<PAGE> 1
PROSPECTUS
SEPTEMBER 26, 1997
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified,
open-end management investment company that seeks 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
including derivative investments to hedge against market and currency risk or
to gain exposure to equity markets. 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 that 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, and for
participants in certain fee-based programs the minimum initial purchase is $500
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made 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 NOR HAS THE SECURITIES AND EXCHANGE 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 September 26, 1997 (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 Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information. 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> 2
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C CLASS D
---------- ------------------------------------- -------------------- --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)................... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments..................... None None None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)............... None(d) 4.0% during the first year, 1.0% for one year(f) None(d)
decreasing 1.0% annually
thereafter to 0.0%
after the fourth year(e)
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.................... .15% .15% .15% .15%
Shareholder Servicing Costs(i).... .18% .23% .25% .20%
Other............................. .35% .35% .35% .35%
------ ----- ----- -----
Total Other Expenses............ .68% .73% .75% .70%
------ ----- ----- -----
Total Fund Operating Expenses......... 1.53% 2.58% 2.60% 1.80%
====== ===== ===== =====
</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 30 and "Shareholder
Services -- Fee-Based Programs" -- page 41.
(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 32.
(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 30.
(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 certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 41.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 41.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 41.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
25.
(h) See "Purchase of Shares -- Distribution Plans" -- page 35.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 27.
2
<PAGE> 3
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 (including any
applicable CDSC for Class B and Class C shares):
Class A......................................... $ 67 $ 98 $ 132 $225
Class B......................................... $ 66 $ 100 $ 137 $272*
Class C......................................... $ 36 $ 81 $ 138 $293
Class D......................................... $ 70 $ 106 $ 145 $253
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of the period:
Class A......................................... $ 67 $ 98 $ 132 $225
Class B......................................... $ 26 $ 80 $ 137 $272*
Class C......................................... $ 26 $ 81 $ 138 $293
Class D......................................... $ 70 $ 106 $ 145 $253
</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 $5.35) for
confirming purchases and repurchases. Purchases and redemptions made directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares."
3
<PAGE> 4
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 $1 billion ("LargeCap Issuers") and in debt securities. The Fund
may invest up to 100% of its assets in such securities for temporary defensive
purposes.
It is anticipated that a substantial portion of the Fund's total assets
will be invested in the developed countries of Europe and the Far East and that
a significant portion of its total assets also may be invested in developing
countries. While investments in markets of developing countries are subject to
considerable risks (see "Risk Factors and Special Considerations"), the Fund
believes that recent developments, including liberalization of government
policies, development of labor-intensive, export-oriented industries and rapid
growth of securities markets, in such developing countries could present
attractive investment opportunities.
The Fund is authorized to employ a variety of investment techniques to
hedge against market and currency risks. However, the Fund may not necessarily
be engaging in hedging activities when market or currency movements occur. See
"Investment Objective and Policies."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investments in securities of SmallCap Issuers involve special
considerations and risks not typically associated with investments in securities
of LargeCap Issuers, including risks associated with limited product lines,
markets or financial and management resources; risks associated with lesser
frequency and volume of trading of stocks of SmallCap Issuers as compared to
LargeCap Issuers and the greater effect of abrupt or erratic price movements on
SmallCap Issuers; and risks associated with the sensitivity of SmallCap Issuers
to market changes.
In addition, investments in securities of issuers located in various
foreign countries involve special considerations and risks not typically
associated with investments in securities of U.S. issuers, including
4
<PAGE> 5
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 140
registered investment companies. The Manager and FAM also offer portfolio
management and portfolio analysis services to individuals and institutions. As
of August 31, 1997, the Manager and FAM had a total of approximately $267.7
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> 6
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 that 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 CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The 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."
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, after approximately
decreasing 1.0% annually to eight years(5)
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
- ---------------
(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 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 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 certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
(6) The CDSC may be waived in connection with 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 certain fee-based programs. Sales charges also are reduced under a
right of accumulation that 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. Such CDSC may be modified in connection with
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
7
<PAGE> 8
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 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 who 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. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 and over. 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 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."
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
8
<PAGE> 9
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 that 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> 10
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, 1997,
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 YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED JUNE 30, OCTOBER 21, 1994+ ENDED JUNE 30, AUGUST 5, 1994+
------------------- TO JUNE 30, --------------------- TO JUNE 30,
1997++ 1996 1995 1997++ 1996 1995
------- ------- ------------------ -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.86 $ 8.92 $ 9.82 $ 10.71 $ 8.84 $ 10.00
------- ------- -------- -------- -------- --------
Investment income (loss)--net........... .01 .13 .04 (.10) (.06) .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net..................... .72 1.97 (.93) .72 2.04 (1.16)
------- ------- -------- -------- -------- --------
Total from investment operations........ .73 2.10 (.89) .62 1.98 (1.15)
------- ------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.............. (.09) (.10) -- (.06) (.05) --
In excess of investment
income--net....................... (.22) -- -- (.14) -- --
Realized gain on investments--net... (.59) (.06) -- (.59) (.06) --
In excess of realized gain on
investments--net.................. -- -- (.01) -- -- (.01)
------- ------- -------- -------- -------- --------
Total dividends and distributions....... (.90) (.16) (.01) (.79) (.11) (.01)
------- ------- -------- -------- -------- --------
Net asset value, end of period.......... $ 10.69 $ 10.86 $ 8.92 $ 10.54 $ 10.71 $ 8.84
======= ======= ========= ======== ======== =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 7.53% 23.87% (9.11%)# 6.47% 22.57% (11.55%)#
======= ======= ========= ======== ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 1.53% 1.55% 1.62%* 2.58% 2.61% 2.56%*
======= ======= ========= ======== ======== =========
Investment income (loss)--net........... .13% .46% 1.06%* (1.00%) (.66%) .10%*
======= ======= ========= ======== ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................ $ 5,508 $ 3,083 $ 5,992 $111,261 $131,656 $132,296
======= ======= ========= ======== ======== =========
Portfolio turnover...................... 63.17% 60.33% 47.96% 63.17% 60.33% 47.96%
======= ======= ========= ======== ======== =========
Average commission rate paid##.......... $ .0104 $ .0011 -- $ .0104 $ .0011 --
======= ======= ========= ======== ======== =========
</TABLE>
- ---------------
<TABLE>
<C> <S>
* 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. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the
prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the rate
shown.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
CLASS C CLASS D
---------------------------------------- --------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED JUNE 30, OCTOBER 21, 1994+ ENDED JUNE 30, AUGUST 5, 1994+
------------------- TO JUNE 30, ------------------- TO JUNE 30,
1997++ 1996 1995 1997++ 1996 1995
------- ------- ------------------ ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 10.71 $ 8.84 $ 9.80 $ 10.83 $ 8.91 $ 10.00
------- ------- -------- ------- ------- --------
(.10) (.05) .01 (.02) .02 .08
.71 2.03 (.96) .72 2.05 (1.16)
------- ------- -------- ------- ------- --------
.61 1.98 (.95) .70 2.07 (1.08)
------- ------- -------- ------- ------- --------
(.06) (.05) -- (.08) (.09) --
(.15) -- -- (.20) -- --
(.59) (.06) -- (.59) (.06) --
-- -- (.01) -- -- (.01)
------- ------- -------- ------- ------- --------
(.80) (.11) (.01) (.87) (.15) (.01)
------- ------- -------- ------- ------- --------
$ 10.52 $ 10.71 $ 8.84 $ 10.66 $ 10.83 $ 8.91
======= ======= ============== ======= ======= =============
6.38% 22.56% (9.75%)# 7.27% 23.50% (10.85%)#
======= ======= ============== ======= ======= =============
2.60% 2.63% 2.66%* 1.80% 1.83% 1.77%*
======= ======= ============== ======= ======= =============
(1.00%) (.64%) .20%* (.21%) .10% .90%*
======= ======= ============== ======= ======= =============
$ 5,962 $ 5,753 $ 4,924 $19,441 $22,593 $ 23,928
======= ======= ============== ======= ======= =============
63.17% 60.33% 47.96% 63.17% 60.33% 47.96%
======= ======= ============== ======= ======= =============
$ .0104 $ .0011 -- $ .0104 $ .0011 --
======= ======= ============== ======= ======= =============
</TABLE>
11
<PAGE> 12
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
12
<PAGE> 13
comparable domestic companies. Such markets have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Further,
satisfactory custodial services for investment securities may not be available
in some countries having smaller capital markets, which may result in the Fund
incurring additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon and could cause the Fund to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Brokerage commissions and other transaction costs on
foreign securities exchanges are generally higher than in the U.S. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in foreign countries than there is in the U.S.
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
13
<PAGE> 14
the amount of investment by foreign persons in a particular company, or limit
the investment by foreign persons in a company to only a specific class of
securities which may have less advantageous terms than securities of the company
available for purchase by nationals. Certain countries may restrict investment
opportunities in issuers or industries deemed important to national interests.
The manner in which foreign investors may invest in companies in certain
countries, as well as limitations on such investments, may have an adverse
impact on the operations of the Fund. For example, the Fund may be required in
certain of such countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the Fund.
Re-registration may in some instances not be able to occur on a timely basis,
resulting in a delay during which the Fund may be denied certain of its rights
as an investor, including rights as to dividends or to be made aware of certain
corporate actions. There also may be instances where the Fund places a purchase
order but is subsequently informed, at the time of re-registration, that the
permissible allocation of the investment to foreign investors has been filled,
depriving the Fund of the ability to make its desired investment at that time.
Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or the proceeds of sales
of securities by foreign investors. The Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments. No more than 15% of the Fund's net assets may be
comprised, in the aggregate, of assets which are (i) subject to material legal
restrictions on repatriation or (ii) invested in illiquid securities. Even where
there is no outright restriction on repatriation of capital, the mechanics of
repatriation may affect certain aspects of the operations of the Fund.
A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their capital
markets. In accordance with the Investment Company Act 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
14
<PAGE> 15
obligations, and may invest no more than 5% of its total assets in sovereign
debt obligations which are in default. Certain of the sovereign debt obligations
in which the Fund may invest may involve great risk and are deemed to be the
equivalent in terms of quality to high yield/high risk securities. The Fund may
have difficulty disposing of certain sovereign debt obligations because there
may be no liquid secondary trading market for such securities. The Fund may
invest up to 5% of its total assets in sovereign debt obligations that are in
default. Whenever, in the judgment of the Manager, market or economic conditions
warrant, the Fund may invest, for temporary defensive purposes, up to 100% of
the Fund's total assets in the debt securities discussed above. See "Investment
Objective and Policies -- Characteristics of Certain Debt Securities."
Derivative Investments. In order to seek to hedge various portfolio
positions, including to hedge against price movements in markets in which the
Fund anticipates increasing its exposure, the Fund may invest in certain
instruments which may be characterized as derivative investments. These
investments include various types of interest rate transactions, options and
futures. Such investments also may consist of indexed securities, including
inverse securities. The Fund has express limitations on the percentage of its
assets that may be committed to certain of such investments. Other of such
investments have no express quantitative limitations, although they may be made
solely for hedging purposes, not for speculation, and may in some cases require
limitations as to the type of permissible counter-party to the transaction.
Interest rate transactions involve the risk of an imperfect correlation between
the index used in the hedging transactions and that pertaining to the securities
which are the subject of such transactions. Similarly, utilization of options
and futures transactions involves the risk of imperfect correlation in movements
in the price of options and futures and movements in the price of the securities
or interest rates which are the subject of the hedge. Investments in indexed
securities, including inverse securities, subject the Fund to the risks
associated with changes in the particular indices, which may include reduced or
eliminated interest payments and losses of invested principal. For a further
discussion of these investments and their attendant risks, see "Investment
Objective and Policies -- 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 or to meet redemptions. 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> 16
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> 17
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.
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 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
17
<PAGE> 18
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 rely
on the Manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Manager will take into
18
<PAGE> 19
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
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obligations may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental entity's
willingness or ability to repay principal and interest due in a timely manner
may be affected by, among other factors, its cash flow situation, the extent of
its foreign reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden to the
economy as a whole, the governmental entity's policy towards the International
Monetary Fund and the political constraints to which a governmental entity may
be subject. Governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearages on their debt. The commitment on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due may result in the cancellation of such
third parties' commitments to lend funds to the governmental entity, which may
further impair such debtor's ability or willingness to timely service its debts.
Consequently, governmental entities may default on their sovereign debt
obligations.
Holders of sovereign debt obligations, including the Fund, may be requested
to participate in the rescheduling of such debt and to extend further loans to
governmental entities. 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
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rapid prepayment of principal than its stated maturity would indicate. Because
the prepayment characteristics of the underlying mortgages vary, it is not
possible to predict accurately the realized yield or average life of a
particular issue of the mortgage-related securities. (Asset-backed securities,
other than those backed by home equity loans, generally do not prepay in
response to changes in interest rates but may be subject to prepayment in
response to other factors.) Prepayment rates are important because of their
effect on the yield and price of the securities. Accelerated prepayments
adversely impact yields for securities purchased at a premium (i.e., a price in
excess of principal amount) and may involve additional risk of loss of principal
because the premium may not have been fully amortized at the time the obligation
is repaid. The opposite is true for securities purchased at a discount. The Fund
may purchase mortgage-related (and asset-backed) securities at a premium or at a
discount.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Options, Futures and Forward Foreign
Exchange Transactions. The Fund 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 United
States, although the Fund will endeavor to achieve the best net results in
effecting its portfolio transactions.
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Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. This limitation is a fundamental
policy, and it may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. During the period of such a loan, the Fund typically
receives the income on both the loaned securities and the collateral and thereby
increases its yield. In certain circumstances, the Fund may receive a flat fee.
Such loans are terminable at any time, and the borrower, after notice, will be
required to return borrowed securities within five business days. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or otherwise, the Fund could experience delays and costs
in gaining access to the collateral and could suffer a loss to the extent the
value of the collateral falls below the market value of the borrowed securities.
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 liquid 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. 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.
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<PAGE> 23
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the contract
with the Fund, to repurchase 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 that 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
that are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its net assets, taken at market value would be
invested in such securities.
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<PAGE> 24
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 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.
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<PAGE> 25
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 140 registered investment companies and provides investment
advisory services to individual and institutional accounts. As of August 31,
1997, the Manager and FAM had a total of approximately $267.7 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, 1997, the fee paid by the Fund to the Manager was $1,260,012 (based
upon average daily net assets of approximately $147.4 million).
The Management Agreement provides that, subject to the direction of the
Board of Directors of the Fund, the Manager is responsible for the actual
management of the Fund's portfolio and constantly reviews the Fund's holdings in
light of its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Manager, subject to review by the Board of Directors. The Manager
is also obligated to perform certain administrative and management services for
the Fund and is obligated to provide all of the office space, facilities,
equipment and personnel necessary to perform its duties under the Management
Agreement.
Also, 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, 1997, MLAM paid MLAM U.K. a fee of
$144,451 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, 1997, the Fund reimbursed
the Manager $123,555 for accounting services. For the same fiscal year the ratio
of total expenses to average net assets was 1.53%, 2.58%, 2.60% and 1.80% for
Class A, Class B, Class C and Class D shares, respectively.
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<PAGE> 26
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:
HUBERTUS AARTS -- Vice President of the Fund -- Vice President and
Portfolio Manager with MLAM U.K. since 1995. Previously Mr. Aarts was Portfolio
Manager with Mees Pierson and with its predecessor, Pierson Heldring & Pierson.
Mr. Aarts is primarily responsible for the Fund's European investments.
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.
R. ELISE BAUM -- Vice President of the Fund -- Vice President of the
Manager since 1995; employee of the Manager since 1992. Ms. Baum is primarily
responsible for investments in North America.
A. GRACE PINEDA -- Vice President of the Fund -- First Vice President of
the Manager since 1997; Vice President of the Manager from 1989 to 1997. Ms.
Pineda is primarily responsible for investments in Latin America.
JAMES E. RUSSELL -- Vice President of the Fund -- First Vice President of
the Manager since 1997; Vice President of the Manager from 1992 to 1997;
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.
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 that 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).
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<PAGE> 27
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives an annual
fee of up to $11.00 per Class A or Class D account and up to $14.00 per Class B
or Class C account and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent under the
Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge
will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing a beneficial interest of a person in the relevant share
class on a record keeping system, provided the record keeping system is
maintained by a subsidiary of ML & Co. For the fiscal year ended June 30, 1997,
the Fund paid the Transfer Agent $331,495 pursuant to the Transfer Agency
Agreement.
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, and for participants in
certain fee-based programs, the minimum initial purchase is $500 and the minimum
subsequent purchase is $50.
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 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 $5.35) to
confirm a sale of shares to such customers. Purchases made directly through the
Transfer Agent are not subject to the processing fee.
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<PAGE> 28
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 (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). 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 CDSC's and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
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.
28
<PAGE> 29
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to D shares
years, at a rate of 4.0% automatically after
during the first year, approximately eight years(5)
decreasing 1.0% annually to
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans 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 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 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 certain fee-based programs.
29
<PAGE> 30
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 THE 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>
- ---------------
* 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 by certain retirement plan
investors and participants 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 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection with
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, 1997, the Fund sold 640,103 Class A
shares for aggregate net proceeds to the Fund of $6,302,473. The gross sales
charges for the sale of its Class A shares for the year were $104, of which $4
and $100 were received by the Distributor and Merrill Lynch, respectively.
During the fiscal year ended June 30, 1997, 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, 1997, the Fund sold 599,650 Class D
shares for aggregate net proceeds to the Fund of $6,180,271. The gross sales
charges for the sale of its Class D shares for the year were $31,566, of which
$1,954 and $29,612 were received by the Distributor and Merrill Lynch,
respectively. During the fiscal year ended June 30, 1997, 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
30
<PAGE> 31
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 and U.S. branches of foreign owned
banking institutions provided that the program or the branch 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.
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 -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Class A shares are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and,
subject to certain conditions, 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.
31
<PAGE> 32
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
which declines each year, 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 account maintenance fees are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. 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 that
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.
32
<PAGE> 33
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
YEAR SINCE PERCENTAGE OF
PURCHASE 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, 1997, the Distributor received CDSCs of
$424,847 with respect to redemptions of Class B shares. Additional CDSCs payable
to the Distributor may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain fee-based programs.
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 that are purchased by eligible 401(k)
or eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC is also waived for any Class B shares purchased
within qualifying Employee Access(SM) Accounts. 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 certain fee-based programs. See "Shareholder Services."
33
<PAGE> 34
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
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. The CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs." For the fiscal year ended June 30, 1997, the Distributor received
CDSCs of $2,530 with respect to redemptions of Class C shares.
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 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
34
<PAGE> 35
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 per
share.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
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, 1997, the Fund paid the Distributor
$1,184,206 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $117.8
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended June 30, 1997, the Fund paid the
Distributor $56,970 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately $5.7
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, 1997, the Fund paid the
Distributor $51,012 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan
35
<PAGE> 36
of approximately $20.3 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
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. At December 31,
1996, 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 $2,427,000
(2.07% of Class B net assets at that date). As of June 30, 1997, direct cash
revenues for the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $2,224,166 (2.00% of Class B net assets at that
date). At December 31, 1996, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class C shares exceeded fully allocated accrual revenues by
approximately $78,000 (1.38% of Class C net assets at that date). As of June 30,
1997, direct cash revenues for the period since the commencement of operations
of Class C shares exceeded direct cash expenses by $83,168 (1.39% 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 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
36
<PAGE> 37
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. Redemption
requests should not be sent to the Fund. The redemption request in either event
requires the signatures of all persons in whose names the shares are registered,
signed exactly as their names appear on the Transfer Agent's register or on the
certificate, as the case may be. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" (including, for example,
Merrill Lynch branches and certain other financial institutions) as such is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents, such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payment
will be mailed within seven days of receipt of a proper notice of redemption.
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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 that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent 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 that 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.
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INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of 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. 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 such 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.
SYSTEMATIC WITHDRAWAL PLANS
A 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 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. With respect to redemptions of Class B and Class
C shares pursuant to a systematic withdrawal plan, the maximum number of Class B
or Class C shares that can be redeemed from an account annually shall not exceed
10% of the value of shares of such class in that account at the time the
election to join the systematic withdrawal plan was made. Any CDSC that
otherwise might be due on such redemption of Class B or Class C shares will be
waived. Shares redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares are otherwise redeemed.
See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and
Class C Shares -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares." Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last Class
B shares in an account to Class D shares, the systematic withdrawal
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<PAGE> 40
plan will automatically be applied thereafter to Class D shares. See "Purchase
of Shares -- Deferred Sales Charge Alternatives-Class B and C
Shares -- Conversion of Class B Shares to Class D Shares."
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) or CBA(R) accounts
may arrange to have periodic investments made in the Fund in their CMA(R) or
CBA(R) accounts or in certain related accounts in amounts of $100 or more
through the CMA(R) or CBA(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. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on accounts represented by uncashed distribution or
redemption checks. 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.
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.
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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 of the exchanged
shares and a purchase of the acquired shares 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 be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(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.
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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 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.
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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 will be reinvested automatically in shares
of the Fund at net asset value without a sales charge. However, a shareholder
whose account is maintained at the Transfer Agent or whose account is maintained
through Merrill Lynch 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
Federal tax requirements 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, thereby 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). For a
detailed discussion of Federal tax considerations relevant to foreign currency
transactions, see "Additional Information -- Taxes."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as 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. Recent legislation
creates additional categories of capital gains taxable at different rates.
Although the legislation does not explain how gain in these categories will be
taxed to shareholders of RICs, it authorizes regulations applying the new
categories of gain and the new rates to sales of securities by RICs. In the
absence of guidance, there is some uncertainty as to the manner in which the
categories of gain and related rates will be passed through to shareholders in
capital gains. 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
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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. It is anticipated that IRS guidance permitting categories of gain and
related rates to be passed through to shareholders would also require this
written notice to designate the amounts of various categories of capital gain
income included in 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. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. 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. In the case of
foreign taxes passed through by a RIC, the holding period requirements referred
to above must be met by both the shareholder and the RIC. 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 and other
information needed to claim the foreign tax credit.
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
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number. When establishing an account, an investor must certify under penalty of
perjury that such number is correct and that such investor is not otherwise
subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be treated
as owning shares in a passive foreign investment company ("PFIC") for U.S.
Federal income tax purposes. The Fund may be subject to U.S. Federal income tax,
and an additional tax in the nature of interest (the "interest charge"), on a
portion of the distributions from such a company and on gain from the
disposition of the shares of such a company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid the
taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs. Alternatively, under recent legislation, the Fund could elect
to "mark to market" at the end of each taxable year all shares that it holds in
PFICs. If it made this election, the Fund would recognize as ordinary income any
increase in the value of such shares over their adjusted basis and as ordinary
loss any decrease in such value to the extent it did not exceed prior increases.
By making the mark-to-market election, the Fund could avoid imposition of the
interest charge with respect to 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
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<PAGE> 46
pertinent Code sections and the Treasury regulations promulgated thereunder. The
Code and the Treasury regulations are subject to change by legislative, judicial
or administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all the classes of the Fund is
determined once daily as of 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is open
for trading or on any other day on which there is sufficient trading in
portfolio securities that the net asset value of the Fund's shares may be
materially affected. The net asset value is computed by dividing the sum of the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and any account maintenance and/or distribution fees
payable to the Distributor, are accrued daily. The Fund employs Merrill Lynch
Services Pricing(SM) Service ("MLSPS") an affiliate of the Manager, to provide
certain securities prices for the Fund. During the fiscal year ended June 30,
1997, the Fund did not pay MLSPS a fee for such service.
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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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
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<PAGE> 47
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 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
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acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities in which to invest in a
market the Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium.
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").
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<PAGE> 50
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 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 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 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.
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SWAPS
The Fund is authorized to enter into equity swap agreements, which are
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.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.
Forward foreign exchange transactions 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 U.S. 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 U.S. 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 "Options on Securities and Securities
Indices -- Types of Options" above and "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments" below.
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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 demonstrably 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 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
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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 Manager anticipates
the Fund can receive on each business day at least two independent bids or
offers, unless a quotation from only one dealer is available, in which case that
dealer's quotation may be used.
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 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 Manager, 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)
<TABLE>
<S> <C>
Occupation .........................................
...................................................
Signature of Owner
Occupation ......................................... Name and Address of Employer.................................................
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(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
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Global SmallCap Fund, Inc. Authorization Form.
Specify type of account (check one) [ ] checking [ ] savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number ............................... Account Number......................
Bank Address....................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor..........................................................
Signature of Depositor .......................... Date ........................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
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MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed under "Additional
Information -- Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service (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.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
<TABLE>
<S> <C>
............................, 19....
Dear Sir/Madam: Date of Initial Purchase
</TABLE>
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.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner (If registered in joint names, both must
sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
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
[] [] [] [] [] [] []
Branch-Code F/C No. ..............................
F/C Last Name
[] [] [] [] [] [] []
Dealer's Customer A/C No.
56
<PAGE> 57
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
<TABLE>
<S> <C>
(PLEASE PRINT)
------------------------------------
Name................................................................................
First Name Initial Last Name
------------------------------------
Social Security Number
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Account Number ..........................
(if existing account)
Address.............................................................................
(Zip Code)
Name................................................................................
First Name Initial Last Name
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A, [ ] Class B*, [ ] Class C* 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 THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE): [ ]
$________ of [ ] Class A, [ ] Class B*, [ ] Class C* 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 MY 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.
* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS HELD
IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL PLAN
IS MADE.
57
<PAGE> 58
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.
58
<PAGE> 59
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> 60
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>
PAGE
----
<S> <C>
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........ 25
Code of Ethics.............................. 26
Transfer Agency Services.................... 27
Purchase of Shares............................ 27
Initial Sales Charge Alternatives -- Class A
and Class D Shares........................ 30
Deferred Sales Charge Alternatives -- Class
B and Class C Shares...................... 32
Distribution Plans.......................... 35
Limitations on the Payment of Deferred Sales
Charges................................... 36
Redemption of Shares.......................... 37
Redemption.................................. 37
Repurchase.................................. 38
Reinstatement Privilege -- Class A and Class
D Shares.................................. 38
Shareholder Services.......................... 38
Investment Account.......................... 39
Systematic Withdrawal Plans................. 39
Automatic Investment Plans.................. 40
Automatic Reinvestment of Dividends and
Distributions............................. 40
Exchange Privilege.......................... 40
Fee-Based Programs.......................... 41
Performance Data.............................. 41
Additional Information........................ 43
Dividends and Distributions................. 43
Taxes....................................... 43
Determination of Net Asset Value............ 46
Organization of the Fund.................... 47
Shareholder Reports......................... 47
Shareholder Inquiries....................... 47
Appendix A.................................... 48
Authorization Form............................ 55
Code # 18187-0997
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
PROSPECTUS
September 26, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
(MlYNCH COMPASS)
<PAGE> 61
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified,
open-end investment company that seeks 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 including derivative investments to hedge
against market and currency risk or to gain exposure to equity markets. 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
September 26, 1997 (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 September 26, 1997.
<PAGE> 62
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 years ended June 30,
1996 and 1997, the Fund's portfolio turnover rate was 60.33% and 63.17%,
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. However, under recently enacted legislation, this requirement will no
longer apply to the Fund after its fiscal year ending June 30, 1998.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") (collectively, the "Depositary Receipts") or
other securities convertible into securities of foreign issuers. The Depositary
Receipts may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by an American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. GDRs are receipts issued
throughout the world which evidence a similar ownership arrangement. Generally,
ADRs, in registered form, are designed for use in the U.S. securities markets,
and EDRs, in bearer form, are designed for use in European securities markets.
GDRs are tradeable both in the U.S. and Europe and are designed for use
throughout the world. The Fund may invest in unsponsored Depositary Receipts.
The issuers of unsponsored Depositary Receipts are not obligated to disclose
material information in the United States, and therefore, there may not be a
correlation between such information and the market value of such securities.
2
<PAGE> 63
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis on each day the Fund determines its net asset value in U.S. dollars, the
Fund intends to manage its portfolio so as to give reasonable assurance that it
will be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. See "Redemption of Shares." Under present conditions, the Manager
does not believe that these considerations will have any significant effect on
its portfolio strategy, although there can be no assurance in this regard.
Stock or Other Financial Index Futures and Options. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock or other
financial index futures and options, 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 "marking 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
3
<PAGE> 64
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 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 effectively.
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 investments also will be limited in order to qualify
for the special tax treatment afforded regulated investment companies ("RICs")
under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Dividends, Distributions and Taxes -- Taxes." To qualify under both the
Investment Company Act and the Code, the Fund will comply with certain
requirements, including limiting its investments so that at the time of
investment and at the close of each quarter of the taxable year (i) not more
than 25% of the market value of the Fund's total assets will be invested in the
securities of a single issuer and (ii) with respect to 75% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the
4
<PAGE> 65
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 liquid securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the amount of its commitment in connection with such
purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to the
Fund at the option of the issuer. The price and coupon of the security is fixed
at the time of the commitment. At the time of entering into the agreement the
Fund is paid a commitment fee, regardless of whether or not the security is
ultimately issued. 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% 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 liquid securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. 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 and purchase and sale contracts 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
5
<PAGE> 66
or other credit enhancement. Under such agreements, the seller 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, often less than one
week. Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement; the Fund does not have the right to seek additional collateral in the
case of purchase and sale contracts. In the event of default by the seller under
a repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under 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.
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).
6
<PAGE> 67
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.)
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. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Sec-
7
<PAGE> 68
tion 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the Investment
Company Act, at any time its shares are owned by another investment company
that is part of the same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position except
to the extent permitted by applicable law. The Fund 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.
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
8
<PAGE> 69
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.
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 (65) -- 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; and Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
DONALD CECIL (70) -- 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 (70) -- 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 (66) -- 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 from 1990 to
1991; Adjunct Professor, Wharton School, University of Pennsylvania, from 1989
to 1990; Partner, Small Cities Cable Television since 1986.
RICHARD R. WEST (59) -- 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) and Alexander's Inc. (real estate company).
EDWARD D. ZINBARG (62) -- 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 (57) -- 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.
9
<PAGE> 70
NORMAN R. HARVEY (64) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1982.
HUBERTUS AARTS (35) -- Vice President(1)(2) -- Vice President and Portfolio
Manager with Merrill Lynch Asset Management U.K. Limited ("MLAM UK") since 1995;
Portfolio Manager with Mees Pierson from 1993 to 1995 and with its predecessor,
Pierson Heldring & Pierson, from 1990 to 1993.
ANDREW JOHN BASCAND (35) -- Vice President(1)(2) -- Director of MLAM U.K.
since 1993 and Director of Merrill Lynch Global Asset Management Limited
("MLGAM") since 1994; Senior Economist of A.M.P. Asset Management plc in London
from 1992 to 1993 and Chief Economist of A.M.P. Investments (NZ) in New Zealand
from 1989 to 1991; Economic Adviser to the Chief Economist of the Reserve Bank
of New Zealand from 1987 to 1989.
R. ELISE BAUM (37) -- Vice President(1) -- Vice President of the Manager
since 1995; employee of the Manager since 1992.
DONALD C. BURKE (37) -- Vice President(1)(2) -- First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director of
Taxation of the Manager since 1990.
A. GRACE PINEDA (40) -- Vice President(1)(2) -- First Vice President of the
Manager since 1997; Vice President of the Manager from 1989 to 1997.
JAMES E. RUSSELL (45) -- Vice President(1) -- First Vice President of the
Manager since 1997; Vice President of the Manager from 1992 to 1997.
GERALD M. RICHARD (48) -- 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 thereof since 1984.
PHILIP M. MANDEL (50) -- Secretary(1)(2) -- First Vice President of MLAM
since 1997; Vice President and Assistant General Counsel of Merrill Lynch from
1989 to 1997.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Manager, or its affiliate FAM, acts as
investment adviser or manager.
At August 31, 1997, the officers and Directors of the Fund as a group (16
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
10
<PAGE> 71
per Committee meeting attended. Fees and expenses paid to the non-affiliated
Directors for the fiscal year ended June 30, 1997, aggregated $36,887.
The following table sets forth for the fiscal year ended June 30, 1997,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996, 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:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
OTHER
PENSION OR RETIREMENT MLAM/FAM-ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF DIRECTOR FROM FUND PART OF FUND'S EXPENSES DIRECTORS(1)
- --------------------------------------- ------------ ------------------------ ----------------
<S> <C> <C> <C>
Donald Cecil........................... $8,500 None $268,933
Edward H. Meyer........................ $5,500 None $227,933
Charles C. Reilly...................... $7,500 None $293,833
Richard R. West........................ $7,500 None $272,833
Edward D. Zinbarg...................... $7,500 None $127,333
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Reilly (43 registered investment companies consisting of 56 portfolios); Mr.
West (44 registered investment companies consisting of 66 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 years
ended June 30, 1996 and 1997, the investment advisory fees paid by the Fund to
the Manager aggregated $1,300,660, $1,285,653, and $1,260,012, respectively.
As described in the Prospectus, the Manager has also entered into a
sub-advisory agreement with MLAM U.K. pursuant to which MLAM U.K. provides
investment advisory services to the Manager with
11
<PAGE> 72
respect to the Fund. For the fiscal period August 5, 1994 (commencement of
operations) to June 30, 1995 and for the fiscal years ended June 30, 1996 and
1997, the sub-advisory fees paid by the Manager to MLAM U.K. pursuant to such
agreement aggregated $133,021, $150,719 and $144,451, 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. The Fund
pays all other expenses incurred in the operation of the Fund, including, among
other things, taxes; expenses for legal and auditing services; costs of printing
proxies, stock certificates, shareholder reports, prospectuses and statements of
additional information (except to the extent paid by the Distributor); charges
of the custodian, any sub-custodian and transfer agent; expenses of redemption
of shares; Commission fees; expenses of registering the shares under Federal,
state or foreign laws; fees and expenses of unaffiliated Directors; accounting
and pricing costs (including the daily calculation of net asset value);
insurance; interest; brokerage costs; litigation and other extraordinary or non-
recurring expenses; and other expenses properly payable by the Fund. Accounting
services are provided to the Fund by the Manager, and the Fund reimburses the
Manager for its costs in connection with such services on a semi-annual basis.
For the fiscal period ended August 5, 1994 (commencement of operations) to June
30, 1995, and for the fiscal years ended June 30, 1996 and 1997, the Fund
reimbursed the Manager $111,195, $105,306 and $123,555, respectively, 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. Similarly, the following
entities may be considered "controlling persons" of MLAM U.K.: Merrill Lynch
Europe Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings,
a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will 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.
12
<PAGE> 73
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 (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). 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."
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 new Class A shares of the Fund for the fiscal 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 A
shares for the fiscal year ended June 30, 1997, were $104, of which $100 was
received by Merrill Lynch and $4 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
13
<PAGE> 74
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 gross sales charges for the sale of
Class D shares of the Fund for the fiscal year ended June 30, 1997, were $31,566
of which $29,612 was received by Merrill Lynch and $1,954 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 (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Code) although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company," as that term is defined in
the Investment Company Act, but does not include purchases by any such company
that has not been in existence for at least six months or that 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 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
14
<PAGE> 75
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 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
15
<PAGE> 76
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(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum 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.
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.
16
<PAGE> 77
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 that might result from an
acquisition of assets having net unrealized appreciation that is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities that (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, that
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 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
17
<PAGE> 78
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.
18
<PAGE> 79
The following table sets forth comparative information as of June 30, 1997,
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and with respect to Class B shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JUNE 30, 1997
--------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- --------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
AUGUST 5, 1994 (COMMENCEMENT OF
OPERATIONS) TO JUNE 30, 1997:
Under NASD Rule as Adopted............. $174,793 $10,925 $ 2,352 $13,277 $4,129 $ 9,148 $834
Under Distributor's Voluntary Waiver... $174,793 $10,925 $ 874 $11,799 $4,129 $ 7,670 $834
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT OF
OPERATIONS) TO JUNE 30, 1997:
Under NASD Rule as Adopted............. $ 8,972 $ 561 $ 104 $ 665 $ 103 $ 562 $ 45
</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. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch Mutual
Funds Advisor ("MFA") program. The CDSC is booked as a contingent obligation
that declines over a two-year period in two equal installments and is
payable only if the shareholder terminates participation in the MFA program
prior to the second anniversary of the date such shareholder joined the MFA
program.
(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.
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.
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<PAGE> 80
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 certain
instances, including 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 in the case of such withdrawals 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 years ended June 30, 1996 and 1997, the
Distributor received CDSCs of $390,517, $492,135 and $424,847, respectively,
with respect to redemptions of Class B shares, all of which were paid to Merrill
Lynch. Additional CDSCs payable to the Distributor during the fiscal year ended
June 30, 1997 may have been waived or converted to a contingent obligation in
connection with a shareholder's participation in certain fee-based programs. For
the fiscal period October 21, 1994 (commencement of operations) to June 30,
1995, and for the fiscal years ended June 30, 1996 and 1997, the Distributor
received CDSCs of $2,540, $2,470 and $2,530, 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.
20
<PAGE> 81
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of ADRs,
EDRs, GDRs or other securities convertible into foreign equity securities. ADRs,
EDRs and GDRs may be listed on stock exchanges or traded in 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 dollar 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 dollar amount of
transactions on which the Fund paid brokerage commissions. For the fiscal year
ended June 30, 1997, the Fund paid total brokerage commissions of $476,042, of
which $56,999 or 12.0% was paid to Merrill Lynch for effecting 14.0% of the
aggregate dollar 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.
21
<PAGE> 82
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 that they manage unless the member (i) has obtained
prior express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with the aggregate compensation received
by the member in effecting such transactions, and (iii) complies with any rules
the Commission has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is open
for trading or on any other day on which there is sufficient trading in
portfolio securities that the net asset value of the Fund's shares may be
materially affected. The NYSE is not open on New Year's Day, Martin Luther King,
Jr. 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 Fund
employs Merrill Lynch Services Pricing(SM) Service ("MLSPS") an affiliate of the
Manager, to provide certain securities prices to the Fund. During the fiscal
year ended June 30, 1997, the Fund did not pay MLSPS a fee for such service. 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, that are traded on
stock exchanges are valued at the last sale price (regular way) on the exchange
on which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price. 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
22
<PAGE> 83
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 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
23
<PAGE> 84
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 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 NYSE 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 Merrill Lynch in writing if their
account is maintained with Merrill Lynch or 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 of such notice, those instructions will be
effected.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired 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 shares having a value of $10,000 or more.
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At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. 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 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 shares in the Investment Account
are automatically reinvested in Fund shares. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares" in the Prospectus.
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares -- Deferred Sales Charge Alternatives-Class B
and C Shares -- Conversion of Class B Shares to Class D Shares" in the
Prospectus; if an investor wishes to change the amount being withdrawn in a
systematic withdrawal plan the investor should contact his or her Financial
Consultant.
Withdrawal payments should not be considered as dividends, 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 shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors 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.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
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.
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EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. 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 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,
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<PAGE> 87
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 Special Value Fund Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds 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 that 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 the newly-acquired 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 that 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, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised mutual
funds, with shares for which certificates have not been issued may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares at any time and may thereafter resume such offering
from time to time. The exchange privilege is available only to U.S. shareholders
in states where the exchange legally may be made.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as 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. Recent legislation
creates additional categories of capital gains taxable at different rates.
Although the legislation does not explain how gain in these categories will be
taxed to shareholders of RICs, it authorizes regulations applying the new
categories of gain and the new rates to sales of securities by RICs. In the
absence of guidance, there is some uncertainty as to the manner in which the
categories of gain and related rates will be passed through to shareholders as
capital gains. 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. It is anticipated that IRS guidance permitting categories of gain and
related rates to be passed through to shareholders would also require this
written notice to designate the amounts of various categories of capital gain
income included in capital gain dividends in a notice sent to shareholders. 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 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.
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Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. 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. In the case of
foreign taxes passed through by a RIC, the holding period requirements referred
to above must be met by both the shareholder and the RIC. 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 and other
information needed to claim the foreign tax credit. For this purpose, the Fund
will allocate foreign taxes and foreign source income among the Class A, Class
B, Class C and Class D shareholders according to a method 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.
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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 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 recent legislation the Fund could elect to
"mark to market" at the end of each taxable year all shares that it holds in
PFICs. If it made this election, the Fund would recognize as ordinary income any
increase in the value of such shares over their adjusted basis and as ordinary
loss any decrease in such value to the extent it did not exceed prior increases.
By making the mark-to-market election, the Fund could avoid imposition of the
interest charge with respect to 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
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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. Under recently enacted legislation, this
requirement will no longer apply to the Fund after its fiscal year ending June
30, 1998.
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
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certain transactions entered into by the Fund solely to reduce the risk of
currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
32
<PAGE> 93
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
OF A OF A
HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT PERCENTAGE BASED 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
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year ended June 30, 1997.......... 1.89% $ 1,018.90 5.39% $ 1,053.90
Inception (October 21, 1994) to
June 30, 1997................... 5.23% $ 1,147.10 6.24% $ 1,176.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year ended June 30, 1997.......... 7.53% $ 1,075.30 6.38% $ 1,063.80
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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to
June 30, 1997................... 14.71% $ 1,147.10 17.68% $ 1,176.80
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES CLASS D SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT PERCENTAGE BASED 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
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year ended June 30, 1997.......... 2.51% $ 1,025.10 1.64% $ 1,016.40
Inception (August 5, 1994) to June
30, 1997........................ 4.44% $ 1,134.30 3.95% $ 1,119.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year ended June 30, 1997.......... 6.47% $ 1,064.70 7.27% $ 1,072.70
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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (August 5, 1994) to June
30, 1997........................ 13.43% $ 1,134.30 11.91% $ 1,119.10
</TABLE>
33
<PAGE> 94
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 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.
34
<PAGE> 95
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, 1997, is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net Assets................................. $5,508,051 $111,260,842 $5,962,238 $19,441,078
========= =========== ========= ==========
Number of Shares Outstanding............... 515,134 10,558,477 566,674 1,824,208
========= =========== ========= ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)............................. $ 10.69 $ 10.54 $ 10.52 $ 10.66
Sales Charge (for Class A and Class D
shares: 5.25% of offering price (5.54% of
net asset value per share))*............. $ .59 ** ** $ .59
---------- ------------ ---------- -----------
Offering Price............................. $ 11.28 $ 10.54 $ 10.52 $ 11.25
========= =========== ========= ==========
</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
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.
35
<PAGE> 96
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, ML&Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name to
any other company, and the Fund has granted 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on August 31, 1997.
36
<PAGE> 97
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-term
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.
37
<PAGE> 98
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.
38
<PAGE> 99
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols presented below are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
Aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
Aa An issue which is rated "aa" is considered 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.
39
<PAGE> 100
DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S RATINGS SERVICES
("STANDARD & POOR'S")
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
<TABLE>
<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.
</TABLE>
40
<PAGE> 101
<TABLE>
<S> <C>
B Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC The rating "CC" is typically applied to debt subordinated to senior debt that is
assigned an actual or implied "CCC" rating.
C The rating "C" typically is applied to debt subordinated to senior debt which is
assigned an actual or implied "CCC-" debt rating. The "C" rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
</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>
<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.
</TABLE>
41
<PAGE> 102
<TABLE>
<S> <C>
* 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>
<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".
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.
42
<PAGE> 103
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:
<TABLE>
<S> <C>
I. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to make payments for a preferred stock in this category
than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as predominantly
B speculative with respect to the issuer's capacity to pay preferred stock obligations.
CCC "BB" indicates the lowest degree of speculation and "CCC" the highest 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>
43
<PAGE> 104
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.
44
<PAGE> 105
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS,
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global SmallCap Fund, Inc. as of
June 30, 1997, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the two-year period 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,
1997, 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, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 15, 1997
45
<PAGE> 106
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Value Percent of
EUROPE Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
Denmark Investment Banking 20,492 Finansierings Instituttet for
Industri og Handvarek A/S (FIH)
(Class B) $ 518,093 $ 522,369 0.4%
Publishing 12,150 Sondagsavisen A/S 517,141 535,137 0.4
Textiles 8,882 Carli Grey International A/S 267,698 502,398 0.3
Total Investments in Denmark 1,302,932 1,559,904 1.1
Finland Computer Software 4,560 TT Tieto OY 298,105 395,726 0.3
Diversified 21,240 ASKO OY (Class A) 423,261 392,408 0.3
Holding Company 8,716 Fiskars OY AB 451,050 739,584 0.5
17,600 Instrumentarium OY (Group A) 635,762 661,858 0.5
------------- ------------- ------
1,086,812 1,401,442 1.0
Household Products 7,244 Huhtamaki OY 325,534 312,229 0.2
Total Investments in Finland 2,133,712 2,501,805 1.8
</TABLE>
46
<PAGE> 107
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
EUROPE Value Percent of
(continued) Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
France Apparel 640 Damart S.A. $ 524,338 $ 480,526 0.3%
Automobile Parts 6,981 Bertrand Faure S.A. 341,645 367,771 0.3
Computer Software 2,588 Altran Technologies S.A. 745,400 845,795 0.6
Electrical 12,000 Cofidur 488,534 332,942 0.2
Components
Gaming 1,386 Groupe Partouche S.A. 124,296 94,368 0.1
Holding Company 2,482 Societe EuraFrance S.A. 751,104 1,018,165 0.7
Home Furnishings 2,148 Castorama Dubois Investissements
S.C.A. 334,672 302,370 0.2
Manufacturing 17,170 Sommer Allibert S.A. 510,514 602,056 0.4
Total Investments in France 3,820,503 4,043,993 2.8
Germany Auto & Truck 4,800 Koegel Fahrzeugwerke AG
(Preferred) 621,179 688,626 0.5
Machine Tools 2,036 Plettac AG 447,858 468,516 0.3
& Machinery 2,190 Walter AG 556,006 842,018 0.6
------------- ------------- ------
1,003,864 1,310,534 0.9
Machinery & 21,220 ++Kloeckner Werke AG 1,897,517 1,473,442 1.0
Engineering
Manufacturing 3,680 Escada AG (Preferred) 610,130 588,133 0.4
3,087 KSB AG (Preferred) 442,057 761,741 0.5
------------- ------------- ------
1,052,187 1,349,874 0.9
Retail Specialty 18,000 Moebel Walther AG 770,212 1,094,916 0.8
Total Investments in Germany 5,344,959 5,917,392 4.1
Greece Building & 15,980 Titan Cement Co. S.A. 302,811 788,640 0.6
Construction
Total Investments in Greece 302,811 788,640 0.6
Hungary Banking 35,123 OTP Bank (GDR) (b) 837,618 930,760 0.6
Total Investments in Hungary 837,618 930,760 0.6
Ireland Containers 68,000 Clondalkin Group PLC 667,110 657,935 0.5
Foods 59,608 Greencore Group PLC 299,101 294,410 0.2
Total Investments in Ireland 966,211 952,345 0.7
Italy Diversified 890,000 ++Compagnie Industriali Riunite
S.p.A. (CIR) 996,497 566,949 0.4
Total Investments in Italy 996,497 566,949 0.4
Netherlands Building & 15,441 NBM-Amstelland NV 410,332 411,771 0.3
Construction
Computer Software 47,655 ++DOCdata NV 645,299 619,622 0.4
Electrical Equipment 19,251 Twentsche Kabel Holding NV 760,165 1,045,396 0.7
Engineering & 37,034 Volker Wessels Stevin NV 780,063 1,040,491 0.7
Construction
Holding Company 20,500 Internatio-Muller NV 413,160 647,027 0.5
Industrial Services 11,234 Koninklijke Pakhoed NV 405,048 396,386 0.3
Instruments/ 11,000 ++Elsag Bailey Process Automation
Photo--Optical NV (ADR) (a) 174,650 202,125 0.2
Printing & 12,000 Roto Smeets de Boer NV 563,281 589,231 0.4
Publishing
Total Investments in the
Netherlands 4,151,998 4,952,049 3.5
</TABLE>
47
<PAGE> 108
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Norway Computer Software 22,320 Merkantildata ASA 516,760 441,932 0.3
Newspaper/Publishing 27,744 Schibsted ASA 572,146 549,326 0.4
Total Investments in Norway 1,088,906 991,258 0.7
Poland Engineering & 131,800 Elektrim Towarzystwo Handlowe S.A. 462,537 1,147,483 0.8
Construction
Tire & Rubber 30,000 T.C. Debica S.A. 399,679 616,438 0.4
Total Investments in Poland 862,216 1,763,921 1.2
Portugal Retail Sales 18,950 Estabelecimentos Jeronimo Martins
& Filho S.A. 531,828 1,324,335 0.9
Total Investments in Portugal 531,828 1,324,335 0.9
Russia Cellular Telephones 25,600 ++Vimpel-Communications (ADR) (a) 767,821 972,800 0.7
Total Investments in Russia 767,821 972,800 0.7
Spain Automotive & Equipment 32,000 Estacionamientos Subterraneos,
S.A. (Ordinary) 614,689 701,935 0.5
Steel 2,485 Acerinox S.A. 444,465 465,948 0.3
Telecommunications 12,150 Amper S.A. 307,003 345,728 0.3
Total Investments in Spain 1,366,157 1,513,611 1.1
Sweden Biotechnology 33,200 ++Biora AB 347,898 309,181 0.2
Engineering & 23,853 Svedala Industri AB 313,241 496,719 0.4
Construction
Forest Products/ 819,500 Rottneros Bruks AB Free 1,265,254 900,969 0.6
Paper & Packaging
Hotels 28,350 ++Scandic Hotels AB 514,574 447,358 0.3
Investment 48,819 Bure Investment AB 419,935 615,652 0.4
Management
Special Services 32,000 ++Mandator AB (B Shares) 530,278 366,298 0.3
Total Investments in Sweden 3,391,180 3,136,177 2.2
Switzerland Advertising 3,200 Edipresse S.A. (Bearer) 679,120 757,357 0.5
Building Products 1,800 Belimo Automation AG 423,875 518,625 0.4
Distribution 3,070 ++TEGE S.A. 253,281 434,901 0.3
Industrials 9,175 Oerlikon-Buehrle Holdings AG 989,278 1,076,302 0.7
Machine Tools 4,100 ++Agie Charmilles Holdings
& Machinery (Registered) 398,671 407,834 0.3
Machinery 1,031 Saurer AG (Registered) 449,610 683,938 0.5
Paper & Forest 24,800 Mercer International, Inc.
Products (ADR) (a) 422,910 234,050 0.2
Photography 2,694 Fotolabo S.A. 904,008 859,374 0.6
Retailing 1,075 Grands Magasins Jelmoli S.A. 620,093 671,091 0.5
Total Investments in Switzerland 5,140,846 5,643,472 4.0
United Aerospace 17,700 ++DONCASTERS PLC (ADR) (a) 323,541 409,313 0.3
Kingdom
Beverages 131,500 Matthew Clark PLC 1,188,993 529,216 0.4
Chemicals 390,000 Inspec Group PLC 1,844,704 1,284,169 0.9
Commercial Services 40,000 Serco Group PLC (Ordinary) 417,691 465,640 0.3
Computer Services 70,770 Misys PLC 705,945 1,589,999 1.1
Computers 158,600 ++Acorn Computer Group PLC 231,981 487,941 0.3
Electronic 36,455 Fairey Group PLC $ 309,973 $ 293,423 0.2%
Components
</TABLE>
48
<PAGE> 109
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
EUROPE Value Percent of
(concluded) Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
United
Kingdom
(concluded)
Employee Services 200,000 Corporate Services Group PLC 594,020 621,962 0.4
Home Furnishings 220,000 ++Limelight Group PLC 654,727 193,906 0.1
Media/Publishing 82,000 International Business
Communications PLC (Ordinary) 298,340 535,918 0.4
Merchandising 36,947 Smith (W.H.) Group PLC 230,419 221,809 0.2
Metals 15,504 Johnson Matthey PLC 126,265 148,511 0.1
Oil Services 40,000 Expro International Group PLC 330,488 302,666 0.2
Pharmaceuticals 43,300 ++Celltech Group PLC 429,955 191,541 0.1
162,300 ++Oxford Molecular Group PLC 828,101 763,831 0.6
------------- ------------- ------
1,258,056 955,372 0.7
Rental Services 82,000 Ashtead Group PLC 422,736 377,052 0.3
133,588 Thorn PLC 325,868 377,667 0.3
------------- ------------- ------
748,604 754,719 0.6
Textiles 215,220 Dewhirst Group PLC 601,484 762,350 0.5
Total Investments in the United
Kingdom 9,865,231 9,556,914 6.7
Total Investments in Europe 42,871,426 47,116,325 33.1
LATIN
AMERICA
Argentina Retailing 24,889 ++Grimoldi S.A. 95,150 98,327 0.1
Total Investments in Argentina 95,150 98,327 0.1
Brazil Metals 42,000 ++Latas de Aluminio S.A. (GDR) (b) 672,000 640,500 0.4
Textiles 2,054,000 Companhia de Tecidos Norte de
Minas S.A. (Preferred) 652,560 801,375 0.6
2,054,000 Empresa Nacional de Comercio 0 0 0.0
------------- ------------- ------
652,560 801,375 0.6
Utilities--Electric 879,478 Centrais Electricas de Santa
Catarina S.A. (CELESC) 'B'
(Preferred) 780,981 1,307,167 0.9
Total Investments in Brazil 2,105,541 2,749,042 1.9
Chile Supermarkets 42,000 ++Supermercados Unimarc S.A.
(ADR) (a) 703,500 787,500 0.6
Total Investments in Chile 703,500 787,500 0.6
Colombia Banking 41,300 Banco Ganadero S.A. (Class A)
(Preferred) (ADR) (a) 811,698 1,073,800 0.7
Total Investments in Colombia 811,698 1,073,800 0.7
Mexico Banking 350,850 ++Grupo Financiero Banorte, S.A.
de C.V. 387,614 364,760 0.2
Broadcasting--Media 129,000 Grupo Radio Centro, S.A. de C.V.
(ADR) (a) 1,527,535 1,515,750 1.1
Building Materials 47,890 ++Internacional de Ceramica, S.A de
C.V. (ADR) (a) 355,919 401,079 0.3
Engineering & 207,450 Grupo Profesional Planeacion y
Construction Proyectos, S.A. de C.V. (Class B) 924,041 966,098 0.7
Total Investments in Mexico 3,195,109 3,247,687 2.3
</TABLE>
49
<PAGE> 110
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Peru Foods 250,947 ++Consorcio Alimentos Fabril
Pacifico S.A. 268,537 421,402 0.3
Total Investments in Peru 268,537 421,402 0.3
Total Investments in Latin America 7,179,535 8,377,758 5.9
MIDDLE EAST/
AFRICA
South Building & 171,443 Murray & Roberts Holding Ltd. 427,734 402,706 0.3
Africa Construction
Newspaper/Publishing 19,100 Nasionale Pers Beperk 215,694 220,109 0.2
Retailing 468,000 Metro Cash & Carry Ltd. 450,022 412,880 0.3
Total Investments in South Africa 1,093,450 1,035,695 0.8
Zimbabwe Beverages 767,619 Delta Corporation Ltd. 412,821 1,178,880 0.8
Total Investments in Zimbabwe 412,821 1,178,880 0.8
Total Investments in the Middle
East/Africa 1,506,271 2,214,575 1.6
NORTH
AMERICA
Canada Leisure 42,384 Four Seasons Hotels Inc. 495,789 1,259,691 0.9
Mining 32,925 Cambior Inc. 457,703 372,464 0.3
Natural Resources 20,000 Total Petroleum of North
America Ltd. 188,500 197,500 0.1
Total Investments in Canada 1,141,992 1,829,655 1.3
United Aerospace 110,000 ++UNC, Inc. 637,625 1,608,750 1.1
States
Airlines 28,000 ++Reno Air, Inc. 215,504 238,000 0.2
Apparel 13,200 ++Farah, Inc. 111,210 84,150 0.1
70,100 ++Norton McNaughton, Inc. 850,711 341,738 0.2
------------- ------------- ------
961,921 425,888 0.3
Automobile Parts 27,000 Walbro Corp. 494,287 529,875 0.4
Banking & Finance 6,750 Charter One Financial, Inc. 117,321 363,656 0.3
24,000 ++Civic Bancorp 294,750 318,000 0.2
8,300 Haven Bancorp, Inc. 235,863 307,100 0.2
------------- ------------- ------
647,934 988,756 0.7
Biotechnology 16,000 ++COR Therapeutics, Inc. 157,250 170,000 0.1
10,000 ++Gilead Sciences, Inc. 284,341 276,250 0.2
33,575 ++NeoRx Corp. 227,195 148,989 0.1
6,200 ++Ostex International, Inc. 53,275 13,950 0.0
7,700 ++Scios, Inc. 38,438 47,163 0.1
------------- ------------- ------
760,499 656,352 0.5
Broadcasting 65,500 ++Paxson Communications Corp. 691,960 835,125 0.6
Building & Building 24,200 ++Giant Cement Holding, Inc. 329,963 444,675 0.3
Materials 27,700 Oakwood Homes Corporation 588,398 664,800 0.5
22,300 Ryland Group, Inc. 303,251 314,988 0.2
8,200 ++Toll Brothers, Inc. 158,483 150,675 0.1
------------- ------------- ------
1,380,095 1,575,138 1.1
</TABLE>
50
<PAGE> 111
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH AMERICA Value Percent of
(concluded) Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
United Cable 13,100 ++General Cable Corp. $ 275,100 $ 335,688 0.2%
States
(concluded) Communication 12,800 ++Dynatech Corporation 389,064 457,600 0.3
Equipment
Computer Software 75,000 ++Phoenix Technologies Ltd. 988,585 975,000 0.7
12,700 ++Premenos Technology Corp. 109,394 107,950 0.1
34,900 ++Software Spectrum, Inc. 612,425 444,975 0.3
7,163 ++Sterling Commerce, Inc. 101,474 235,484 0.2
35,400 ++Structural Dynamics Research Corp. 708,579 929,250 0.7
------------- ------------- ------
2,520,457 2,692,659 2.0
Computers & Computer 16,250 ++Boole & Babbage, Inc. 335,969 339,219 0.2
Services 20,950 ++Storage Technology Corporation 743,230 932,275 0.7
10,800 ++Vanstar Corporation 96,537 152,550 0.1
25,500 ++Wang Laboratories, Inc. 545,387 543,469 0.4
------------- ------------- ------
1,721,123 1,967,513 1.4
Data Processing 72,500 ++Metromail Corporation 1,297,337 1,794,375 1.3
37,100 ++Platinum Technology, Inc. 485,504 491,575 0.3
69,000 ++Sybase, Inc. 1,160,081 1,017,750 0.7
117,300 ++VMARK Software, Inc. 1,115,086 909,075 0.6
------------- ------------- ------
4,058,008 4,212,775 2.9
Diversified 18,000 ++ACX Technologies, Inc. 383,079 405,000 0.3
Electronics 45,900 ++Alpha Industries, Inc. 346,984 381,544 0.3
15,000 ++BI, Inc. 163,785 108,750 0.1
66,500 ++C.P. Clare Corp. 565,288 1,030,750 0.7
4,000 ++CHS Electronics Inc. 72,454 105,500 0.1
16,100 ++DII Group, Inc. 349,947 708,400 0.5
6,600 ++Marshall Industries 195,530 245,850 0.2
31,800 ++Nu Horizons Electronics Corp. 282,957 258,375 0.2
14,700 ++Triumph Group, Inc. 366,858 455,700 0.3
6,100 Wyle Electronics 221,793 240,950 0.2
------------- ------------- ------
2,565,596 3,535,819 2.6
Environmental 41,514 BHA Group Inc. (Class A) 532,342 768,009 0.5
Control 59,200 ++Envirosource Inc. 225,921 118,400 0.1
------------- ------------- ------
758,263 886,409 0.6
Gaming 16,000 ++WMS Industries, Inc. 298,927 401,000 0.3
Healthcare-- 21,200 ++Magellan Health Services, Inc. 578,874 625,400 0.5
Products/Services 53,800 ++Ramsay Health Care, Inc. 330,777 161,400 0.1
------------- ------------- ------
909,651 786,800 0.6
Insurance 2,300 ++ARM Financial Group, Inc.
(Class A) 34,500 46,000 0.0
4,000 American National Insurance Co. 328,116 349,000 0.2
35,000 ++Gryphon Holdings, Inc. 494,289 533,750 0.4
37,000 PXRE Corp. 838,025 1,137,750 0.8
7,600 Security-Connecticut Corp. 178,106 418,475 0.3
------------- ------------- ------
1,873,036 2,484,975 1.7
</TABLE>
51
<PAGE> 112
<TABLE>
<S> <C> <C> <C> <C> <C>
Iron & Steel 28,800 Quanex Corporation 631,528 883,800 0.6
Machinery 12,000 AGCO Corporation 266,610 431,250 0.3
22,200 Stewart & Stevenson Services, Inc. 532,085 577,200 0.4
------------- ------------- ------
798,695 1,008,450 0.7
Medical 4,000 Analogic Corporation 68,500 136,000 0.1
19,400 ++Biomatrix, Inc. 285,121 358,900 0.2
17,200 ++Physician Computer Network, Inc. 98,652 115,025 0.1
12,000 ++Sierra Health Services Inc. 381,993 375,000 0.3
22,100 ++VISX, Inc. 562,135 524,875 0.4
18,200 ++Vivus, Inc. 417,401 432,250 0.3
------------- ------------- ------
1,813,802 1,942,050 1.4
Metals 5,500 Applied Industrial Technologies,
Inc. 157,324 198,000 0.1
15,800 Castle (A.M) & Company 291,876 348,588 0.2
17,700 ++Citation Corporation 238,490 303,112 0.2
6,500 Commonwealth Industries, Inc. 109,901 131,625 0.1
29,700 ++Shiloh Industries, Inc. 401,507 579,150 0.4
------------- ------------- ------
1,199,098 1,560,475 1.0
Natural Resources 20,300 ++Brown (Tom), Inc. 236,050 428,838 0.3
25,000 ++Plains Resources, Inc. 156,250 368,750 0.3
23,500 ++TransTexas Gas Corp. 258,500 358,375 0.2
39,474 ++Zemex Corporation 344,674 305,923 0.2
------------- ------------- ------
995,474 1,461,886 1.0
Restaurants 26,500 ++Au Bon Pain Company, Inc.
(Class A) 172,691 178,875 0.1
52,100 ++TPI Enterprises, Inc. 5,816 7,294 0.0
------------- ------------- ------
178,507 186,169 0.1
Retailing 58,500 Baker (J.), Inc. 751,804 460,687 0.3
102,300 CML Group, Inc. 255,765 185,419 0.1
25,000 ++Catherines Stores Corp. 202,020 93,750 0.1
21,700 ++Chico's Fashions, Inc. 157,663 113,925 0.1
20,300 ++Department 56, Inc. 460,150 450,406 0.3
2,200 Fingerhut Companies, Inc. 37,235 38,362 0.0
------------- ------------- ------
1,864,637 1,342,549 0.9
Telecommunications 124,100 ++Applied Digital Access, Inc. 693,077 961,775 0.7
36,900 ++Comdial Corporation 227,438 309,037 0.2
45,900 ++Metromedia International
Group, Inc. 582,537 582,356 0.4
51,300 ++Network Equipment Technologies,
Inc. 738,108 923,400 0.7
800 ++Primark Corp. 20,434 21,300 0.0
------------- ------------- ------
2,261,594 2,797,868 2.0
Transportation 10,300 Air Express International Corp. 278,291 407,494 0.3
6,100 ++Landair Services, Inc. 82,120 86,925 0.1
------------- ------------- ------
360,411 494,419 0.4
Transportation 22,043 ++Aramex International, Limited 165,901 209,408 0.1
Services
Wire & Cable Products 8,000 ++Anixter International Inc. 109,298 137,500 0.1
Total Investments in the
United States 31,921,074 37,048,696 26.1
Total Investments in North
America 33,063,066 38,878,351 27.4
</TABLE>
52
<PAGE> 113
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
PACIFIC Shares Held/ Value Percent of
BASIN Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
Australia Entertainment 1,188,000 Burswood Property Trust $ 1,567,077 $ 1,558,210 1.1%
Publishing 283,000 West Australian Newspaper
Holdings Ltd. 1,034,360 1,257,803 0.9
Total Investments in Australia 2,601,437 2,816,013 2.0
Hong Kong Banking 315,333 JCG Holdings, Ltd. 254,871 254,406 0.2
Electronic 109,000 QPL International Holdings Ltd. 88,423 92,161 0.0
Components
Financial US$ 420,000 Goldlion Capital Corp., 4.875%
Services due 2/01/1999 318,914 390,600 0.3
Foods/Food 6,892,000 Tingyi (Cayman Islands)
Processing Holdings Co. 1,575,707 1,717,039 1.2
Packaging 3,772,600 Sinocan Holdings Ltd. 1,254,878 1,862,730 1.3
Telecommunications 301,000 ++Smartone Telecommunications 587,939 683,844 0.5
Total Investments in Hong Kong 4,080,732 5,000,780 3.5
Indonesia Banking-- 303,000 PT Bank Bali (Foreign) 634,023 810,494 0.6
International
Consumer--Goods 2,006,500 PT Wicaksana Overseas
International 2,517,754 2,456,517 1.7
Real Estate 474,000 PT Ciputra Development (Foreign) 463,436 473,025 0.3
Textiles & Apparel 1,093,500 PT Great River Industries 496,241 686,250 0.5
Total Investments in Indonesia 4,111,454 4,426,286 3.1
Japan Automobile Parts 11,700 Exedy Corporation 199,379 149,227 0.1
58,000 Murakami Corporation 1,148,025 633,354 0.4
50,000 Showa Corporation 502,169 424,129 0.3
55,000 Yamakawa Industrial Co. 695,828 208,046 0.2
------------- ------------- ------
2,545,401 1,414,756 1.0
Beverages 79,000 Hokkaido Coca-Cola Bottling Co.,
Ltd. 1,298,058 1,083,515 0.7
74,000 Sanyo Coca-Cola Bottling Co., Ltd. 1,118,168 976,151 0.7
------------- ------------- ------
2,416,226 2,059,666 1.4
Chemicals 50,000 Canon Chemicals, Inc. 934,042 1,070,149 0.8
Computer Services 15,000 Sumisho Computer Systems Corp. 249,015 300,079 0.2
51,700 TKC Corporation 1,374,367 1,296,226 0.9
------------- ------------- ------
1,623,382 1,596,305 1.1
Construction 89,600 Japan Foundation Engineering Co.,
Ltd. 1,735,016 978,422 0.7
157,000 Yondenko Corp. 1,518,456 1,071,171 0.7
------------- ------------- ------
3,253,472 2,049,593 1.4
Consumer Electricals 59,000 Roland Corporation 1,429,975 1,453,481 1.0
Electrical Equipment 26,000 Shinmei Electric Co. 1,340,491 515,594 0.4
48,000 Sukegawa Electric Co. 630,495 211,759 0.1
------------- ------------- ------
1,970,986 727,353 0.5
Electronic Components 35,000 Chiyoda Integre Co., Ltd. 220,393 244,606 0.2
Foods/Food Processing 43,000 Ariake Japan Co., Ltd. 1,525,975 1,645,322 1.2
Health Services 25,000 Kanto Biomedical Laboratory Co. 528,125 386,564 0.3
26,000 SRL Inc. 557,018 399,755 0.3
------------- ------------- ------
</TABLE>
53
<PAGE> 114
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
1,085,143 786,319 0.6
Industrials 14,500 Nitto Kohki Company Ltd. 488,740 485,149 0.3
Iron & Steel 218,000 Nippon Chutetsukan K.K. 1,367,147 818,905 0.6
Machinery 27,000 Miura Co., Ltd. 449,645 382,109 0.3
Metal Fabrication 124,000 Toyo Kohan Co., Ltd. 1,057,406 1,059,422 0.7
Pollution Control 168,000 Organo Corporation 1,844,463 1,386,914 1.0
Real Estate 53,000 Keihanshin Real Estate Co. Ltd. 525,507 358,828 0.2
56,000 TOC Company Ltd. 596,958 665,327 0.5
------------- ------------- ------
1,122,465 1,024,155 0.7
Restaurants 47,000 Aim Services Co., Ltd. 1,405,610 681,576 0.5
49,000 Mos Food Services, Inc. 1,431,739 907,487 0.6
83,000 Ohsho Food Service Corp. 2,244,318 1,261,641 0.9
------------- ------------- ------
5,081,667 2,850,704 2.0
Retail Specialty 66,000 ADO Electric Industrial Co., Ltd. 1,956,905 1,602,865 1.1
60,000 Arcland Sakamoto Co., Ltd. 964,197 728,575 0.5
30,000 Nitori Co. 906,611 393,116 0.3
------------- ------------- ------
3,827,713 2,724,556 1.9
Services 66,000 Ichinen Co., Ltd. 1,663,714 789,901 0.6
Trading 34,000 Japan CBM Corp. 1,197,480 1,054,425 0.7
Trucking 108,000 Nippon Konpo Unyu Soko Co. 1,045,185 786,861 0.6
Total Investments in Japan 36,150,620 26,410,651 18.6
Malaysia Advertising 221,000 Seni Jaya Corporation BHD 708,918 998,296 0.7
Chemicals 109,000 Chemical Company of Malaysia BHD 340,194 295,855 0.2
Consumer Products 290,000 Amway (Malaysia) Holdings BHD 1,781,860 1,723,660 1.2
& Services
Engineering & 378,000 Asas Dunia BHD 1,355,969 1,220,708 0.9
Construction
Newspaper/ 143,000 New Straits Times Press BHD 602,724 838,610 0.6
Publishing
Total Investments in Malaysia 4,789,665 5,077,129 3.6
New Zealand Agriculture 1,090,500 Wrightson Ltd. 808,404 694,485 0.5
Chemicals 146,000 Fernz Corporation Ltd. 439,021 494,575 0.4
Textiles 176,150 Lane Walker Rudkin Industries,
Ltd. 196,618 186,173 0.1
Total Investments in New Zealand 1,444,043 1,375,233 1.0
Philippines Banking 31,392 ++Security Bank Corporation 24,933 37,527 0.0
Financial Services 46,128 Far East Bank & Trust Company 83,473 115,539 0.1
Total Investments in the
Philippines 108,406 153,066 0.1
South Korea Banking 69,700 Cho-Hung Bank Co. Ltd. 461,958 473,425 0.3
Tire & Rubber 42,390 Korea Kumho Petrochemical Co. 302,607 294,721 0.2
Total Investments in South Korea 764,565 768,146 0.5
Thailand Transportation 62,000 Thoresen Thai Agency PLC 'Express'
(Warrants) (d) 0 61 0.0
322,800 Thoresen Thai Agency PLC 'Foreign' 783,253 209,003 0.1
Total Investments in Thailand 783,253 209,064 0.1
Total Investments in the Pacific
Basin 54,834,175 46,236,368 32.5
</TABLE>
54
<PAGE> 115
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
SOUTHEAST Value Percent of
ASIA Shares Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
India Financial Services 24,764 ++Industrial Credit & Investment
Corporation of India Ltd. (ICICI)
(GDR)(b) $ 277,849 $ 355,982 0.2%
Hotels 59,400 EIH Limited (GDR)(b)(c) 576,350 980,100 0.7
Recreation & 250,000 Su-Raj Diamonds Ltd. 346,583 116,003 0.1
Consumer Goods
Total Investments in Southeast
Asia 1,200,782 1,452,085 1.0
OPTIONS Nominal Value Covered Premiums
PURCHASED by Options Purchased Paid
Currency Put 5,200,000 Japanese Yen, expiring February
Options Purchased 1998 at YEN 120 77,740 39,000 0.0
Total Investments in Options
Purchased 77,740 39,000 0.0
Total Investments $ 140,732,995 144,314,462 101.5
=============
Variation Margin on Stock Index Futures Contracts* 76,475 0.1
Unrealized Appreciation on Forward Foreign Exchange Contracts** 63,990 0.0
Liabilities in Excess of Other Assets (2,282,718) (1.6)
------------- ------
Net Assets $ 142,172,209 100.0%
============= ======
<FN>
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
(c)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securitites Act of 1933.
(d)Warrants entitle the Fund to purchase a predetermined number of
shares of stock/face amount of bonds at a predetermined price
until the expiration date.
++Non-income producing security.
*Stock index futures contracts sold as of June 30, 1997 were as
follows:
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
23 S&P Index CME September 1997 $10,237,875
Total Stock Index Futures Contracts Sold
(Total Contract Price--$10,331,025) $10,237,875
===========
**Forward foreign exchange contracts sold as of June 30, 1997 were
as follows:
Unrealized
Foreign Currency Expiration Appreciation
Sold Date (Note 1c)
NZ$ 1,554,000 August 1997 $ 21,066
YEN 1,499,543,260 July 1997 42,924
Total Unrealized Appreciation on Forward Foreign
Exchange Contracts--Net
(US$ Commitment--$14,269,542) $ 63,990
===========
See Notes to Financial Statements.
</TABLE>
55
<PAGE> 116
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$140,655,255) (Note 1a) $144,275,462
Options purchased, at value (premiums paid--$77,740) (Notes 1a & 1c) 39,000
Unrealized appreciation on forward foreign exchange contracts
(Note 1c) 63,990
Foreign cash (Note 1d) 958,811
Cash on deposit for stock index futures contracts 500,000
Variation margin on stock index futures contracts (Note 1c) 76,475
Receivables:
Securities sold $ 5,399,278
Dividends 418,635
Capital shares sold 33,930
Interest 8,484 5,860,327
------------
Deferred organization expenses (Note 1g) 76,377
Prepaid registration fees and other assets (Note 1g) 206,540
------------
Total assets 152,056,982
------------
Liabilities: Payables:
Securities purchased 3,859,094
Capital shares redeemed 452,806
Distributor (Note 2) 103,318
Investment adviser (Note 2) 102,269 4,517,487
------------
Accrued expenses and other liabilities 5,367,286
------------
Total liabilities 9,884,773
------------
Net Assets: Net assets $142,172,209
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 51,513
Class B Common Stock, $0.10 par value, 100,000,000 shares
authorized 1,055,848
Class C Common Stock, $0.10 par value, 100,000,000 shares
authorized 56,667
Class D Common Stock, $0.10 par value, 100,000,000 shares
authorized 182,421
Paid-in capital in excess of par 136,197,064
Undistributed realized capital gains on investments and
foreign currency transactions--net 896,735
Unrealized appreciation on investments and foreign currency
transactions--net 3,731,961
------------
Net assets $142,172,209
============
Net Asset Class A--Based on net assets of $5,508,051 and 515,134
Value: shares outstanding $ 10.69
============
Class B--Based on net assets of $111,260,842 and 10,558,477
shares outstanding $ 10.54
============
Class C--Based on net assets of $5,962,238 and 566,674
shares outstanding $ 10.52
============
Class D--Based on net assets of $19,441,078 and 1,824,208
shares outstanding $ 10.66
============
See Notes to Financial Statements.
</TABLE>
56
<PAGE> 117
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended June 30, 1997
<S> <S> <C> <C>
Investment Dividends (net of $206,666 foreign withholding tax) $ 1,849,337
Income Interest and discount earned 509,261
(Notes 1e & 1f): ------------
Total income 2,358,598
------------
Expenses: Investment advisory fees (Note 2) $ 1,260,012
Account maintenance and distribution fees--Class B (Note 2) 1,184,206
Transfer agent fees--Class B (Note 2) 271,529
Custodian fees 222,107
Printing and shareholder reports 138,849
Accounting services (Note 2) 123,555
Professional fees 76,527
Registration fees (Note 1g) 75,851
Account maintenance and distribution fees--Class C (Note 2) 56,970
Account maintenance fees--Class D (Note 2) 51,012
Transfer agent fees--Class D (Note 2) 39,059
Directors' fees and expenses 36,887
Amortization of organization expenses (Note 1g) 36,661
Pricing fees 29,498
Transfer agent fees--Class C (Note 2) 13,937
Transfer agent fees--Class A (Note 2) 6,970
Other 8,275
------------
Total expenses 3,631,905
------------
Investment loss--net (1,273,307)
------------
Realized & Realized gain from:
Unrealized Gain Investments--net 3,622,812
(Loss) on Foreign currency transactions--net 1,630,794 5,253,606
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 4,953,964
(Notes 1c, 1d, Foreign currency transactions--net (478,492) 4,475,472
1f & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 9,729,078
------------
Net Increase in Net Assets Resulting from Operations $ 8,455,771
============
See Notes to Financial Statements.
</TABLE>
57
<PAGE> 118
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
June 30,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment loss--net $ (1,273,307) $ (795,024)
Realized gain on investments and foreign currency transactions
--net 5,253,606 16,571,278
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 4,475,472 15,421,162
------------ ------------
Net increase in net assets resulting from operations 8,455,771 31,197,416
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (27,732) (19,859)
Shareholders Class B (680,759) (619,675)
(Note 1h): Class C (34,097) (22,117)
Class D (163,840) (214,561)
In excess of investment income--net:
Class A (66,906) --
Class B (1,642,412) --
Class C (82,264) --
Class D (395,284) --
Realized gain on investments--net:
Class A (179,170) (10,675)
Class B (6,808,450) (682,938)
Class C (324,707) (24,845)
Class D (1,160,558) (131,445)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (11,566,179) (1,726,115)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (17,802,460) (33,525,896)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (20,912,868) (4,054,595)
Beginning of year 163,085,077 167,139,672
------------ ------------
End of year* $142,172,209 $163,085,077
============ ============
<FN>
*Undistributed investment income--net (Note 1i) $ -- $ 2,179,735
============ ============
See Notes to Financial Statements.
</TABLE>
58
<PAGE> 119
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Oct. 21, For the Aug. 5,
financial statements. Year Ended 1994++ to Year Ended 1994++ to
June 30, June 30, June 30, June 30,
Increase (Decrease) in Net Asset Value: 1997++++ 1996 1995 1997++++ 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.86 $ 8.92 $ 9.82 $ 10.71 $ 8.84 $ 10.00
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .01 .13 .04 (.10) (.06) .01
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .72 1.97 (.93) .72 2.04 (1.16)
-------- -------- -------- -------- -------- --------
Total from investment operations .73 2.10 (.89) .62 1.98 (1.15)
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.09) (.10) -- (.06) (.05) --
In excess of investment income--net (.22) -- -- (.14) -- --
Realized gain on investments--net (.59) (.06) -- (.59) (.06) --
In excess of realized gain on
investments--net -- -- (.01) -- -- (.01)
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.90) (.16) (.01) (.79) (.11) (.01)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 10.69 $ 10.86 $ 8.92 $ 10.54 $ 10.71 $ 8.84
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 7.53% 23.87% (9.11%)+++ 6.47% 22.57% (11.55%)+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.53% 1.55% 1.62%* 2.58% 2.61% .83%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income (loss)--net .13% .46% 1.06%* (1.00%) (.66%) .10%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 5,508 $ 3,083 $ 5,992 $111,261 $131,656 $132,296
======== ======== ======== ======== ======== ========
Portfolio turnover 63.17% 60.33% 47.96% 63.17% 60.33% 47.96%
======== ======== ======== ======== ======== ========
Average commission rate paid+++++ $ .0104 $ .0011 -- $ .0104 $ .0011 --
======== ======== ======== ======== ======== ========
<FN>
*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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may significantly affect
the rate shown.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
59
<PAGE> 120
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Oct. 21, For the Aug. 5,
financial statements. Year Ended 1994++ to Year Ended 1994++ to
June 30, June 30, June 30, June 30,
Increase (Decrease) in Net Asset Value: 1997++++ 1996 1995 1997++++ 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.71 $ 8.84 $ 9.80 $ 10.83 $ 8.91 $ 10.00
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.10) (.05) .01 (.02) .02 .08
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .71 2.03 (.96) .72 2.05 (1.16)
-------- -------- -------- -------- -------- --------
Total from investment operations .61 1.98 (.95) .70 2.07 (1.08)
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.06) (.05) -- (.08) (.09) --
In excess of investment income--net (.15) -- -- (.20) -- --
Realized gain on investments--net (.59) (.06) -- (.59) (.06) --
In excess of realized gain on
investments--net -- -- (.01) -- -- (.01)
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.80) (.11) (.01) (.87) (.15) (.01)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 10.52 $ 10.71 $ 8.84 $ 10.66 $ 10.83 $ 8.91
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.38% 22.56% (9.75%)+++ 7.27% 23.50% (10.85%)+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses 2.60% 2.63% 2.66%* 1.80% 1.83% 1.77%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income (loss)--net (1.00%) (.64%) .20%* (.21%) .10% .90%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 5,962 $ 5,753 $ 4,924 $ 19,441 $ 22,593 $ 23,928
======== ======== ======== ======== ======== ========
Portfolio turnover 63.17% 60.33% 47.96% 63.17% 60.33% 47.96%
======== ======== ======== ======== ======== ========
Average commission rate paid+++++ $ .0104 $ .0011 -- $ .0104 $ .0011 --
======== ======== ======== ======== ======== ========
<FN>
*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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may significantly affect
the rate shown.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
60
<PAGE> 121
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).
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
61
<PAGE> 122
NOTES TO FINANCIAL STATEMENTS (continued)
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 dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined 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. Distributions in
excess of investment are due primarily to differing tax treatments
for foreign currency transactions.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting for
foreign exchange transactions. Accordingly, current year's permanent
book/tax differences of $2,186,866 have been reclassified between
undistributed net realized capital gains and accumulated net
investment loss. These reclassifications have no effect on net
assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM" or "Investment
Adviser"). 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, 1997, MLAM paid
MLAM U.K. a fee of $144,451 pursuant to such Agreement.
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:
62
<PAGE> 123
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, 1997, 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 $ 4 $ 100
Class D $1,954 $29,612
For the year ended June 30, 1997, MLPF&S received contingent
deferred sales charges of $13,831 and $2,530 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $56,999 in commissions on the execution
of portfolio security transactions for the year ended June 30, 1997.
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., MLFD, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 1997 were $87,919,940 and $100,594,474,
respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were
as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Investments:
Long-term $ 4,855,377 $ 3,620,207
Short-term 29,464 --
Stock index futures contracts (1,124,529) 93,150
Options written (137,500) --
------------ ------------
Total investments 3,622,812 3,713,357
------------ ------------
Currency transactions:
Options purchased (169,509) (38,740)
Options written 13,143 --
Foreign currency transactions (274,830) (6,646)
Forward foreign exchange
contracts 2,061,990 63,990
------------ ------------
Total currency transactions 1,630,794 18,604
------------ ------------
Total $ 5,253,606 $ 3,731,961
============ ============
As of June 30, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $3,076,987, of which $21,147,838 related to
appreciated securities and $18,070,851 related to depreciated
securities. The aggregate cost of investments, at June 30, 1997 for
Federal income tax purposes was $141,198,475.
Transactions in put options written for the year ended June 30, 1997
were as follows:
Nominal Value
Covered by Put Premiums
Options Written Paid
Outstanding put options written,
beginning of year -- --
Options written 780,000 $ 13,143
Options exercised (780,000) (13,143)
---------- ----------
Outstanding put options written,
end of year -- $ --
========== ==========
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $17,802,460 and $33,525,896 for the years ended June 30, 1997
and June 30, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Year Ended Dollar
June 30, 1997 Shares Amount
Shares sold 640,103 $ 6,302,473
Shares issued to shareholders in
reinvestment of dividends and
distributions 25,500 247,091
------------ ------------
Total issued 665,603 6,549,564
Shares redeemed (434,307) (4,334,013)
------------ ------------
Net increase 231,296 $ 2,215,551
============ ============
63
<PAGE> 124
NOTES TO FINANCIAL STATEMENTS (concluded)
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 B Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
Shares sold 2,372,220 $ 24,001,485
Shares issued to shareholders in
reinvestment of dividends and
distributions 555,932 5,336,945
------------ ------------
Total issued 2,928,152 29,338,430
Automatic conversion of shares (31,361) (318,122)
Shares redeemed (4,628,694) (46,586,988)
------------ ------------
Net decrease (1,731,903) $(17,566,680)
============ ============
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 C Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
Shares sold 251,158 $ 2,498,757
Shares issued to shareholders in
reinvestment of dividends and
distributions 41,482 397,810
------------ ------------
Total issued 292,640 2,896,567
Shares redeemed (263,160) (2,632,858)
------------ ------------
Net increase 29,480 $ 263,709
============ ============
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 D Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
Shares sold 599,650 $ 6,180,271
Automatic conversion of shares 31,011 318,122
Shares issued to shareholders in
reinvestment of dividends and
distributions 99,660 963,719
------------ ------------
Total issued 730,321 7,462,112
Shares redeemed (992,678) (10,177,152)
------------ ------------
Net decrease (262,357) $ (2,715,040)
============ ============
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)
============ ============
5. Commitments:
At June 30, 1997, 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 $1,416,000 and
$3,135,000, respectively.
64
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<PAGE> 127
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..................... 13
Initial Sales Charge Alternatives --
Class A and Class D Shares........ 13
Reduced Initial Sales Charges --
Class A and Class D Shares........ 15
Distribution Plans................... 17
Limitations on the Payment of
Deferred Sales Charges............ 18
Redemption of Shares................... 19
Deferred Sales Charges -- Class B and
Class C Shares.................... 20
Portfolio Transactions and Brokerage... 20
Determination of Net Asset Value....... 22
Shareholder Services................... 23
Investment Account................... 23
Automatic Investment Plans........... 24
Automatic Reinvestment of Dividends
and Capital Gains Distributions... 24
Systematic Withdrawal Plans.......... 24
Exchange Privilege................... 26
Dividends, Distributions and Taxes..... 28
Tax Treatment of Options, Futures and
Forward Foreign Exchange
Transactions...................... 30
Special Rules for Certain Foreign
Currency Transactions............. 31
Performance Data....................... 32
General Information.................... 34
Description of Shares................ 34
Computation of Offering Price Per
Share............................. 35
Independent Auditors................. 35
Custodian............................ 35
Transfer Agent....................... 35
Legal Counsel........................ 35
Reports to Shareholders.............. 36
Additional Information............... 36
Security Ownership of Certain
Beneficial Owners................. 36
Appendix............................... 37
Independent Auditors' Report........... 45
Financial Statements................... 46
Code # 18186-0997
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
STATEMENT OF
ADDITIONAL
INFORMATION
September 26, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
[MLYNCH COMPASS]
<PAGE> 128
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 IMDATE OR IMAGE IN TEST
- ---------------------- -------------------
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.
