Services 20,000 ++Applied Bioscience International, Inc. 126,189 207,500 0.1
Chemicals 8,000 Arcadian Corp. 161,443 158,000 0.1
Computer Software 54,900 ++Hyperion Software Corp. 599,419 672,525 0.4
16,600 ++Software Spectrum Inc. 337,768 373,500 0.2
28,000 ++VMARK Software, Inc. 439,368 255,500 0.2
------------ ------------ ------
1,376,555 1,301,525 0.8
Computers 17,000 ++Storage Technology Corporation 414,612 650,250 0.4
16,100 ++Stratus Computer, Inc. 462,891 466,900 0.3
24,700 Telxon Corporation 274,366 290,225 0.2
------------ ------------ ------
1,151,869 1,407,375 0.9
Data Processing 19,000 ++Compuware Corp. 554,040 745,750 0.5
40,000 ++Landmark Graphics Corp. 838,665 770,000 0.5
20,000 ++Platinum Technology Inc. 332,428 300,000 0.2
5,000 ++Sterling Software, Inc. 177,175 385,000 0.2
25,400 ++Symantec Corp. 312,641 317,500 0.2
------------ ------------ ------
2,214,949 2,518,250 1.6
Electronics 6,200 ++Alpha Industries, Inc. 60,166 55,025 0.0
10,900 ++BI, Inc. 108,175 144,425 0.1
25,000 ++CHS Electronics Inc. 351,514 337,500 0.2
3,300 ++ITI Technologies Inc. 90,113 107,663 0.1
31,900 ++VLSI Technology, Inc. 438,017 442,613 0.3
------------ ------------ ------
1,047,985 1,087,226 0.7
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
(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 Environmental Control 25,740 BHA Group Inc. (Class A) $ 346,317 $ 341,055 0.2%
States 78,000 ++Envirosource Inc. 304,028 273,000 0.2
(concluded) ------------ ------------ ------
650,345 614,055 0.4
Fertilizer 10,900 Mississippi Chemical Corp. 235,242 215,275 0.1
Gaming 38,000 ++Players International Inc. 381,481 370,500 0.2
Healthcare-- 25,000 ++Beverly Enterprises, Inc. 339,390 300,000 0.2
Products/Services 49,000 ++Magellan Health Services, Inc. 884,348 1,053,500 0.6
53,800 ++Ramsay Health Care, Inc. 330,777 161,400 0.1
------------ ------------ ------
1,554,515 1,514,900 0.9
Home Furnishing 20,400 Crown Crafts, Inc. 303,212 209,100 0.1
Insurance 40,000 First Colony Corp. 841,337 1,240,000 0.7
60,000 PXRE Corp. 1,375,075 1,455,000 0.9
22,200 Security-Connecticut Corp. 493,582 604,950 0.4
------------ ------------ ------
2,709,994 3,299,950 2.0
Iron & Steel 15,800 ++Gibraltar Steel Corp. 284,997 312,050 0.2
12,200 ++Olympic Steel, Inc. 182,763 338,550 0.2
32,000 Quanex Corp. 677,636 756,000 0.5
------------ ------------ ------
1,145,396 1,406,600 0.9
Machinery 12,000 AGCO Corp. 266,610 333,000 0.2
15,800 Bearings, Inc. 455,964 426,600 0.3
19,800 Cincinnati Milacron, Inc. 483,025 475,200 0.3
------------ ------------ ------
1,205,599 1,234,800 0.8
Medical 10,000 Analogic Corporation 171,250 262,500 0.2
10,000 ++Biomatrix, Inc. 152,941 160,000 0.1
4,300 ++Healthdyne Technologies, Inc. 51,531 55,363 0.0
20,000 Medex, Inc. 214,677 257,500 0.2
8,700 Sierra Health Services Inc. 286,095 274,050 0.2
------------ ------------ ------
876,494 1,009,413 0.7
Metals 15,000 ++CasTech Aluminum Group, Inc. 246,037 221,250 0.1
15,500 Commonwealth Aluminum Corp. 259,735 242,188 0.1
19,200 ++Shiloh Industries, Inc. 270,331 300,000 0.2
------------ ------------ ------
776,103 763,438 0.4
Natural Resources 20,300 ++Brown (Tom), Inc. 236,050 340,025 0.2
17,000 ++Newpark Resources Inc. 277,262 624,750 0.4
35,000 ++Plains Resources, Inc. 218,750 455,000 0.3
55,000 ++TransTexas Gas Corp. 605,000 481,250 0.3
34,700 Zemex Corporation 315,450 264,588 0.2
------------ ------------ ------
1,652,512 2,165,613 1.4
Paper & Forest 15,000 Pope & Talbot, Inc. 247,088 226,875 0.1
Products
46
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
Paper & Forest
Products (continued) 23,400 ++Mercer International, Inc. 404,544 310,050 0.2
------------ ------------ ------
651,632 536,925 0.3
Pharmaceuticals 48,000 ++NeoRx Corp. 323,331 270,000 0.2
Restaurants 67,500 ++TPI Enterprises, Inc. 377,458 236,250 0.1
Retailing 85,000 Baker (J.), Inc. 1,231,429 637,500 0.4
27,300 CML Group, Inc. 83,265 116,025 0.1
25,000 ++Catherines Stores Corp. 202,020 243,750 0.1
27,700 ++Chico's Fashions Inc. 197,652 273,538 0.2
12,000 ++Department 56, Inc. 266,760 271,500 0.2
42,300 Levitz Furniture Inc. 213,948 195,637 0.1
7,500 ++Rex Stores Corp. 97,950 115,312 0.0
------------ ------------ ------
2,293,024 1,853,262 1.1
Telecommunication 15,400 ++Network Equipment Technologies, Inc. 398,149 327,250 0.2
Equipment
Transportation 10,300 Air Express International Corp. 278,291 285,825 0.2
2,400 Expeditors International of
Washington, Inc. 69,219 73,200 0.0
10,000 ++Kirby Corp. 154,306 168,750 0.1
------------ ------------ ------
501,816 527,775 0.3
Total Investments in the United
States 27,046,632 28,832,245 17.7
Total Investments in North America 28,364,652 30,423,056 18.7
PACIFIC
BASIN
Australia Insurance 154,261 QBE Insurance Group 599,026 916,246 0.6
Mining 559,351 QCT Resources Ltd. 650,305 739,270 0.5
Publishing 158,000 West Australian Newspaper Holdings Ltd. 557,621 596,633 0.4
Total Investments in Australia 1,806,952 2,252,149 1.5
Hong Kong Banking 1,432,333 JCG Holdings, Ltd. 1,085,879 1,165,777 0.7
Financial US$ 420,000 Goldlion Capital Corp.,
Services 4.875% due 2/01/1999 318,914 558,600 0.3
Foods/Food 2,234,000 ++Tingyi (Cayman Islands) Holdings Co. 576,463 613,300 0.4
Processing
Packaging 3,772,600 Sinocan Holdings Ltd. 1,254,878 1,657,107 1.0
Total Investments in Hong Kong 3,236,134 3,994,784 2.4
Indonesia Banking-- 163,000 PT Bank Bali (Foreign) 337,016 350,236 0.2
International
Consumer--Goods 130,000 PT Wicaksana Overseas International 336,176 357,542 0.2
Textiles 2,224,000 PT Great River Industries 554,988 1,290,245 0.8
Total Investments in Indonesia 1,228,180 1,998,023 1.2
Japan Apparel 13,000 Goldwin Inc. 145,137 100,876 0.1
Automobile Parts 58,000 Murakami Corp. 1,148,025 916,012 0.6
41,000 Sanoh Industrial 542,817 378,035 0.2
110,000 Showa Corp. 1,098,685 1,104,619 0.7
85,000 Yamakawa Industrial Co. 1,040,181 737,174 0.4
------------ ------------ ------
3,829,708 3,135,840 1.9
</TABLE>
47
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
(in US dollars)
PACIFIC BASIN Value Percent of
(continued) Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Japan Banks 17,000 Bank of the Ryukyus, Ltd. $ 988,951 $ 608,362 0.4%
(concluded)
Beverages 79,000 Hokkaido Coca-Cola Bottling
Co., Ltd. 1,298,058 1,103,433 0.7
74,000 Sanyo Coca-Cola Bottling
Co., Ltd 1,118,168 1,114,661 0.7
------------ ------------ ------
2,416,226 2,218,094 1.4
Chemicals 37,000 Canon Chemicals, Inc. 824,918 854,574 0.5
25,000 Katakura Chikkarin Co., Ltd. 278,420 224,575 0.1
------------ ------------ ------
1,103,338 1,079,149 0.6
Computer Services 47,000 TKC Corp. 1,374,367 1,390,177 0.8
Construction 89,600 Japan Foundation Engineering
Co., Ltd. 1,735,016 1,717,729 1.1
80,000 Tsuchiya Home Co. 1,737,127 1,577,506 1.0
20,000 USK Corp. 337,371 281,176 0.2
157,000 Yondenko Corp. 1,518,456 1,633,924 1.0
------------ ------------ ------
5,327,970 5,210,335 3.3
Consumer Electricals 59,000 Roland Corp. 1,429,975 1,098,777 0.7
Electrical Equipment 24,000 Energy Support Corp. 182,225 210,334 0.1
26,000 Shinmei Electric Co. 1,340,491 676,465 0.4
52,000 Sukegawa Electric Co. 682,343 460,471 0.3
------------ ------------ ------
2,205,059 1,347,270 0.8
Foods/Food Processing 43,000 Ariake Japan Co., Ltd. 1,525,975 1,625,160 1.0
Health Services 25,000 Kanto Biomedical Laboratory 528,125 390,268 0.2
26,000 SRL Inc. 557,018 531,678 0.3
------------ ------------ ------
1,085,143 921,946 0.5
Industrials 13,200 Nitto Kohki Company Limited 489,424 596,494 0.4
31,000 Roki Techno Co., Ltd. 868,533 741,464 0.4
------------ ------------ ------
1,357,957 1,337,958 0.8
Iron & Steel 218,000 Nippon Chutetsukan K.K. 1,367,147 1,213,986 0.7
Machinery 44,000 Giken Seisakusho Co. Inc. 1,182,453 964,031 0.6
27,000 Miura Co., Ltd. 449,645 458,463 0.3
------------ ------------ ------
1,632,098 1,422,494 0.9
Metal Fabrication 124,000 Toyo Kohan Co., Ltd 1,057,406 911,265 0.6
Packaging 45,000 Chuo Kagaku Co. Ltd. 1,894,958 1,027,022 0.6
Pharmaceuticals 12,000 Towa Pharmaceutical Co. 709,641 377,944 0.2
Pollution Control 168,000 Organo Corp. 1,844,463 1,809,750 1.1
Real Estate 53,000 Keihanshin Real Estate Co. Ltd. 525,507 460,617 0.3
56,000 TOC Corp. 596,958 664,597 0.4
------------ ------------ ------
1,122,465 1,125,214 0.7
Restaurants 47,000 Aim Services Co., Ltd. 1,405,610 1,227,132 0.8
45,000 Mos Food Services, Inc. 1,446,914 1,105,076 0.7
48
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
Restaurants (continued) 83,000 Ohsho Food Service Corp. 2,244,318 1,553,314 0.9
------------ ------------ ------
5,096,842 3,885,522 2.4
Retail Specialty 60,000 ADO Electric Industrial Co., Ltd. 1,956,905 1,813,036 1.1
60,000 Arcland Sakamoto 964,197 942,122 0.6
71,000 Daika Corporation 1,109,857 609,275 0.4
48,000 Home Wide Corp. 847,706 723,024 0.4
30,000 Nitori Co. 906,611 670,988 0.4
------------ ------------ ------
5,785,276 4,758,445 2.9
Retail Stores 106,000 Sotetsu Rosen Co., Ltd. 992,634 841,884 0.5
Services 63,000 Ichinen Co., Ltd. 1,667,714 1,236,535 0.8
Trading 31,000 Japan CBM Corp. 1,200,936 1,117,856 0.7
Trucking 108,000 Nippon Konpo Unyu Soko 1,045,185 981,011 0.6
70,000 Tonami Transportation Co., Ltd. 548,070 469,691 0.3
------------ ------------ ------
1,593,255 1,450,702 0.9
Total Investments in Japan 48,754,641 41,252,563 25.3
Malaysia Advertising 122,000 Seni Jaya Corporation BHD 328,696 349,759 0.2
Broadcasting 135,000 Sistem Televisyen Malaysia BHD 207,258 276,062 0.2
135,000 Sistem Televisyen Malaysia BHD
(Class A Shares) 201,389 254,411 0.1
------------ ------------ ------
408,647 530,473 0.3
Engineering & 130,000 Asas Dunia BHD 401,214 516,038 0.3
Construction
Newspaper/Publishing 132,000 New Straits Times Press BHD 541,189 688,051 0.4
Total Investments in Malaysia 1,679,746 2,084,321 1.2
New Zealand Agriculture 1,090,500 Wrightson Ltd. 808,404 798,699 0.5
Chemicals 146,000 Fernz Corporation Limited 439,021 434,726 0.3
Food Merchandising 1,170,000 Affco Holdings Limited 474,738 440,476 0.3
Real Estate 135,000 Kiwi Income Property Trust 94,514 90,559 0.1
Textiles 88,500 Lane Walker Rudkin Industries, Ltd. 101,374 98,137 0.1
Total Investments in New Zealand 1,918,051 1,862,597 1.3
Philippines Banking 65,400 Security Bank Corporation 114,553 176,317 0.1
Financial Services 25,625 Far East Bank & Trust Company 718,315 901,530 0.5
Total Investments in the Philippines 832,868 1,077,847 0.6
South Korea Utilities--Electric 22,700 ++Korea Electric Power Corp. (ADR) (a) 500,762 550,475 0.3
Wireless 96,600 ++Korea Mobile Telecommunications
Communications Corp. (GDR) (b) (f) 1,160,125 1,634,955 1.0
Total Investments in South Korea 1,660,887 2,185,430 1.3
Total Investments in the Pacific
Basin 61,117,459 56,707,714 34.8
</TABLE>
49
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
(in US dollars)
SOUTHEAST Shares Held/ Value Percent of
ASIA Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
India Hotels 39,600 East India Hotels Ltd. (GDR) (b) (f) $ 576,350 $ 1,094,148 0.7%
Recreation & 250,000 ++Su-Raj Diamonds Ltd. 346,583 304,025 0.2
Consumer Goods
Total Investments in India 922,933 1,398,173 0.9
Total Investments in Southeast Asia 922,933 1,398,173 0.9
SHORT-TERM
SECURITIES Issue
Commercial US$ 5,000,000 Caterpillar, Inc., 5.34% due 7/09/1996 4,992,583 4,992,583 3.1
Paper* 5,195,000 General Electric Capital Corp.,
5.56% due 7/01/1996 5,193,395 5,193,395 3.2
Total Investments in Commercial Paper 10,185,978 10,185,978 6.3
US Government United States Treasury Bills (e):
Obligations* 60,000 4.90% due 7/25/1996 59,788 59,812 0.0
10,000 4.95% due 7/25/1996 9,964 9,969 0.0
50,000 4.96% due 7/25/1996 49,821 49,844 0.0
3,100,000 4.97% due 7/25/1996 3,088,873 3,090,297 1.9
90,000 4.98% due 7/25/1996 89,676 89,718 0.1
Total Investments in US Government
Obligations 3,298,122 3,299,640 2.0
Total Investments in Short-Term
Securities 13,484,100 13,485,618 8.3
OPTIONS Face Premiums
PURCHASED Amount Paid
Currency Call C$ 3,200,000 Canadian Dollar, expiring August
Options Purchased 1996 at C$1.34 4,800 2,720 0.0
Currency Put YEN 5,000,000 Japanese Yen, expiring September
Options Purchased 1996 at YEN 105 117,500 184,000 0.1
Total Investments in Currency
Options Purchased 122,300 186,720 0.1
Put Options US$ 10,000 S&P 500 Index Option, expiring
Purchased September 1996 at US$650.50 137,500 75,000 0.1
Total Investments in Put Options
Purchased 137,500 75,000 0.1
Total Investments in Options Purchased 259,800 261,720 0.2
Total Investments $162,219,598 161,096,211 98.8
============
Variation Margin on Stock Index Futures Contracts** (20,625) 0.0
Unrealized Appreciation on Forward Foreign Exchange Contracts*** 445,667 0.3
Other Assets Less Liabilities 1,563,824 0.9
------------ ------
Net Assets $163,085,077 100.0%
============ ======
</TABLE>
50
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
(c)Formerly The Co-Operative Bank of Concord.
(d)Formerly Scios Nova, Inc.
(e)Security held as collateral in connection with open stock index
futures contracts.
(f)Restricted securities as to resale. The value of the Fund's
investments in restricted securities was approximately $3,458,000,
representing 2.1% of net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
East India Hotels 3/13/1995-
Ltd. (GDR) 3/17/1995 $ 576,350 $1,094,148
Korea Mobile
Telecommunications 7/06/1995-
Corp. (GDR) 4/16/1996 1,160,125 1,634,955
Siderar S.A. (ADR) 4/30/1996 612,000 729,000
Total $2,348,475 $3,458,103
========== ==========
</TABLE>
(g)Formerly Compania Industrial Peru Pacifico S.A.
(h)Formerly Euro RSCG Worldwide S.A.
++Non-income producing security.
*Commercial Paper and certain US Government 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 sold as of June 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
<S> <C> <C> <C> <C>
4 FTSE100 LIFFE September 1996 $ 574,381
11 S&P Index NASDAQ September 1996 3,722,400
Total Stock Index Futures Contracts Sold
(Total Contract Price--$4,243,981) $4,296,781
==========
</TABLE>
***Forward foreign exchange contracts as of June 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation
Foreign Currency Expiration (Depreciation)
Purchased Date (Note 1b)
<S> <C> <C> <C>
YEN 711,571,550 August 1996 $ (243,093)
Total (US$ Commitment--$6,784,670) $ (243,093)
----------
Foreign Currency Sold
DM 2,619,352 July 1996 $ 4,118
DM 2,439,415 August 1996 11,111
FMK 11,420,700 August 1996 (62,832)
Frf 5,932,684 August 1996 5,938
Nlg 1,650,180 August 1996 10,260
NZ$ 2,392,079 August 1996 (5,915)
YEN 2,302,271,310 August 1996 726,080
Total (US$ Commitment--$31,406,989) $ 688,760
----------
Total Unrealized Appreciation--Net on Forward
Foreign Exchange Contracts $ 445,667
----------
</TABLE>
See Notes to Financial Statements.
51
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$161,959,798) (Note 1a) $160,834,491
Unrealized appreciation on forward foreign exchange
contracts (Note 1c) 445,667
Options purchased, at value (premiums paid--$259,800) (Notes 1a & 1c) 261,720
Foreign cash (Note 1d) 313,407
Cash 96,593
Receivables:
Securities sold $ 4,467,299
Dividends 501,569
Capital shares sold 275,426
Interest 8,381
Forward foreign exchange contracts (Note 1c) 586 5,253,261
------------
Deferred organization expenses (Note 1g) 113,039
Prepaid registration fees and other assets (Note 1g) 50,486
------------
Total assets 167,368,664
------------
Liabilities: Payables:
Securities purchased 3,537,973
Capital shares redeemed 254,815
Distributor (Note 2) 108,503
Investment adviser (Note 2) 105,300
Variation margin on stock index futures contracts (Notes 1a & 1c) 20,625 4,027,216
------------
Accrued expenses and other liabilities 256,371
------------
Total liabilities 4,283,587
------------
Net Assets: Net assets $163,085,077
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 28,384
Class B Common Stock, $0.10 par value, 100,000,000 shares
authorized 1,229,038
Class C Common Stock, $0.10 par value, 100,000,000 shares
authorized 53,719
Class D Common Stock, $0.10 par value, 100,000,000 shares
authorized 208,657
Paid-in capital in excess of par 153,826,175
Undistributed investment income--net 2,179,735
Undistributed realized capital gains on investments and foreign
currency transactions--net 6,302,880
Unrealized depreciation on investments and foreign currency
transactions--net (743,511)
------------
Net assets $163,085,077
============
Net Asset Class A--Based on net assets of $3,083,348 and 283,838 shares
Value: outstanding $ 10.86
============
Class B--Based on net assets of $131,655,570 and 12,290,380 shares
outstanding $ 10.71
============
Class C--Based on net assets of $5,752,849 and 537,194 shares
outstanding $ 10.71
============
Class D--Based on net assets of $22,593,310 and 2,086,565 shares
outstanding $ 10.83
============
See Notes to Financial Statements.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1996
<S> <C> <C> <C>
Investment Dividends (net of $270,579 foreign withholding tax) $ 2,354,510
Income Interest and discount earned 609,298
(Notes 1e & 1f): ------------
Total income 2,963,808
------------
Expenses: Investment advisory fees (Note 2) $ 1,285,653
Account maintenance and distribution fees--Class B (Note 2) 1,213,070
Transfer agent fees--Class B (Note 2) 332,824
Printing and shareholder reports 208,345
Custodian fees 171,292
Accounting services (Note 2) 105,306
Registration fees (Note 1g) 83,263
Professional fees 79,827
Account maintenance fees--Class D (Note 2) 56,605
Transfer agent fees--Class D (Note 2) 52,894
Account maintenance and distribution fees--Class C (Note 2) 45,789
Directors' fees and expenses 38,828
Amortization of organization expenses (Note 1g) 36,661
Pricing fees 10,573
Transfer agent fees--Class C (Note 2) 13,387
Transfer agent fees--Class A (Note 2) 6,132
Other 18,383
------------
Total expenses 3,758,832
------------
Investment loss--net (795,024)
------------
Realized & Realized gain from:
Unrealized Gain on Investments--net 9,493,066
Investments & Foreign currency transactions--net 7,078,212 16,571,278
Foreign Currency ------------
Transactions--Net Change in unrealized appreciation/depreciation on:
(Notes 1c, 1d, Investments--net 15,080,396
1f & 3): Foreign currency transactions--net 340,766 15,421,162
------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 31,992,440
------------
Net Increase in Net Assets Resulting from Operations $ 31,197,416
============
See Notes to Financial Statements.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the
Period
For the August 5,
Year Ended 1994++ to
June 30, June 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income (loss)--net $ (795,024) $ 387,027
Realized gain (loss) on investments and foreign currency
transactions--net 16,571,278 (5,854,788)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 15,421,162 (16,164,673)
------------ ------------
Net increase (decrease) in net assets resulting from operations 31,197,416 (21,632,434)
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (19,859) --
Shareholders Class B (619,675) --
(Note 1h): Class C (22,117) --
Class D (214,561) --
Realized gain on investments--net:
Class A (10,675) --
Class B (682,938) --
Class C (24,845) --
Class D (131,445) --
In excess of realized gain on investments--net:
Class A -- (1,696)
Class B -- (81,949)
Class C -- (1,158)
Class D -- (14,960)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (1,726,115) (99,763)
------------ ------------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions share transactions (33,525,896) 188,771,869
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets (4,054,595) 167,039,672
Beginning of period 167,139,672 100,000
------------ ------------
End of period* $163,085,077 $167,139,672
============ ============
*Undistributed investment income--net (Note 1i) $ 2,179,735 $ 387,027
============ ============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Class A Class B
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Aug. 5,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
June 30, June 30, June 30, June 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.92 $ 9.82 $ 8.84 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net .13 .04 (.06) .01
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.97 (.93) 2.04 (1.16)
-------- -------- -------- --------
Total from investment operations 2.10 (.89) 1.98 (1.15)
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.10) -- (.05) --
Realized gain on investments--net (.06) -- (.06) --
In excess of realized gain on investments--net -- (.01) -- (.01)
-------- -------- -------- --------
Total dividends and distributions (.16) (.01) (.11) (.01)
-------- -------- -------- --------
Net asset value, end of period $ 10.86 $ 8.92 $ 10.71 $ 8.84
======== ======== ======== ========
Total Investment Based on net asset value per share 23.87% (9.11%)+++ 22.57% (11.55%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.55% 1.62%* 2.61% .83%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net .46% 1.06%* (.66%) .10%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 3,083 $ 5,992 $131,656 $132,296
Data: ======== ======== ======== ========
Portfolio turnover 60.33% 47.96% 60.33% 47.96%
======== ======== ======== ========
Average commission rate paid+++++ $ .0011 -- $ .0011 --
======== ======== ======== ========
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities.
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios have For the Period For the Period
been derived from information provided in the Year Oct. 21, Year Aug. 5,
financial statements. Ended 1994++ to Ended 1994++ to
June 30, June 30, June 30, June 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.84 $ 9.80 $ 8.91 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net (.05) .01 .02 .08
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 2.03 (.96) 2.05 (1.16)
-------- -------- -------- --------
Total from investment operations 1.98 (.95) 2.07 (1.08)
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.05) -- (.09) --
Realized gain on investments--net (.06) -- (.06) --
In excess of realized gain on investments--net -- (.01) -- (.01)
-------- -------- -------- --------
Total dividends and distributions (.11) (.01) (.15) (.01)
-------- -------- -------- --------
Net asset value, end of period $ 10.71 $ 8.84 $ 10.83 $ 8.91
======== ======== ======== ========
Total Investment Based on net asset value per share 22.56% (9.75%)+++ 23.50% (10.85%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.63% 2.66%* 1.83% 1.77%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net (.64%) .20%* .10% .90%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 5,753 $ 4,924 $ 22,593 $ 23,928
Data: ======== ======== ======== ========
Portfolio turnover 60.33% 47.96% 60.33% 47.96%
======== ======== ======== ========
Average commission rate paid+++++ $ .0011 -- $ .0011 --
======== ======== ======== ========
</TABLE>
* Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission rate
per share for purchases and sales of equity securities.
++Commencement of Operations.
See Notes to Financial Statements.
56
<PAGE>
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. The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded 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 Government 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 additions to such securities
daily to ensure that the contract is fully collateralized.
(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 operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
* Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
* Options--The Fund is authorized to 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).
57
<PAGE>
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 contracts for the purpose of
hedging the market risk on existing securities 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 transactions 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 dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(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.
(i) Reclassification--Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial reporting and tax purposes. Accordingly, current
year's permanent book/tax differences of $3,463,944 have been reclassified from
undistributed net realized capital gains to undistributed net investment income.
These reclassifications have no effect on net assets or net asset value per
share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement Merrill Lynch Asset
Management, L.P. ("MLAM"). The general partner of MLAM is Princeton Services,
Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML & Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee of
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 MLAM and MLAM U.K. but
in no event in excess of the amount that MLAM actually receives. For the year
ended June 30, 1996, MLAM paid MLAM U.K. a fee of $150,719 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 MLAM 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.
58
<PAGE>
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 year ended June 30, 1996, 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 $ 46 $ 530
Class D $4,093 $57,042
For the year ended June 30, 1996, MLPF&S received contingent deferred sales
charges of $492,135 and $2,470 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $42,982 in commissions on the execution of
portfolio security transactions for the year ended June 30, 1996.
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
year ended June 30, 1996 were $85,801,261 and $114,982,626, respectively.
Net realized and unrealized gains (losses) as of June 30, 1996 were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Investments:
Long-term $ 8,968,274 $ (1,126,825)
Short-term 1,454 1,518
Stock index futures contracts 868,759 (52,800)
Options purchased (331,431) (62,500)
Options written (13,990) --
------------ ------------
Total investments 9,493,066 (1,240,607)
Currency transactions:
Options purchased (44,442) 64,420
Options written 428,806 --
Foreign currency transactions 4,554,398 (12,991)
Forward foreign exchange 2,139,450 445,667
contracts ------------ ------------
Total currency transactions 7,078,212 497,096
------------ ------------
Total $ 16,571,278 $ (743,511)
============ ============
As of June 30, 1996, net unrealized depreciation for Federal income tax purposes
aggregated $1,440,581, of which $16,546,995 related to appreciated securities
and $17,987,576 related to depreciated securities. The aggregate cost of
investments, including options purchased, at June 30, 1996 for Federal income
tax purposes was $162,350,072.
Transactions in call options written for the year ended June 30, 1996 were as
follows:
Nominal Value
Covered by Premiums
Written Options Received
Outstanding call options
written at beginning of year 19,000,000 $ 285,706
Options written 5,003,000 125,963
Options closed (2,003,000) (84,169)
Options expired (22,000,000) (327,500)
------------ ------------
Outstanding call options
written at end of year -- --
============ ============
Transactions in put options written for the year ended June 30, 1996 were as
follows:
Nominal Value
Covered by Premiums
Written Options Paid
Outstanding put options
written at beginning of year -- --
Options written 5,000,000 $ 35,750
Options expired (5,000,000) (35,750)
------------ ------------
Outstanding put options
written at end of year -- --
============ ============
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share transactions
was $(33,525,896) and $188,771,869 for the year ended June 30, 1996 and for the
period ended June 30, 1995, respectively. Transactions in capital shares for
each class were as follows:
Class A Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 296,811 $ 2,900,817
Shares issued to shareholders
in reinvestment of dividends and
distributions 3,060 27,820
------------ ------------
Total issued 299,871 2,928,637
Shares redeemed (687,569) (6,547,134)
------------ ------------
Net decrease (387,698) $ (3,618,497)
============ ============
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
============ ============
++Commencement of Operations.
Class B Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 3,191,120 $ 31,771,205
Shares issued to shareholders
in reinvestment of dividends and
distributions 69,565 627,475
------------ ------------
Total issued 3,260,685 32,398,680
Automatic conversion of shares (38,752) (370,604)
Shares redeemed (5,891,101) (56,152,670)
------------ ------------
Net decrease (2,669,168) $(24,124,594)
============ ============
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
============ ============
++Prior to August 5, 1994 (commencement of operations), the Fund issued 5,000
shares to MLAM for $50,000.
Class C Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 368,083 $ 3,622,074
Shares issued to shareholders
in reinvestment of dividends and
distributions 4,696 42,310
------------ ------------
Total issued 372,779 3,664,384
Shares redeemed (392,451) (3,747,857)
------------ ------------
Net decrease (19,672) $ (83,473)
============ ============
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
============ ============
++Commencement of Operations.
Class D Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 1,341,253 $ 13,808,237
Automatic conversion of shares 38,393 370,604
Shares issued to shareholders
in reinvestment of dividends and
distributions 17,279 156,896
------------ ------------
Total issued 1,396,925 14,335,737
Shares redeemed (1,996,494) (20,035,069)
------------ ------------
Net decrease (599,569) $ (5,699,332)
============ ============
60
<PAGE>
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
============ ============
++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 were
redesignated Class D Shares. There were 2,992,993 shares redesignated amounting
to $29,891,279.
5. Commitments:
On June 30, 1996, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of
Investments, under which it had agreed to purchase and sell various foreign
currencies with approximate values of $837,000 and $1,303,000, respectively.
61
<PAGE>
[This page is intentionally left blank.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Investment Objective and Policies 2
Other Investment Policies and Practices 4
Investment Restrictions 6
Management of the Fund 9
Compensation of Directors 10
Management and Advisory Arrangements 11
Purchase of Shares 12
Initial Sales Charge Alternatives--
Class A and Class D Shares 13
Reduced Initial Sales Charges--
Class A and Class D Shares 14
Distribution Plans 16
Limitations on the Payment of Deferred Sales
Charges 17
Redemption of Shares 18
Deferred Sales Charges--
Class B and Class C Shares 19
Portfolio Transactions and Brokerage 19
Determination of Net Asset Value 21
Shareholder Services 22
Investment Account 22
Automatic Investment Plans 22
Automatic Reinvestment of Dividends
and Capital Gains Distributions 23
Systematic Withdrawal Plans--
Class A and Class D Shares 23
Exchange Privilege 24
Dividends, Distributions and Taxes 26
Tax Treatment of Options, Futures and
Forward Foreign Exchange Transactions 28
Special Rules for Certain Foreign
Currency Transactions 29
Performance Data 29
General Information 31
Description of Shares 31
Computation of Offering Price
Per Share 32
Independent Auditors 32
Custodian 32
Transfer Agent 32
Legal Counsel 33
Reports to Shareholders 33
Additional Information 33
Appendix 34
Independent Auditors' Report 41
Financial Statements 42
</TABLE>
Code # 18186-1096
[LOGO]
Merrill Lynch
Global SmallCap
Fund, Inc.
Statement of
Additional
Information
October 28, 1996
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 fiscal year ended June 30, 1996 and for
the period August 5, 1994 (commencement of operations) to June 30, 1995.
Contained in Part B:
Schedule of Investments as of June 30, 1996.
Statement of Assets and Liabilities as of June 30, 1996.
Statement of Operations for the year ended June 30, 1996.
Statements of Changes in Net Assets for the fiscal year ended June 30,
1996 and for the period August 5, 1994 (commencement of operations) to
June 30, 1995.
Financial Highlights for the fiscal year ended June 30, 1996 and for
the period August 5, 1994 (commencement of operations) to June 30,
1995.
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- --------------------------------------------------------------------------------------------------------------
<S> <C>
1(a) --Articles of Incorporation of Registrant, dated April 8, 1994.(a)
(b) --Articles of Amendment to the Articles of Incorporation of the Registrant, dated May 18, 1994.(b)
(c) --Articles of Amendment to the Articles of Incorporation of the Registrant, dated July 26, 1994.(c)
(d) --Articles of Amendment to the Articles of Incorporation of the Registrant, dated August 3, 1994.(d)
(e) --Articles of Amendment to the Articles of Incorporation of the Registrant, dated October 17, 1994.(d)
(f) --Articles Supplementary to Articles of Incorporation of the Registrant, dated October 17, 1994.(d)
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 holders
of shares of the Registrant.(e)
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.(f)
(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 the Registrant and Merrill Lynch Funds Distributor,
Inc.(f)
(d) --Form of Class D Shares Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc.(f)
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 Merrill Lynch Financial Data Services, Inc.(b)
(b) --Form of License Agreement relating to the use of name.(b)
10 --Opinion of Brown & Wood LLP, counsel for the Registrant.
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.(f)
(c) --Form of Class D Shares Distribution Plan and Class D Shares Distribution Plan Sub-Agreement of the
Registrant.(f)
16(a) --Schedule of computation of each performance quotation provided in the Registration Statement in response to
Item 22 relating to Class A Shares. (d)
C-1
<PAGE>
(b) --Schedule of computation of each performance quotation provided in the Registration Statement in response to
Item 22 relating to Class B Shares.(d)
(c) --Schedule of computation of each performance quotation provided in the Registration Statement in response to
Item 22 relating to Class C Shares.(d)
(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).(d)
17(a) --Financial Data Schedule for Class A shares.
(b) --Financial Data Schedule for Class B shares.
(c) --Financial Data Schedule for Class C shares.
(d) --Financial Data Schedule for Class D shares.
18 --Merrill Lynch Select Pricing(SM) System Plan pursuant to
Rule 18f-3.(g)
</TABLE>
(a) Filed on April 29, 1994 as an Exhibit to Registrant's Registration
Statement on Form N-1A under the Securities Act of 1933, as amended (File
No. 33-53399) the ("Registration Statement").
(b) Filed on June 23, 1994 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement.
(c) Filed on July 28, 1994 as an Exhibit to Pre-Effective Amendment No. 2 to
the Registration Statement.
(d) Filed on October 25, 1995 as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement.
(e) 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 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.
(f) Filed on October 19, 1994 as an Exhibit to Post-Effective Amendment No. 1
to the Registration Statement.
(g) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996, relating to shares of Merrill Lynch
New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
Item 25. Persons Controlled by or under Common Control with 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, 1996*
------------------------------------------------------------- --------------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share 1,443
Class B Shares of Common Stock, par value $0.10 per share 15,568
Class C Shares of Common Stock, par value $0.10 per share 1,026
Class D Shares of Common Stock, par value $0.10 per share 2,421
</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.
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
C-2
<PAGE>
of the advance which exceeds the amount which it is ultimately determined he
or she is entitled to receive from the Registrant by reason of
indemnification; and (iii) (a) such promise must be secured by a surety bond,
other suitable insurance or an equivalent form of security which 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 Investment Adviser
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or 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
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust,
Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch 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 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 Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., and The
Municipal Fund Accumulation Program, Inc.; and for the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy
Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund,
Inc., MuniVest Fund, Inc., MuniVest Fund II Inc., MuniVest 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.,
C-3
<PAGE>
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., 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 MLAM, FAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill
Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250
Vesey Street, New York, New York 10281. The address of Merrill Lynch
Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
July 1, 1994, for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the first two
paragraphs of this Item 28, and Messrs. Giordano, Harvey, 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
------------------------------------------------------- ----------------------------------------
<S> <C> <C>
ML & Co. Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services General Partner General Partner of FAM
Arthur Zeikel President President of FAM; President and Director
of Princeton Services; Director of
MLFD; Executive Vice President of
ML & Co.
Terry K. Glenn Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
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
Michael J. Hennewinkel Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
N. John Hewitt Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Philip L. Kirstein Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of FAM; Senior Vice
Secretary President, General Counsel,
Director and Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss Senior Vice President and Senior Vice President and Controller of
Controller FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Michael L. Quinn Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch, Pierce, Fenner & Smith
Incorporated from 1989 to 1995
C-4
<PAGE>
Richard L. Reller Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Gerald M. Richard Senior Vice President and Senior Vice President and Treasurer of
Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Ronald L. Welburn Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Anthony Wiseman Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: 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.
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,
1994, for his or her 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 first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
Position(s) with Other Substantial Business, Profession,
Name MLAM U.K. Vocation or Employment
------------------------------------------------------- ----------------------------------------
<S> <C> <C>
Arthur Zeikel Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services; Director of MLFD;
Executive Vice President of ML &
Co.
Alan J. Albert Senior Managing Vice President of the Manager
Director
Terry K. Glenn Director Executive Vice President of the Manager
and FAM; Executive Vice President
and Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Adrian Holmes Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand Director Director of Merrill Lynch Global Asset
Management
Edward Gobora Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan Director Vice President, Institutional Marketing,
Debt and Equity Group, Merrill
Lynch Capital Markets from 1989 to
1994
Gerald M. Richard Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of
Princeton Services; Vice President
and Treasurer of MLFD
Stephen J. Yardley Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham Company Secretary None
Debra Anne Searle Assistant Company Secretary None
</TABLE>
C-5
<PAGE>
Item 29. Principal Underwriters
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs
of Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc. and The
Municipal Fund Accumulation Program, Inc., and MLFD also acts as the
principal underwriter for the following closed-end investment companies:
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) Position(s) and Office(s) Position(s) and Office(s)
Name with MLFD with the Registrant
----------------------------- ---------------------------------- ------------------------------
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Arthur Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Kevin P. Boman Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Mark A. DeSario Vice President None
James T. Fatseas Vice President None
Debra W. Landsman-Yaros Vice President None
Michelle T. Lau 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-6
<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 25th day of October 1996.
Merrill Lynch Global SmallCap Fund, Inc.
(Registrant)
By: /s/Gerald M. Richard
----------------------------------------
(Gerald M. Richard, Treasurer)
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.
<TABLE>
<CAPTION>
Signature Title Date(s)
--------- ----- -------
<S> <C> <C>
Arthur Zeikel* President (Principal Executive
--------------------------------------- Officer) and Director
(Arthur Zeikel)
/s/Gerald M. Richard Treasurer (Principal Financial
----------------------------------------- and Accounting Officer) October 25, 1996
(Gerald M. Richard)
Donald Cecil* Director
---------------------------------------
(Donald Cecil)
Edward H. Meyer* Director
---------------------------------------
(Edward H. Meyer)
Charles C. Reilly* Director
---------------------------------------
(Charles C. Reilly)
Richard R. West* Director
---------------------------------------
(Richard R. West)
Edward D. Zinbarg* Director
---------------------------------------
(Edward D. Zinbarg)
*By: /s/Gerald M. Richard October 25 1996
-------------------------------------
(Gerald M. Richard, Attorney-in-Fact)
</TABLE>
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
10 --Opinion of Brown & Wood LLP, counsel for the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) --Financial Data Schedule for Class A shares.
17(b) --Financial Data Schedule for Class B shares.
17(c) --Financial Data Schedule for Class C shares.
17(d) --Financial Data Schedule for Class D shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
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
Exhibit 10
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
October 28, 1996
Merrill Lynch Global SmallCap Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by
Merrill Lynch Global SmallCap Fund, Inc., a Maryland corporation (the "Fund"),
of shares of common stock, par value $0.10 per share, of the Fund (the
"Shares"), under the Securities Act of 1933, as amended, pursuant to the Fund's
registration statement on Form N-1A (File No. 33-53399), as amended (the
"Registration Statement"), in the amount set forth under "Amount Being
Registered" on the facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund and such other documents as we
have deemed relevant to the matters referred to in this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global SmallCap Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 3 to Registration
Statement No. 33-53399 of our report dated August 20, 1996 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 24, 1996
[ARTICLE] 6
[CIK] 0000922457
[NAME] MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
[SERIES]
[NUMBER] 001
[NAME] CLASS A
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-START] JUL-01-1995
[PERIOD-END] JUN-30-1996
[INVESTMENTS-AT-COST] 162219598
[INVESTMENTS-AT-VALUE] 161096211
[RECEIVABLES] 5253261
[ASSETS-OTHER] 1019192
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 167368664
[PAYABLE-FOR-SECURITIES] 3537973
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 745614
[TOTAL-LIABILITIES] 4283587
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 155345973
[SHARES-COMMON-STOCK] 283838
[SHARES-COMMON-PRIOR] 671536
[ACCUMULATED-NII-CURRENT] 2179735
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 6302880
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (743511)
[NET-ASSETS] 3083348
[DIVIDEND-INCOME] 2354510
[INTEREST-INCOME] 609298
[OTHER-INCOME] 0
[EXPENSES-NET] (3758832)
[NET-INVESTMENT-INCOME] (795024)
[REALIZED-GAINS-CURRENT] 16571278
[APPREC-INCREASE-CURRENT] 15421162
[NET-CHANGE-FROM-OPS] 31197416
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (19859)
[DISTRIBUTIONS-OF-GAINS] (10675)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 296811
[NUMBER-OF-SHARES-REDEEMED] (687569)
[SHARES-REINVESTED] 3060
[NET-CHANGE-IN-ASSETS] (4054595)
[ACCUMULATED-NII-PRIOR] 387027
[ACCUMULATED-GAINS-PRIOR] (5854788)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (99763)
[GROSS-ADVISORY-FEES] 1285653
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3758832
[AVERAGE-NET-ASSETS] 2740382
[PER-SHARE-NAV-BEGIN] 8.92
[PER-SHARE-NII] .13
[PER-SHARE-GAIN-APPREC] 1.97
[PER-SHARE-DIVIDEND] (.10)
[PER-SHARE-DISTRIBUTIONS] (.06)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.86
[EXPENSE-RATIO] 1.55
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000922457
[NAME] MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
[SERIES]
[NUMBER] 002
[NAME] CLASS B
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-START] JUL-01-1995
[PERIOD-END] JUN-30-1996
[INVESTMENTS-AT-COST] 162219598
[INVESTMENTS-AT-VALUE] 161096211
[RECEIVABLES] 5253261
[ASSETS-OTHER] 1019192
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 167368664
[PAYABLE-FOR-SECURITIES] 3537973
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 745614
[TOTAL-LIABILITIES] 4283587
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 155345973
[SHARES-COMMON-STOCK] 12290380
[SHARES-COMMON-PRIOR] 14959548
[ACCUMULATED-NII-CURRENT] 2179735
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 6302880
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (743511)
[NET-ASSETS] 131655570
[DIVIDEND-INCOME] 2354510
[INTEREST-INCOME] 609298
[OTHER-INCOME] 0
[EXPENSES-NET] (3758832)
[NET-INVESTMENT-INCOME] (795024)
[REALIZED-GAINS-CURRENT] 16571278
[APPREC-INCREASE-CURRENT] 15421162
[NET-CHANGE-FROM-OPS] 31197416
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (619675)
[DISTRIBUTIONS-OF-GAINS] (682938)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 3191120
[NUMBER-OF-SHARES-REDEEMED] (5929853)
[SHARES-REINVESTED] 69565
[NET-CHANGE-IN-ASSETS] (4054595)
[ACCUMULATED-NII-PRIOR] 387027
[ACCUMULATED-GAINS-PRIOR] (5854788)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (99763)
[GROSS-ADVISORY-FEES] 1285653
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3758832
[AVERAGE-NET-ASSETS] 121973520
[PER-SHARE-NAV-BEGIN] 8.84
[PER-SHARE-NII] (.06)
[PER-SHARE-GAIN-APPREC] 2.04
[PER-SHARE-DIVIDEND] (.05)
[PER-SHARE-DISTRIBUTIONS] (.06)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.71
[EXPENSE-RATIO] 2.61
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000922457
[NAME] MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
[SERIES]
[NUMBER] 003
[NAME] CLASS C
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-START] JUL-01-1995
[PERIOD-END] JUN-30-1996
[INVESTMENTS-AT-COST] 162219598
[INVESTMENTS-AT-VALUE] 161096211
[RECEIVABLES] 5253261
[ASSETS-OTHER] 1019192
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 167368664
[PAYABLE-FOR-SECURITIES] 3537973
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 745614
[TOTAL-LIABILITIES] 4283587
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 155345973
[SHARES-COMMON-STOCK] 537194
[SHARES-COMMON-PRIOR] 556866
[ACCUMULATED-NII-CURRENT] 2179735
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 6302880
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (743511)
[NET-ASSETS] 5752849
[DIVIDEND-INCOME] 2354510
[INTEREST-INCOME] 609298
[OTHER-INCOME] 0
[EXPENSES-NET] (3758832)
[NET-INVESTMENT-INCOME] (795024)
[REALIZED-GAINS-CURRENT] 16571278
[APPREC-INCREASE-CURRENT] 15421162
[NET-CHANGE-FROM-OPS] 31197416
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (22117)
[DISTRIBUTIONS-OF-GAINS] (24845)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 368083
[NUMBER-OF-SHARES-REDEEMED] (392451)
[SHARES-REINVESTED] 4696
[NET-CHANGE-IN-ASSETS] (4054595)
[ACCUMULATED-NII-PRIOR] 387027
[ACCUMULATED-GAINS-PRIOR] (5854788)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (99763)
[GROSS-ADVISORY-FEES] 1285653
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3758832
[AVERAGE-NET-ASSETS] 4604102
[PER-SHARE-NAV-BEGIN] 8.84
[PER-SHARE-NII] (.05)
[PER-SHARE-GAIN-APPREC] 2.03
[PER-SHARE-DIVIDEND] (.05)
[PER-SHARE-DISTRIBUTIONS] (.06)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.71
[EXPENSE-RATIO] 2.63
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000922457
[NAME] MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
[SERIES]
[NUMBER] 004
[NAME] CLASS D
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-START] JUL-01-1995
[PERIOD-END] JUN-30-1996
[INVESTMENTS-AT-COST] 162219598
[INVESTMENTS-AT-VALUE] 161096211
[RECEIVABLES] 5253261
[ASSETS-OTHER] 1019192
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 167368664
[PAYABLE-FOR-SECURITIES] 3537973
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 745614
[TOTAL-LIABILITIES] 4283587
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 155345973
[SHARES-COMMON-STOCK] 2086565
[SHARES-COMMON-PRIOR] 2686134
[ACCUMULATED-NII-CURRENT] 2179735
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 6302880
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (743511)
[NET-ASSETS] 22593310
[DIVIDEND-INCOME] 2354510
[INTEREST-INCOME] 609298
[OTHER-INCOME] 0
[EXPENSES-NET] (3758832)
[NET-INVESTMENT-INCOME] (795024)
[REALIZED-GAINS-CURRENT] 16571278
[APPREC-INCREASE-CURRENT] 15421162
[NET-CHANGE-FROM-OPS] 31197416
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (214561)
[DISTRIBUTIONS-OF-GAINS] (131445)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1379646
[NUMBER-OF-SHARES-REDEEMED] (1996494)
[SHARES-REINVESTED] 17279
[NET-CHANGE-IN-ASSETS] (4054595)
[ACCUMULATED-NII-PRIOR] 387027
[ACCUMULATED-GAINS-PRIOR] (5854788)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (99763)
[GROSS-ADVISORY-FEES] 1285653
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3758832
[AVERAGE-NET-ASSETS] 22766390
[PER-SHARE-NAV-BEGIN] 8.91
[PER-SHARE-NII] .02
[PER-SHARE-GAIN-APPREC] 2.05
[PER-SHARE-DIVIDEND] (.09)
[PER-SHARE-DISTRIBUTIONS] (.06)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.83
[EXPENSE-RATIO] 1.83
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
