<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1998
SECURITIES ACT FILE NO. 33-53399
INVESTMENT COMPANY ACT FILE NO. 811-07171
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 5 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 7 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
---------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS:
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
</TABLE>
---------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X]immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Shares of Common Stock, par value $.10
per share
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
OCTOBER 1, 1998
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 (the
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), 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 $250 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 Financial Data Services, Inc. (the "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 COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated October 1, 1998 (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 regarding the Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
----------------
Merrill Lynch Asset Management -- Manager
Merrill Lynch Funds Distributor -- Distributor
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a)
---------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ......................... 5.25%(c)
Sales Charge Imposed on Dividend Reinvestments ......... None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is
lower) ................................................ None(d)
Exchange Fee ........................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees(g) ..................................... 0.85%
Rule 12b-l Fees(h):
Account Maintenance Fees .............................. None
Distribution Fees ..................................... None
Other Expenses:
Shareholder Servicing Costs(i) ......................... .20%
Other .................................................. .58%
--------
Total Other Expenses .................................. .78%
--------
Total Fund Operating Expenses ........................... 1.63%
========
<CAPTION>
CLASS B(b) CLASS C CLASS D
-------------------------------------- ---------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ......................... None None 5.25%(c)
Sales Charge Imposed on Dividend Reinvestments ......... None None None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is
lower) ................................................ 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% annually year(f)
thereafter to 0.0%
after the fourth year(e)
Exchange Fee ........................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees(g) ..................................... 0.85% 0.85% 0.85%
Rule 12b-l Fees(h):
Account Maintenance Fees .............................. 0.25% 0.25% 0.25%
Distribution Fees ..................................... 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:
Shareholder Servicing Costs(i) ......................... .24% .26% .20%
Other .................................................. .58% .58% .58%
---- ---- --------
Total Other Expenses .................................. .82% .84% .78%
---- ---- --------
Total Fund Operating Expenses ........................... 2.67% 2.69% 1.88%
==== ==== ========
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in certain
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 28 and "Shareholder
Services -- Fee-Based Programs" -- page 40.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 30.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A or Class D purchases of $1,000,000 or
more may not be subject to an initial sales charge. See "Purchase of Shares
-- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 28.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. A 0.75% sales
charge for 401(k) purchases over $1,000,000 will apply. See "Shareholder
Services -- Fee-Based Programs" -- page 40.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 40.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 40.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
24.
(h) See "Purchase of Shares -- Distribution Plans" -- page 33.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 26.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales charge (Class A and Class
D shares only) and assuming (1) the Total Fund Operating Expenses for each
class set forth on page 2, (2) a 5% annual return throughout the periods and
(3) redemption at the end of the period (including any applicable CDSC for
Class B and Class C shares):
Class A ........................................................ $68 $101 $137 $ 236
Class B ........................................................ $67 $103 $142 $ 282*
Class C ........................................................ $37 $ 84 $142 $ 302
Class D ........................................................ $71 $108 $149 $ 261
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A ........................................................ $68 $101 $137 $ 236
Class B ........................................................ $27 $ 83 $142 $ 282*
Class C ........................................................ $27 $ 84 $142 $ 302
Class D ........................................................ $71 $108 $149 $ 261
</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>
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 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."
4
<PAGE>
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. The Manager
is owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co."), a financial
services holding company and the parent of Merrill Lynch. Merrill Lynch Asset
Management U.K. Limited ("MLAM U.K."), an indirect, wholly owned subsidiary of
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 Asset Management Group of ML & Co. (which includes the Manager), acts
as the investment adviser to more than 100 registered investment companies and
offers portfolio management services to individuals and institutions. As of
August 1998, the Asset Management Group had a total of approximately $473
billion in investment company and other portfolio assets under management. This
amount includes assets managed for 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 capital gains, if any, will be distributed to the
Fund's shareholders at least annually. See "Additional Information -- Dividends
and Distributions."
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily as
of 15 minutes after the close of business on the New York Stock Exchange (the
"NYSE") (generally 4:00 p.m., New York time), on each day during which the NYSE
is open for trading. See "Additional Information -- Determination of Net Asset
Value."
5
<PAGE>
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by MLAM or FAM, an affiliate of MLAM.
Funds advised by MLAM or FAM 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."
6
<PAGE>
<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% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(4) eight years(5)
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>
- --------
(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 retire-
ment 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. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply. 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."
7
<PAGE>
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, as well as 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 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 shares), 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.
8
<PAGE>
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 CDSCs imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation 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>
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, 1998,
appear in the annual report of the Fund for the fiscal year ended June 30, 1998
(the "Annual Report"), which has been incorporated by reference into the
Statement of Additional Information. Further information about the performance
of the Fund is also contained in the Annual Report, 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
------------------------------------------------------
FOR THE YEAR
ENDED JUNE 30, FOR THE PERIOD
---------------------------------- OCTOBER 21, 1994+
TO JUNE 30,
1998++ 1997++ 1996 1995
----------- ----------- ---------- -------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......... $ 10.69 $ 10.86 $ 8.92 $ 9.82
-------- ------- ------- --------
Investment income (loss) -- net ............. ( .01) .01 .13 .04
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net ........................ ( .81) .72 1.97 ( .93)
-------- ------- ------- ---------
Total from investment operations ............. ( .82) .73 2.10 ( .89)
-------- ------- ------- ---------
Less dividends and distributions:
Investment income -- net ................... -- ( .09) ( .10) --
In excess of investment income -- net ...... -- ( .22) -- --
Realized gain on investments -- net ........ -- ( .59) ( .06) --
In excess of realized gain on
investments -- net ........................ ( .42) -- -- ( .01)
-------- -------- ------- ---------
Total dividends and distributions ............ ( .42) ( .90) ( .16) ( .01)
-------- -------- ------- ---------
Net asset value, end of period ............... $ 9.45 $ 10.69 $ 10.86 $ 8.92
======== ======== ======= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........... (7.15%) 7.53% 23.87% (9.11 %)#
======== ======== ======= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses ..................................... 1.63% 1.53% 1.55% 1.62%*
======== ======== ======= =========
Investment income (loss) -- net .............. ( .15%) .13% .46% 1.06%*
======== ======== ======= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ..... $ 4,376 $ 5,508 $ 3,083 $ 5,992
======== ======== ======= =========
Portfolio turnover ........................... 52.73% 63.17% 60.33% 47.96 %
======== ======== ======= =========
<CAPTION>
CLASS B
------------------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED JUNE 30, AUG. 5, 1994+
-------------------------------------- TO JUNE 30,
1998++ 1997++ 1996 1995
----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......... $ 10.54 $ 10.71 $ 8.84 $ 10.00
------- ------- ------- ---------
Investment income (loss) -- net ............. ( .12) ( .10) ( .06) .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net ........................ ( .78) .72 2.04 ( 1.16)
------- ------- ------- ----------
Total from investment operations ............. ( .90) .62 1.98 ( 1.15)
------- ------- ------- ----------
Less dividends and distributions:
Investment income -- net ................... -- ( .06) ( .05) --
In excess of investment income -- net ...... -- ( .14) -- --
Realized gain on investments -- net ........ -- ( .59) ( .06) --
In excess of realized gain on
investments -- net ........................ ( .36) -- -- ( .01)
------- ------- ------- ----------
Total dividends and distributions ............ ( .36) ( .79) ( .11) ( .01)
------- ------- ------- ----------
Net asset value, end of period ............... $ 9.28 $ 10.54 $ 10.71 $ 8.84
======= ======= ======= ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........... (8.15%) 6.47% 22.57% (11.55 %)#
======= ======= ======= ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ..................................... 2.67% 2.58% 2.61% 2.56%*
======= ======= ======= ==========
Investment income (loss) -- net .............. ( 1.25%) ( 1.00%) ( .66%) .10%*
======= ======= ======= ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ..... $57,424 $111,261 $131,656 $ 132,296
======= ======== ======== ==========
Portfolio turnover ........................... 52.73% 63.17% 60.33% 47.96 %
======= ======== ======== ==========
</TABLE>
- -------
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
+ Commencement of Operations.
++ Based on average shares outstanding.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------
FOR THE YEAR
ENDED JUNE 30, FOR THE PERIOD
------------------------------------ OCTOBER 21, 1994+
TO JUNE 30,
1998++ 1997++ 1996 1995
----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......... $ 10.52 $ 10.71 $ 8.84 $ 9.80
-------- -------- -------- --------
Investment income (loss) -- net ............. ( .12) ( .10) ( .05) .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net ........................ ( .79) .71 2.03 ( .96)
-------- -------- -------- ---------
Total from investment operations ............. ( .91) .61 1.98 ( .95)
-------- -------- -------- ---------
Less dividends and distributions:
Investment income -- net ................... -- ( .06) ( .05) --
In excess of investment income -- net ...... -- ( .15) -- --
Realized gain on investments -- net ........ -- ( .59) ( .06) --
In excess of realized gain on
investments -- net ........................ ( .36) -- -- ( .01)
-------- -------- -------- ---------
Total dividends and distributions ............ ( .36) ( .80) ( .11) ( .01)
-------- -------- -------- ---------
Net asset value, end of period ............... $ 9.25 $ 10.52 $ 10.71 $ 8.84
======== ======== ======== =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........... ( 8.19%) 6.38% 22.56% (9.75%)#
======== ======== ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses ..................................... 2.69% 2.60% 2.63% 2.66%*
======== ======== ======== =========
Investment income (loss) -- net .............. ( 1.23%) ( 1.00%) ( .64%) .20%*
======== ======== ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ..... $ 4,312 $ 5,962 $ 5,753 $ 4,924
======== ======== ======== =========
Portfolio turnover ........................... 52.73% 63.17% 60.33% 47.96 %
======== ======== ======== =========
<CAPTION>
CLASS D
----------------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED JUNE 30, AUGUST 5, 1994+
----------------------------------- TO JUNE 30,
1998++ 1997++ 1996 1995
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......... $ 10.66 $ 10.83 $ 8.91 $ 10.00
------- ------- ------- ---------
Investment income (loss) -- net ............. ( .05) ( .02) .02 .08
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net ........................ ( .79) .72 2.05 ( 1.16)
------- ------- ------- ----------
Total from investment operations ............. ( .84) .70 2.07 ( 1.08)
------- ------- ------- ----------
Less dividends and distributions:
Investment income -- net ................... -- ( .08) ( .09) --
In excess of investment income -- net ...... -- ( .20) -- --
Realized gain on investments -- net ........ -- ( .59) ( .06) --
In excess of realized gain on
investments -- net ........................ ( .41) -- -- ( .01)
------- ------- ------- ----------
Total dividends and distributions ............ ( .41) ( .87) ( .15) ( .01)
------- ------- ------- ----------
Net asset value, end of period ............... $ 9.41 $ 10.66 $ 10.83 $ 8.91
======= ======= ======= ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........... ( 7.43%) 7.27% 23.50% (10.85 %)#
======= ======= ======= ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ..................................... 1.88% 1.80% 1.83% 1.77%*
======= ======= ======= ==========
Investment income (loss) -- net .............. ( .46%) ( .21%) .10% .90%*
======= ======= ======= ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ..... $11,026 $19,441 $22,593 $ 23,928
======= ======= ======= ==========
Portfolio turnover ........................... 52.73% 63.17% 60.33% 47.96 %
======= ======= ======= ==========
</TABLE>
- -------
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
+ Commencement of Operations.
++ Based on average shares outstanding.
11
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
INVESTING IN SMALLCAP ISSUERS. Under normal market conditions, the Fund
expects to invest at least 66% of its assets in equity securities of SmallCap
Issuers. Based on recent U.S. share prices, the Fund considers SmallCap Issuers
to be issuers with individual market capitalizations of no greater than $1
billion (determined at the time of purchase). While the SmallCap Issuers in
which the Fund will primarily invest may offer greater opportunities for capital
appreciation than LargeCap Issuers, investments in smaller companies may involve
greater risks and thus may be considered speculative. For example, small
companies may have limited product lines, markets or financial resources, or
they may be dependent on a limited management group. Full development of these
companies takes time and, for this reason, the Fund should be considered as a
long-term investment and not as a vehicle for seeking short-term profits, nor
should an investment in the Fund be considered a complete investment program. In
addition, many small company stocks trade less frequently and in smaller volume,
and may be subject to more abrupt or erratic price movements, than stocks of
large companies. The securities of small companies may also be more sensitive to
market changes than the securities of large companies. These factors may result
in above-average fluctuations in the net asset value of the Fund's shares. The
Fund is not an appropriate investment for individual investors requiring safety
of principal or a predictable return of income from their investment.
INTERNATIONAL INVESTING. International investments involve certain risks
not involved in domestic investments, including fluctuations in foreign exchange
rates, future political and economic developments, different legal systems and
the existence or possible imposition of exchange controls or other foreign or
U.S. governmental laws or restrictions applicable to such investments.
Securities prices in different countries are subject to different economic,
financial, political and social factors. Because the Fund will invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities in
the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets. These
forces are, in turn, affected by international balance of payments and other
economic and financial conditions, government intervention, speculation and
other factors. With respect to certain countries, there may be the possibility
of expropriation of assets, confiscatory taxation, high rates of inflation,
political or social instability or diplomatic developments which could affect
investment in those countries. In addition, certain foreign investments may be
subject to foreign withholding taxes. As a result, management of the Fund may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country.
Most of the securities held by the Fund will not be registered with the
Commission, nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which U.S. companies are
subject. Moreover, because the Fund emphasizes the stocks of issuers with
smaller market capitalizations (by U.S. standards), the Fund can be expected to
have more difficulty obtaining information about the issuers or valuing or
disposing of its securities than it would if it were to concentrate on more
widely held stocks.
Foreign financial markets often have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices may be more volatile than securities of comparable
domestic companies. Such markets have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities 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
12
<PAGE>
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon and could cause the Fund to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Brokerage commissions and other transaction costs on
foreign securities exchanges are generally higher than in the U.S. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in foreign countries than there is in the U.S.
A significant portion of the Fund's assets may be invested in the
developing countries of the world, including, but not limited to, countries
located in Eastern Europe, Latin America and the Far East. The risks noted above
as well as in "Restrictions on Foreign Investment" below are often heightened
for investments in developing countries, which may increase the volatility of
the Fund's net asset value.
Certain developing countries are especially large debtors. Trading in debt
obligations ("sovereign debt obligations") issued or guaranteed by developing
governments or their agencies and instrumentalities ("foreign governmental
entities") involves a high degree of risk. The foreign governmental entity that
controls the repayment of sovereign debt obligations may not be willing or able
to repay the principal and/or interest when due in accordance with the terms of
such obligations. A foreign governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the relative size of the debt service
burden to the economy as a whole, the foreign governmental entity's dependence
on expected disbursements from third parties, the foreign governmental entity's
policy toward the International Monetary Fund and the political constraints to
which a foreign governmental entity may be subject. As a result, foreign
governmental entities may default on their sovereign debt obligations. Holders
of sovereign debt obligations (including the Fund) may be requested to
participate in the rescheduling of such debt and to extend further loans to
foreign governmental entities. In the event of a default by a foreign
governmental entity, the Fund may have few or no effective legal remedies.
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts") or other securities convertible
into securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the securities underlying
unsponsored Depositary Receipts may not be obligated to report financial
information comparable to domestic issuers in the United States and, therefore,
there may be less information available regarding such issuers. Depositary
Receipts also involve the risks of other investments in foreign securities, as
discussed above.
RESTRICTIONS ON FOREIGN INVESTMENT. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons in a company to only a
specific 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
13
<PAGE>
occur on a timely basis, resulting in a delay during which the Fund may be
denied certain of its rights as an investor, including rights as to dividends or
to be made aware of certain corporate actions. There also may be instances where
the Fund places a purchase order but is subsequently informed, at the time of
re-registration, that the permissible allocation of the investment to foreign
investors has been filled, depriving the Fund of the ability to make its desired
investment at that time.
Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or the proceeds of sales
of securities by foreign investors. The Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments. No more than 15% of the Fund's net assets may be
comprised, in the aggregate, of assets which are (i) subject to material legal
restrictions on repatriation or (ii) invested in illiquid securities. Even where
there is no outright restriction on repatriation of capital, the mechanics of
repatriation may affect certain aspects of the operations of the Fund.
A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their capital
markets. In accordance with the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Fund may invest up to 10% of its total assets in
securities of closed-end investment companies. This restriction on investments
in securities of closed-end investment companies may limit opportunities for the
Fund to invest indirectly in certain smaller capital markets. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including management fees) and,
indirectly, the expenses of such closed-end investment companies. The Fund also
may seek, at its own cost, to create its own investment entities under the laws
of certain countries.
INVESTING IN DEBT SECURITIES; NO RATING CRITERIA FOR DEBT SECURITIES. While
the Fund intends to invest primarily in equity securities, the Fund reserves the
right to invest up to 34% of its total assets, under normal market conditions,
in debt securities, including high yield/high risk securities (as defined
below), foreign sovereign debt obligations, debt obligations of the U.S.
government or its political subdivisions ("U.S. Government Obligations") and
short-term securities such as money market securities or commercial paper. The
Fund has established no rating criteria for the debt securities in which it may
invest, and such securities may not be rated at all for creditworthiness.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality ("high yield/high risk securities") are predominately speculative with
respect to the capacity to pay interest and to repay principal in accordance
with the terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. These securities are commonly
referred to as "junk" bonds. The Fund is not authorized to purchase debt
securities that are in default, except for sovereign debt obligations, and may
invest no more than 5% of its total assets in sovereign debt obligations which
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."
14
<PAGE>
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. Because of its emphasis on securities of
foreign issuers, including issuers located in developing countries, the Fund
should be considered as a vehicle for diversification and not itself as a
balanced investment program. The suitability for any particular investor of a
purchase of shares of the Fund will depend upon, among other things, such
investor's investment objectives and such investor's ability to accept the risks
of investing in such markets including the risk of loss of principal.
15
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide long-term
growth of capital by investing primarily in equity securities of SmallCap
Issuers located in various foreign countries and in the United States. Under
normal conditions, at least 66% of the Fund's total assets will be invested in
equity securities of SmallCap Issuers. The Fund applies U.S. size standards in
determining SmallCap Issuers, and based on recent U.S. share prices, the Fund
presently considers SmallCap Issuers to be issuers with individual market
capitalizations of no greater than $1 billion. However, the Fund presently
intends to invest primarily in SmallCap Issuers with capitalizations of $750
million or less. The Fund does not generally expect to invest in SmallCap
Issuers whose market capitalizations are less than $50 million. Because the Fund
is permitted to apply the U.S. size standard on a global basis, it may invest in
issuers that might in some countries rank among the largest companies in terms
of capitalization. While the Fund expects to invest primarily in equity
securities of SmallCap Issuers, the Fund may invest up to 34% of its total
assets, under normal market conditions, in equity securities of LargeCap Issuers
and in debt securities. For purposes of the above, market capitalizations are
determined at the time of purchase. There can be no assurance that the Fund's
investment objective will be achieved. The investment objective of the Fund is a
fundamental policy and may not be changed without the approval of the holders of
a majority of the Fund's outstanding voting securities. The Fund may employ a
variety of investments and techniques to hedge against market and currency risk.
The Fund's investment emphasis is on equities, primarily common stock and,
to a lesser extent, securities convertible into common stock, preferred stock,
rights to subscribe for common stock and other securities the return on which is
determined by the performance of a common stock or a basket or index of common
stocks (collectively "equity securities"). The Manager believes that the equity
securities of specific SmallCap Issuers may present different opportunities for
long-term capital appreciation during varying portions of economic or securities
markets cycles, as well as during varying stages of their business development.
The market valuation of SmallCap Issuers tends to fluctuate during economic or
market cycles, presenting attractive investment opportunities at various points
during these cycles. However, investments in SmallCap Issuers may involve
greater risks. See "Risk Factors and Special Considerations." The Fund may
invest in securities of SmallCap Issuers in the relatively early stages of
business development which have a new technology, a unique or proprietary
product or service, or a favorable market position; in securities of relatively
more developed companies that the Manager believes will experience above-average
earnings growth or will receive greater market recognition; and, in securities
of mature companies that the Manager believes to be relatively undervalued in
the marketplace. The Fund's investment policy is further based on the belief
that investment opportunities change rapidly, not only from company to company
and from industry to industry, but also from one national economy to another.
Accordingly, the Fund will invest in a global portfolio of equity securities of
SmallCap Issuers located throughout the world. However, investments in foreign
markets may involve greater risks. See "Risk Factors and Special
Considerations."
Under certain adverse investment conditions, the Fund may restrict the
markets in which its assets will be invested and may increase the proportion of
assets invested in equity securities of LargeCap Issuers and in debt securities.
Investments made for defensive purposes will be maintained only during periods
in which the Manager determines that economic or financial conditions are
adverse for holding or being invested to a greater degree in equity securities
of SmallCap Issuers. The Fund, however, will make such temporary defensive
investments only to the extent management of the Fund believes temporary
defensive investments present less risk than the types of investments in which
the Fund normally invests.
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
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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 of such countries, particularly so-called "emerging" countries that are
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 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.
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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
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
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traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn or a sustained period
of rising interest rates, issuers of high yield/high risk securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During such periods, such issuers may not have sufficient revenues to
meet their interest payment obligations. The issuer's ability to service its
debt obligations also may be adversely affected by specific issuer developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield/high risk
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. The Fund's Directors, or the Manager, will carefully
consider the factors affecting the market for high yield/high risk, lower rated
securities in determining whether any particular security is liquid or illiquid
and whether current market quotations are readily available.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Fund's net asset value. In addition, the Fund may
incur additional expenses to the extent it is required to seek recovery upon a
default on a portfolio holding or to participate in the restructuring of the
obligation.
FOREIGN SOVEREIGN DEBT. Certain developing countries owe significant
amounts of debt to commercial banks and foreign governments. Investment in
sovereign debt obligations of such countries, in particular, involves a high
degree of risk. The governmental entity that controls the repayment of sovereign
debt obligations may not be able or willing to repay the principal and/or
interest when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the 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
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<PAGE>
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities may
default on their sovereign debt obligations.
Holders of sovereign debt obligations, including the Fund, may be requested
to participate in the rescheduling of such debt and to extend further loans to
governmental entities. In the event of a default by the issuer of a sovereign
debt obligation, the Fund may have few or no effective legal remedies for
collecting on such debt.
Certain of the sovereign debt obligations in which the Fund may invest
involve great risk and are deemed to be the equivalent in terms of quality to
high yield/high risk securities discussed above and are subject to many of the
same risks as such securities. Similarly, the Fund may have difficulty disposing
of such sovereign debt obligations because there may be a thin trading market
for such securities. The Fund will not invest more than 5% of its total assets
in sovereign debt obligations which are in default.
SUPRANATIONAL ENTITIES. The Fund also may invest in debt securities of
supranational entities as defined above. Examples include the International Bank
for Reconstruction and Development (the World Bank), the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The government members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
UNITED STATES GOVERNMENT OBLIGATIONS. United States Government Obligations
in which the Fund may invest include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the United
States; and (ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related or
asset-backed securities, some of which are backed by the full faith and credit
of the U.S. Treasury (E.G., direct pass-through certificates of the Government
National Mortgage Association), some of which are supported by the right of the
issuer to borrow from the U.S. Government (E.G., obligations of Federal Home
Loan Banks) and some of which are backed only by the credit of the issuer itself
(E.G., obligations of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its stated
maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of the mortgage-related securities.
(Asset-backed securities, other than those backed by home equity loans,
generally do not prepay in response to changes in interest rates but may be
subject to prepayment in response to 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
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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.
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
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<PAGE>
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.
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
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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.
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.
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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* -- Chairman of the Manager and its affiliate, FAM; Chairman
and Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of ML & Co.
DONALD CECIL -- Special Limited Partner of Cumberland Associates (an
investment partnership).
EDWARD H. MEYER -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the investment adviser of the Fund and provides the
Fund with management and investment advisory services. The Manager is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Asset Management Group of ML & Co. (which includes the
Manager) acts as the investment adviser to more than 100 registered investment
companies and offers portfolio management services to individuals and
institutions. As of August 1998, the Asset Management Group had a total of
approximately $473 billion in investment company and other portfolio assets
under management. This amount includes assets managed for 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, 1998, the fee paid by the Fund to the Manager was $894,653 (based upon
average daily net assets of approximately $105.3 million).
The Management Agreement provides that, subject to the direction of the
Board of Directors of the Fund, the Manager is responsible for the actual
management of the Fund's portfolio and constantly reviews the Fund's holdings in
light of its own research analysis and 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.
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<PAGE>
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, 1998, MLAM paid MLAM U.K. a fee of
$104,922 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, 1998, the Fund reimbursed
the Manager $112,319 for accounting services. For the same fiscal year the ratio
of total expenses to average net assets was 1.63%, 2.67%, 2.69% and 1.88% for
Class A, Class B, Class C and Class D shares, respectively.
Decisions concerning the allocation of the Fund's assets among the three
prime regions outside the United States (I.E., Europe, Latin America and the
Pacific Basin) will be centralized in London, with country and individual
security decisions made in both London and Princeton, New Jersey. Information
about the persons associated with the Manager who are primarily responsible for
the day-to-day management of the Fund's investment portfolio and their titles
and business experience during the past five years is set forth below:
KENNETH L. CHIANG -- Senior Vice President of the Fund -- First Vice
President of the Manager since 1998; Managing Partner of Samuel Asset Management
from 1997 to 1998. Previously, Mr. Chiang served as Vice President and Portfolio
Manager of the Manager from 1993 to 1997. Mr. Chiang is primarily responsible
for the day-to-day management of the Fund's investment portfolio.
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.
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
25
<PAGE>
purchase or sell any security which at the time is being purchased or sold (as
the case may be), or to the knowledge of the employee is being considered for
purchase or sale, by any fund advised by the Manager. Furthermore, the Codes
provide for trading "blackout periods" which prohibit trading by investment
personnel of the Fund within periods of trading by the Fund in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
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, 1998,
the Fund paid the Transfer Agent $249,230 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 (i) for retirement plans, the minimum initial
purchase is $100 and the minimum subsequent purchase is $1, and (ii) for
participants in certain fee-based programs, the minimum initial purchase is $250
and the minimum subsequent purchase is $50.
The Fund offers 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
26
<PAGE>
$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.
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, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do 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 are
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 CDSCs 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, that are eligible
to sell shares.
27
<PAGE>
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% during automatically after
the first year, decreasing 1.0% approximately eight years(5)
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, certain retirement
plans and certain 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.
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.
28
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (I.E., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS 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 certain 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. The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to sub-agreement) for providing
continuing account maintenance activities.
During the fiscal year ended June 30, 1998, the Fund sold 249,406 Class A
shares for aggregate net proceeds to the Fund of $2,387,315. The gross sales
charges for the sale of its Class A shares for the year were $17, of which $1
and $16 were received by the Distributor and Merrill Lynch, respectively. During
the fiscal year ended June 30, 1998, 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, 1998, the Fund sold 900,213 Class D
shares for aggregate net proceeds to the Fund of $8,509,284. The gross sales
charges for the sale of its Class D shares for the year were $20,050, of which
$1,389 and $18,661 were received by the Distributor and Merrill Lynch,
respectively. During the fiscal year ended June 30, 1998, the Distributor
received no CDSCs with respect to redemptions within one year after purchase of
Class D shares purchased subject to a front-end sales charge waiver.
ELIGIBLE CLASS A INVESTORS. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Certain employer-sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares of the Fund
at net asset value provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs 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
29
<PAGE>
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.
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
30
<PAGE>
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." The proceeds from the account maintenance fees are used to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing continuing account maintenance activities.
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
from the dealer's own funds 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 Class B
and Class C shares, such as the payment of compensation to financial consultants
for selling Class B and Class C shares. 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. 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.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
PERCENTAGE OF
YEAR SINCE 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>
31
<PAGE>
For the fiscal year ended June 30, 1998, the Distributor received CDSCs of
$268,729 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. 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."
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, 1998, the Distributor received
CDSCs of $904 with respect to redemptions of Class C shares, all of which were
paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
32
<PAGE>
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 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.
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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, 1998, the Fund paid the Distributor
$811,135 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $81.1
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, 1998, the Fund paid the
Distributor $49,424 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately $4.9
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, 1998, the Fund paid the
Distributor $37,011 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$14.8 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,
1997, 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 $1,395,000
(1.96% of Class B net assets at that date). As of June 30, 1998, direct cash
revenues for the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $3,212,886 (5.60% of Class B net assets at that
date). At December 31, 1997,
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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 $72,000 (1.65% of
Class C net assets at that date). As of June 30, 1998, direct cash revenues for
the period since the commencement of operations of Class C shares exceeded
direct cash expenses by $117,891 (2.73% of Class C net assets at that date).
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 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 that 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.
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REDEMPTION
A shareholder wishing to redeem shares may do so without charge, by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to 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.
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 it has assured itself that 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.
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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.
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
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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 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 CAPITAL GAINS 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 by telephone
(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 (provided that,
in the event that a payment on an account maintained at the Transfer Agent would
amount to $10.00 or less, a shareholder will not receive such payment in cash
and such payment will be automatically reinvested in additional shares). 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.
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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. 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.
Shares of the Fund that 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.
Effective on or about October 12, 1998, Class A and Class D shares also
will be exchangeable for Class A shares of, and Class B and Class C shares also
will be exchangeable for Class B shares of, Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated as available for
exchange by holders of Class A, Class B, Class C and Class D shares of
MLAM-advised mutual funds. Class A shares of Summit have an exchange privilege
back into Class A or Class D shares of MLAM-advised mutual funds; Class B shares
of Summit have an exchange privilege back into Class B or Class C shares of
MLAM-advised mutual funds. The period of time that Class B shares of Summit are
held will count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and, with respect to Class B shares, toward
satisfaction of any Conversion Period. Class B shares of Summit will be subject
to a distribution fee at an annual rate of 0.75% of average daily net assets of
such Class B shares. This exchange privilege does not apply with respect to
certain Merrill Lynch fee-based programs, for which alternative exchange
arrangements may exist. Please see your Merrill Lynch Financial Consultant for
further information.
Prior to the effectiveness of the exchange privilege with Summit, Class A,
Class B, Class C and Class D shares were 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
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Class A, Class B, Class C or Class D shares are held in a money market fund
(other than Summit), 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.
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
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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 Index, the Dow Jones Industrial Average, other market indices or 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. When comparing its performance to a market index the Fund may
refer to various statistical measures derived from the historic performance of
the Fund and the index, such as standard deviation and beta. In addition, from
time to time the Fund may include the Fund's risk adjusted performance ratings
assigned by Morningstar Publications, Inc. in advertising or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance for any future
period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income will be paid at least annually.
All net realized 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
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to shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash (provided that, in the event that a payment on an
account maintained at the Transfer Agent would amount to $10.00 or less, a
shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). 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 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. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares, and after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
created additional categories of capital gains taxable at different rates.
Additional legislation eliminates the highest 28% category for most sales of
capital assets occurring after December 31, 1997. Generally 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, as well as the amount of capital gain dividends in
the different categories of capital gains referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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
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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 from the
Fund only if the shareholder meets certain holding period requirements. The Fund
also must meet these holding period requirements, and if the Fund fails to do
so, it will not be able to "pass through" to shareholders the ability to claim a
credit or a deduction for the related foreign taxes paid by the Fund. If the
Fund satisfies the holding period requirements and more than 50% in value of its
total assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, moreover, 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 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
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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 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.
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DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all the classes of the Fund is
determined by the Manager once daily as of 15 minutes after the close of
business on the NYSE (generally, 4:00 p.m., New York time), on each day during
which the NYSE is open for trading. The net asset value is computed by dividing
the sum of the market values 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 for long positions and at
the last available ask price for short positions. 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. Long positions in 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. Short positions in securities traded in the OTC market are
valued at the last available ask price in the OTC market prior to the time of
valuation. Portfolio securities which are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. When the Fund writes an option, the amount of the premium received is
recorded on the books of the Fund as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last bid price. Any assets or liabilities expressed in
terms of foreign currencies are translated into U.S. dollars at the prevailing
market rates as obtained from one or more dealers. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 12, 1994. As of the
date of this Prospectus, the Fund has an authorized capital of 400,000,000
shares of Common Stock, par value $0.10 per share, divided into four 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
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identical in all respects except that the Class B, Class C and Class D shares
bear certain expenses relating to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses relating 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:
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 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.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Manager or other Fund service
providers do not properly address this problem prior to January 1, 2000. The
Manager has established a dedicated group to analyze these issues and to
implement any systems modifications necessary to prepare for the Year 2000.
Currently, the Manager does not anticipate that the transition to the Year 2000
will have any material impact on its ability to continue to service the Fund
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at current levels. In addition, the Manager has sought assurances from the
Fund's other service providers that they are taking all necessary steps to
ensure that their computer systems will accurately reflect the Year 2000, and
the Manager will continue to monitor the situation. At this time, however, no
assurance can be given that the Fund's other service providers have anticipated
every step necessary to avoid any adverse effect on the Fund attributable to the
Year 2000 Problem.
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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 correlated with 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 is
substantially correlated with the performance of the types of securities it
intends to purchase. When the Fund purchases a call option, in consideration for
the option premium the Fund acquires a right to purchase from another party
specified securities at the exercise price on or before the expiration date, in
the case of an option on securities, or to receive from another party a payment
based on the amount a specified
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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 correlated with securities held in its portfolio. When
the Fund writes a call option, in return for receiving an option premium the
Fund gives another party the right to buy specified securities owned by the Fund
at the exercise price on or before the expiration date, in the case of an option
on securities, or agrees to pay to another party an amount based on any gain in
a specified securities index beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The Fund may
write call options to earn income, through the receipt of option premiums. In
the event the party to which the Fund has written an option fails to exercise
its rights under the option because the value of the underlying securities is
less than the exercise price, the Fund will partially offset any decline in the
value of the underlying securities through the receipt of the option premium. By
writing a call option, however, the Fund limits its ability to sell the
underlying securities, and gives up the opportunity to profit from any increase
in the value of the underlying securities beyond the exercise price, while the
option remains outstanding.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund has written an option fails to exercise its rights under
the option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. The Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
on a security) or is writing the put in connection with trading strategies
involving combinations of options -- for example, the sale and purchase of
options with identical expiration dates on the same security or index but
different exercise prices (a technique called a "spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A put option will be considered covered
if the Fund has segregated assets with respect to such option in the
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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.
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
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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.
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.
52
<PAGE>
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 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.
53
<PAGE>
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.
54
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 1)
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares of
Merrill Lynch Global SmallCap Fund, Inc., and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $................... payable to 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....................................................................
(Zip Code)
Date.......................................................................
Occupation.................................................................
...........................................................................
Signature of Owner
Name and Address of Employer................................................
...........................................................................
...........................................................................
...........................................................................
Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
ORDINARY INCOME DIVIDENDS LONG-TERM CAPITAL GAINS
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Global SmallCap Fund, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (check one) [ ] checking [ ] savings
Name on your Account......................................................
Bank Name.................................................................
Bank Number................................ Account Number................
Bank Address..............................................................
I agree that this authorization will remain in effect until I provide written
notification to 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.
55
<PAGE>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
-----------------------------------------------------------
-----------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed under "Additional Information
- -- Taxes") either because I have not been notified that I am subject thereto as
a result of a failure to report all interest or dividends, or the Internal
Revenue Service ("IRS") has notified me that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
....................................... ..........................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
....................... , 19............
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of
Merrill Lynch Global SmallCap Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch Funds
Distributor 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 my attorney,
with full power of substitution, to surrender for redemption any or all shares
of Merrill Lynch Global SmallCap Fund, Inc. held as security.
By:.......................................................................
Signature of Co-Owner
........................................................................
Signature of Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name......................... (2) Name...........................
Account Number............... Account Number.................
5. FOR DEALER ONLY
Branch Office, Address, Stamp
- ----
----
- ----
----
This form when completed should be mailed to:
Merrill Lynch Global SmallCap Fund, Inc.
c/o Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor 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>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION (PLEASE PRINT)
Name of Owner............................... ---------------------------------
Name of Co-Owner (if any)................... ---------------------------------
Social Security No.
Address..................................... or Taxpayer Identification Number
............................................
Account Number...................
(if existing account)
- --------------------------------------------------------------------------------
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 in ------- or as soon as possible
thereafter. (month)
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $------ of
(check one) [ ] 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 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>
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that 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.
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 Number.......................................................
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, 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 FINANCIAL DATA
SERVICES,INC.
To................................................................Bank
(Investor's Bank)
Bank Address.........................................................
City......................State....................Zip Code..........
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 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>
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
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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 ............. 20
Investment Restrictions ............................. 23
Management of the Fund ................................ 24
Board of Directors .................................. 24
Management and Advisory Arrangements ................ 24
Code of Ethics ...................................... 25
Transfer Agency Services ............................ 26
Purchase of Shares .................................... 26
Initial Sales Charge Alternatives -- Class A and
Class D Shares ................................... 28
Deferred Sales Charge Alternatives -- Class B and
Class C Shares ................................... 30
Distribution Plans .................................. 33
Limitations on the Payment of Deferred Sales
Charges .......................................... 35
Redemption of Shares .................................. 35
Redemption .......................................... 36
Repurchase .......................................... 36
Reinstatement Privilege -- Class A and Class D
Shares ........................................... 37
Shareholder Services .................................. 37
Investment Account .................................. 37
Systematic Withdrawal Plans ......................... 38
Automatic Investment Plans .......................... 38
Automatic Reinvestment of Dividends and Capital
Gains Distributions .............................. 38
Exchange Privilege .................................. 39
Fee-Based Programs .................................. 40
Performance Data ...................................... 40
Additional Information ................................ 41
Dividends and Distributions ......................... 41
Taxes ............................................... 42
Determination of Net Asset Value .................... 45
Organization of the Fund ............................ 45
Shareholder Reports ................................. 46
Shareholder Inquiries ............................... 46
Year 2000 Issues .................................... 46
Appendix A ............................................ 48
Authorization Form .................................... 55
</TABLE>
Code # 18187-1098
(Merrill Lynch logo appears here)
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
PROSPECTUS
October 1, 1998
Distributor:
Merrill Lynch
Funds Distributor
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
Merrill Lynch Global SmallCap Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
----------------
Merrill Lynch Global SmallCap Fund, Inc. (the "Fund") is a diversified,
open-end 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 October
1, 1998 (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 -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is October 1, 1998.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of capital
by investing primarily in a portfolio of equity securities of Small Cap Issuers
located in various foreign countries and in the United States. Reference is made
to "Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for the Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains the Fund has derived from movements in a particular market. To
the extent the various markets move independently, total portfolio volatility is
reduced when the various markets are combined into a single portfolio. Of
course, movements in the various securities markets may be offset by changes in
foreign currency exchange rates. Exchange rates frequently move independently of
securities markets in a particular country. As a result, gains in a particular
securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. (the "Manager"), will
effect portfolio transactions without regard to holding period if, in its
judgment, such transactions are advisable in light of a change in circumstances
of a particular company or within a particular industry or in general market,
economic or financial conditions. As a result of the investment policies
described in the Prospectus, the Fund's portfolio turnover rate may be higher
than that of other investment companies. For the fiscal years ended June 30,
1997 and 1998, the Fund's portfolio turnover rate was 63.17% and 52.73%,
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 may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") (collectively, the "Depositary Receipts") or
other securities convertible into securities of foreign issuers. The Depositary
Receipts may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by an American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. GDRs are receipts issued
throughout the world which evidence a similar ownership arrangement. Generally,
ADRs, in registered form, are designed for use in the U.S. securities markets,
and EDRs, in bearer form, are designed for use in European securities markets.
GDRs are tradeable both in the U.S. and Europe and are designed for use
throughout the world. The Fund may invest in unsponsored Depositary Receipts.
The issuers of unsponsored Depositary Receipts are not obligated to disclose
material information in the United States, and therefore, there may not be a
correlation between such information and the market value of such securities.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis on each day the Fund determines its net asset value in U.S. dollars, the
Fund intends to manage its portfolio so as to give reasonable assurance that it
will be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. 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.
2
<PAGE>
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 contracts move more or less than the prices of the
hedged securities and currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the securities and
currencies which are the subject of the hedge. The successful use of options and
futures also depends on the Manager's ability to predict correctly price
movements in the market involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an exchange
only if there appears to be a liquid secondary market for such options or
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular call or put option or futures contract at any specific
time. Thus, it may not be possible to close an option or futures position. The
Fund will acquire only OTC options for which management believes the Fund can
receive on each business day at least two independent bids or offers (one of
which will be 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.
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<PAGE>
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 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
4
<PAGE>
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 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
5
<PAGE>
value of the loaned securities. The purpose of such loans is to permit the
borrowers to use such securities for delivery to purchasers when such borrowers
have sold short. If cash collateral is received by the Fund, it is invested in
short-term money market securities, and a portion of the yield received in
respect of such investment is retained by the Fund. Alternatively, if securities
are delivered to the Fund as collateral, the Fund and the borrower negotiate a
rate for the loan premium to be received by the Fund for lending its portfolio
securities. In either event, the total return on the Fund's portfolio is
increased by loans of its portfolio securities. The Fund will have the right to
regain record ownership of loaned securities to exercise beneficial rights such
as voting rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time, and the borrower, after
notice, will be required to return borrowed securities within five business
days. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans. With respect to the lending of portfolio securities,
there is the risk of failure by the borrower to return the securities involved
in such transactions.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities (which for
this purpose and under the Investment Company Act, means the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate or real estate mortgage loans, except
that the Fund may invest in securities directly or indirectly secured by real
estate or interests therein or issued by companies which invest in real
estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and similar instruments shall not be
deemed to be the making of a loan, and except further that the Fund may lend
its portfolio securities provided that such loans may be made only in
accordance with applicable law and guidelines set forth in the Fund's
Prospectus and this Statement of Additional Information, as they may be
amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money or pledge its assets, except that the Fund (a) may borrow
from a bank as a temporary measure for extraordinary or emergency purposes or
to meet redemptions in amounts not exceeding 33 1/3% (taken at market value)
of its total assets and pledge its assets to secure such borrowings, (b) may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (c) may purchase securities
on margin to the extent permitted by applicable law. (However, at the present
time, applicable law prohibits the Fund from purchasing securities on
margin.) (The deposit or payment by the Fund of initial or variation margin
in connection with futures contracts or options transactions is not
considered the purchase of a security on margin.)
6
<PAGE>
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended (the "Securities Act"), in purchasing and selling portfolio
securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent the Fund may do so in accordance with applicable law and the
Fund's Prospectus and this Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodities Exchange Act.
9. With respect to 75% of its total assets, (a) invest in the securities
of any one issuer if, immediately after and as a result of such investment,
the value of the holdings of the Fund in the securities of such issuer
exceeds 5% of the Fund's total assets, taken at market value; and (b) invest
in the securities of any one issuer if, immediately after and as a result of
such investment, the Fund owns more than 10% of the outstanding voting
securities of such issuer.
In addition, the Fund has adopted non-fundamental restrictions, which may
be changed by the Board of Directors. Under the non-fundamental investment
restrictions, the Fund may not:
a. Purchase securities of other investment companies except to the extent
that such purchases are permitted by applicable law. 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
Section 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
7
<PAGE>
securities as is equal to the repurchase price less the amount by which the
option is "in-the-money" (I.E., current market value of the underlying
securities minus the option's strike price). The repurchase price with the
primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the Fund
will, for purposes of investment restriction (1), treat securities issued or
guaranteed by the government of any one foreign country as the obligations of a
single issuer.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage." Without such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with Merrill Lynch or any of its affiliates
acting as principal.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio manager
of the Fund, including 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, Director and the portfolio manager is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND DIRECTOR(1)(2) -- Chairman of the
Manager (which term as used herein includes its corporate predecessors) since
1997; Chairman of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1997; President of the Manager and
FAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997 and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; and Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.
DONALD CECIL (71) -- DIRECTOR(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Associates (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 (71) -- 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.
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CHARLES C. REILLY (67) -- 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 from 1986 to 1997.
RICHARD R. WEST (60) -- 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
Realty Trust, Inc. (real estate holding company) and Alexander's Inc. (real
estate company).
EDWARD D. ZINBARG (63) -- 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 (58) -- 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 Princeton Funds
Distributor, Inc. (the "Distributor") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
NORMAN R. HARVEY (65) -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice
President of the Manager and FAM since 1982.
KENNETH L. CHIANG (36) -- SENIOR VICE PRESIDENT(1) -- First Vice President
of the Manager since 1998; Managing Partner of Samuel Asset Management from 1997
to 1998; Vice President and Portfolio Manager of the Manager from 1993 to 1997.
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.
DONALD C. BURKE (38) -- 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.
JAMES E. RUSSELL (46) -- VICE PRESIDENT(1) -- First Vice President of the
Manager since 1997; Vice President of the Manager from 1992 to 1997.
GERALD M. RICHARD (49) -- 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 (51) -- 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.
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At August 31, 1998, the officers and Directors of the Fund as a group (14
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Manager (each, a
"non-affiliated Director") a fee of $3,500 per year plus $500 per Board meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all of the
non-affiliated Directors, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. Fees and expenses paid to the non-affiliated Directors for the
fiscal year ended June 30, 1998, aggregated $36,614.
The following table sets forth for the fiscal year ended June 30, 1998,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1997, 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 $275,850
Edward H. Meyer ........... $5,000 None $222,100
Charles C. Reilly ......... $7,500 None $313,000
Richard R. West ........... $7,500 None $299,000
Edward D. Zinbarg ......... $7,500 None $133,500
</TABLE>
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(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (34 registered investment companies consisting of 34 portfolios); Mr.
Meyer (34 registered investment companies consisting of 34 portfolios); Mr.
Reilly (54 registered investment companies consisting of 67 portfolios); Mr.
West (56 registered investment companies consisting of 81 portfolios) and
Mr. Zinbarg (19 registered investment companies consisting of 19
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.
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<PAGE>
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 years ended June 30,
1996, 1997 and 1998 the investment advisory fees paid by the Fund to the Manager
aggregated $1,285,653, $1,260,012 and $894,653, 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 respect to the Fund. For the
fiscal years ended June 30, 1996, 1997 and 1998, the sub-advisory fees paid by
the Manager to MLAM U.K. pursuant to such agreement aggregated $150,719,
$144,451 and $104,922, 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 years ended June 30, 1996, 1997 and 1998, the
Fund reimbursed the Manager $105,306, $123,555 and $112,319, 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 PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch International
Holdings, Inc., 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.
11
<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests in
the investment portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (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 Class A shares of the Fund 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 A shares for the fiscal year ended June 30, 1998, were
$17, of which $16 was received by Merrill Lynch and $1 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 gross sales charges for the sale
of Class D shares of the Fund for the fiscal year ended June 30, 1998 were
$20,050 of which $18,661 was received by Merrill Lynch and $1,389 was received
by the Distributor.
12
<PAGE>
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his 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 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.
13
<PAGE>
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 at least 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 further
reduced percentage sales charge that would be applicable to a single purchase
equal to the total dollar value of the Class A or Class D shares then being
purchased under such Letter, but there will be no retroactive reduction of the
sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-advised
money market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER
ARRANGEMENTS. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class A or Class D shares at net asset value,
based on the number of employees or number of employees eligible to participate
in the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the contingent deferred sales
charge ("CDSC")
14
<PAGE>
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.
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
15
<PAGE>
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 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
16
<PAGE>
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of June 30, 1998,
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.
DATA CALCULATED AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
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)
---------- ----------- ------------ --------- ---------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
AUGUST 5, 1994 (COMMENCEMENT OF
OPERATIONS) TO JUNE 30, 1998:
Under NASD Rule as Adopted .............. $178,771 $11,173 $3,226 $14,399 $5,041 $9,358 $431
Under Distributor's Voluntary Waiver..... $178,771 $11,173 $ 894 $12,067 $5,041 $7,026 $431
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT OF OPERATIONS) TO
JUNE 30, 1998:
Under NASD Rule as Adopted .............. $ 9,684 $ 605 $ 160 $ 764 $ 141 $ 624 $ 32
</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
Fund Advisor (Merrill Lynch MFA(SM)) program (the "MFA program"). The CDSC
is booked as a contingent obligation that may be payable if the shareholder
terminates participation in 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 (with respect to Class B and Class C
shares), or the voluntary maximum (with respect to Class B shares).
17
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the 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.
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 years ended June 30, 1996, 1997 and 1998, the
Distributor received CDSCs of $492,135, $424,847 and $268,729, 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 years ended
June 30, 1997 and 1998 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 years ended June 30, 1996, 1997 and 1998 the
Distributor received CDSCs of $2,470, $2,530 and $904, 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
18
<PAGE>
addition to and not in lieu of the services required to be performed by the
Manager under the Management Agreement and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information. It is possible that certain supplementary investment research so
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Fund may
be the primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other accounts or investment companies.
In addition, consistent with the Conduct Rules of the NASD and policies
established by the Board of Directors of the Fund, the Manager may consider
sales of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
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. In addition, the Fund may
not purchase securities during the existence of any underwriting syndicate for
such securities of which Merrill Lynch is a member or in a private transaction
in which Merrill Lynch serves as a placement agent except pursuant to procedures
adopted by the Board of Directors of the Fund that either comply with rules
adopted by the Commission or with interpretations of the Commission staff. See
"Investment Objective and Policies -- Investment Restrictions." 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. For the fiscal year ended June 30,
1998, the Fund paid total brokerage commissions of $510,231, of which $52,087,
or 10.21%, was paid to Merrill Lynch for effecting 9.25% 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
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basis in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.
The Board of Directors has considered the possibility of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for their affiliates
and institutional accounts 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, 1998, 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.
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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 for long positions and at the last available ask price for short
positions. 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. Long positions in securities
traded in the OTC market are valued at the last available bid price in the OTC
market prior to the time of valuation. Short positions in securities traded in
the OTC market are valued at the last available ask price in the OTC market
prior to the time of valuation. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last asked price. Options purchased by the Fund are valued at their
last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last bid price. Other investments,
including futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Directors.
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE which will not be reflected in the computation of the Fund's 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.
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Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his or
her shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an IRA from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or 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
(provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares). The Fund is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
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<PAGE>
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 by the Transfer Agent 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.
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
the 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 shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional 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
three 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
CMA(R) or CBA(R) 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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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.
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 are 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. Effective on or about October
12, 1998, the exchange privilege for money market fund shares will be modified
to provide for exchanges solely with Summit Cash Reserves Fund ("Summit"), a
series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated as available for
exchange by holders of Class A, Class B, Class C and Class D shares of
MLAM-advised mutual funds. Class A and Class D shares will be exchangeable for
Class A shares, and Class B and Class C shares will be exchangeable for Class B
shares, of Summit. 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.
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<PAGE>
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other MLAM-advised mutual
funds, including Class A shares of Summit ("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.
Each MLAM-advised mutual fund with Class B or 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 (or, in the case of
Summit for Class B shares), 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
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<PAGE>
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.
Effective on or about October 12, 1998, shareholders also may exchange
their shares into shares of Summit. Class A and Class D shares will be
exchangeable for Class A shares of, and Class B and Class C shares will be
exchangeable for Class B shares of, Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of MLAM-advised mutual
funds; Class B shares of Summit have an exchange privilege back into Class B or
Class C shares of MLAM-advised mutual funds. The period of time that Class B
shares of Summit are held will count toward satisfaction of the holding period
requirement for purposes of reducing any CDSC and, with respect to Class B
shares, toward satisfaction of any conversion period. Class B shares of Summit
will be subject to a distribution fee at an annual rate of 0.75% of average
daily net assets of such Class B shares. This exchange privilege does not apply
with respect to certain Merrill Lynch fee-based programs, for which alternative
exchange arrangements may exist. Please see your Merrill Lynch Financial
Consultant for further information.
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.
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. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares, and after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
created additional categories of capital gains taxable at different rates.
Additional legislation eliminates the highest 28% category for most sales of
capital assets occurring after December 31, 1997. Generally not later than 60
days after the close of its taxable year, the Fund will provide
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<PAGE>
its shareholders with a written notice designating the amounts of any ordinary
income dividends or capital gain dividends, as well as the amount of capital
gain dividends in the different categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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.
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 foreign tax
credits to be claimed with respect to withholding tax on a dividend from the
Fund only if the shareholder meets certain holding period requirements. The Fund
also must meet these holding period requirements, and if the Fund fails to do
so, it will not be able to "pass through" to shareholders the ability to claim a
credit or a deduction for the related foreign taxes paid by the Fund. If the
Fund satisfies the holding period requirements and more than 50% in value of its
total assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, moreover, 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
27
<PAGE>
taxes and foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method similar to that described above for the
allocation of dividends eligible for the dividends received deduction.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period for the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income determined on a calendar year basis and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield/high risk securities may be purchased at a discount and
may therefore cause the Fund to accrue and distribute income before amounts due
under the obligations are paid. In addition, a portion of the interest payments
on such high yield/high risk securities may be treated as dividends for Federal
income tax purposes; in 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
28
<PAGE>
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 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 swaps, 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 swaps,
options, futures and forward foreign exchange contracts.
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,
29
<PAGE>
and all or a portion of distributions made before the losses were realized but
in the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund shares, and
resulting in a capital gain for any shareholder who received a distribution
greater than the shareholder's tax basis in Fund shares (assuming the shares
were held as a capital asset). These rules and the mark-to-market rules
described above, however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of currency fluctuations with respect to its
investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax 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.
30
<PAGE>
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select 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
------------------------------------------- -----------------------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL BASED ON A HYPOTHETICAL
HYPOTHETICAL $1,000 INVESTMENT HYPOTHETICAL $1,000 INVESTMENT
$1,000 AT THE END $1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
- ---------------------------------------- ------------------- ----------------------- ------------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year ended June 30, 1998 ............... (12.02)% $ 879.80 ( 9.07)% $ 909.30
Inception (October 21, 1994) to
June 30, 1998 ......................... 1.72% $ 1,065.10 2.12% $ 1,080.40
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year ended June 30, 1998 ............... ( 7.15)% $ 928.50 ( 8.19)% $ 918.10
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
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994) to June 30,
1998 .................................. 6.51% $ 1,065.10 8.04% $ 1,080.40
CLASS B SHARES CLASS D SHARES
------------------------------------------- ------------------------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL $1,000 BASED ON A HYPOTHETICAL
HYPOTHETICAL INVESTMENT HYPOTHETICAL $1,000 INVESTMENT
$ 1,000 AT THE END $ 1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
- ---------------------------------------- ------- ----------------------- ------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year ended June 30, 1998 ............... (11.69)% $ 883.10 (12.29)% $ 877.10
Inception (August 5, 1994) to June 30,
1998 .................................. 1.28% $ 1,050.20 0.91% $ 1,035.90
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year ended June 30, 1998 ............... ( 8.15)% $ 918.50 ( 7.43)% $ 925.70
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
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (August 5, 1994) to June 30,
1998 .................................. 5.09% $ 1,050.90 3.59% $ 1,035.90
</TABLE>
31
<PAGE>
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.
32
<PAGE>
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, 1998, is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net Assets ..................................... $ 4,376,230 $ 57,423,535 $ 4,311,668 $ 11,026,339
=========== ============ =========== ============
Number of Shares Outstanding ................... 463,145 6,189,230 465,918 1,171,871
=========== ============ =========== ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding) ................. $ 9.45 $ 9.28 $ 9.25 $ 9.41
Sales Charge (for Class A and Class D shares:
5.25% of offering price (5.54% of net asset
value per share))* ............................ .52 ** ** .52
----------- ------------ ----------- ------------
Offering Price ................................. $ 9.97 $ 9.28 $ 9.25 $ 9.93
=========== ============ =========== ============
</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
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.
33
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on June 30 of each year. The Fund sends to
its shareholders at least 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 September 1, 1998.
FINANCIAL STATEMENTS
The Fund's audited financial statements are included in its 1998 annual
report to shareholders, which is incorporated by reference in this Statement of
Additional Information. You may request a copy of the annual report at no charge
by calling 1-800-456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
34
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in "Aaa"
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the "Aaa" securities.
A Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds which are rated "Baa" are considered as medium grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
35
<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. PRIME-1 repayment ability
will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, in assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols presented below are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
36
<PAGE>
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable
over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S ("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.
37
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The "BB" rating category is also
used for debt subordinated to senior debt that is assigned an actual
or implied "BBB - " rating.
B Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The "B" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BB" or "BB - " rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal. The "CCC" rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B - " rating.
CC The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
38
<PAGE>
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC - " debt rating. The
"C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or minus (-):The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
c The letter "c" indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated
conditions enumerated in the tender option documents.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured and interest is adequately
collateralized. In the case of certificates of deposit, the letter
"L" indicates that the deposit, combined with other deposits being
held in the same right and capacity, will be honored for principal
and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the
event that the deposit is assumed by a successor insured
institution, upon maturity.
p The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
39
<PAGE>
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by Standard
& Poor's from other sources it considers reliable. Standard & Poor's does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the debt rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
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.
40
<PAGE>
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 speculative B with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest CCC degree
of speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus 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.
41
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies .......................... 2
Other Investment Policies and Practices .................. 4
Investment Restrictions .................................. 6
Management of the Fund ..................................... 8
Directors and Officers ................................... 8
Compensation of Directors ................................ 10
Management and Advisory Arrangements ..................... 10
Purchase of Shares ......................................... 12
Initial Sales Charge Alternatives -- Class A and
Class D Shares ........................................ 12
Reduced Initial Sales Charges -- Class A and
Class D Shares ........................................ 14
Distribution Plans ....................................... 16
Limitations on the Payment of Deferred Sales
Charges ............................................... 16
Redemption of Shares ....................................... 18
Deferred Sales Charges -- Class B and Class C
Shares ................................................ 18
Portfolio Transactions and Brokerage ....................... 18
Determination of Net Asset Value ........................... 20
Shareholder Services ....................................... 21
Investment Account ....................................... 21
Automatic Investment Plans ............................... 22
Automatic Reinvestment of Dividends and Capital
Gains Distributions ................................... 22
Systematic Withdrawal Plans .............................. 23
Exchange Privilege ....................................... 24
Dividends, Distributions and Taxes ......................... 26
Tax Treatment of Options, Futures and Forward
Foreign Exchange Transactions ......................... 29
Special Rules for Certain Foreign Currency
Transactions .......................................... 29
Performance Data ........................................... 30
General Information ........................................ 32
Description of Shares .................................... 32
Computation of Offering Price Per Share .................. 33
Independent Auditors ..................................... 33
Custodian ................................................ 33
Transfer Agent ........................................... 33
Legal Counsel ............................................ 33
Reports to Shareholders .................................. 34
Additional Information ................................... 34
Security Ownership of Certain Beneficial Owners .......... 34
Financial Statements ....................................... 34
Appendix ................................................... 35
</TABLE>
Code # 18186-1098
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL SMALLCAP
FUND, INC.
STATEMENT OF
ADDITIONAL
INFORMATION
October 1, 1998
Distributor
Merrill Lynch
Funds Distributor
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Contained in Part A:
Financial Highlights for each of the years in the three-year period ended
June 30, 1998 and the period August 5, 1994 (commencement of
operations) to June 30, 1995.
Incorporated by Reference in Part B:
Financial Statements:
Schedule of Investments as of June 30, 1998.*
Statement of Assets and Liabilities as of June 30, 1998.* Statement of
Operations for the year ended June 30, 1998.* Statements of Changes in Net
Assets for each of the years in the two year
period ended June 30, 1998.*
Financial Highlights for each of the years in the three-year period ended
June 30, 1998, and the period August 5, 1994 (commencement of operations)
to June 30, 1995.*
- ---------
* Incorporated by reference to the Registrant's 1998 Annual Report to
shareholders filed with the Securities and Exchange Commission for the year
ended June 30, 1998 pursuant to Rule 30b2-1 under the Investment Company Act
of 1940, as amended ("1940 Act").
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------------------
<S> <C>
1 (a) -- Articles of Incorporation of the Registrant, dated April 8, 1994.(a)
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated May 18, 1994.(b)
(c) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated July 26, 1994.(c)
(d) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated August 3, 1994.(d)
(e) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated October 17,
1994.(d)
(f) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated October 17,
1994.(d)
2 -- By-Laws of the Registrant.(a)
3 -- None.
4 -- Portions of the Articles of Incorporation and the By-Laws of the Registrant defining the rights of
shareholders.(e)
5(a) -- Form of Management Agreement between the Registrant and Merrill Lynch Asset Management,
L.P.(b)
(b) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and Merrill
Lynch Asset Management U.K. Limited.(b)
6(a) -- Form of Class A Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc (now known as Princeton Funds Distributor, Inc.)(the "Distributor").(f)
(b) -- Form of Class B Shares Distribution Agreement between the Registrant and the Distributor.(b)
(c) -- Form of Class C Shares Distribution Agreement between the Registrant and the Distributor.(f)
(d) -- Form of Class D Shares Distribution Agreement between the Registrant and the Distributor.(f)
7 -- None.
8 -- Form of Custody Agreement between the Registrant and Brown Brothers Harriman & Co.(b)
9(a) -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between the Registrant and Merrill Lynch Financial Data Services, Inc. (now known as
Financial Data Services, Inc.)(b)
(b) -- Form of License Agreement relating to the use of name between the Registrant and Merrill Lynch & Co., Inc.(b)
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.(h)
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------------------
<S> <C>
13 -- Certificate of Merrill Lynch Asset Management, L.P.(b)
14 -- None.
15(a) -- Form of Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of the
Registrant.(b)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of the
Registrant.(f)
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of the
Registrant.(f)
16(a) -- Schedule of computation of each performance quotation provided in the Registration Statement
in response to Item 22 relating to Class A shares.(d)
(b) -- Schedule of computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class B shares.(d)
(c) -- Schedule of computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class C shares.(d)
(d) -- Schedule of computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class D shares (formerly designated Class A shares).(d)
17 (a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(g)
</TABLE>
- ---------
(a) Filed on April 29, 1994 as an Exhibit to Registrant's Registration Statement
on Form N-1A under the Securities Act of 1933, as amended (File No.
33-53399) (the "Registration Statement").
(b) Filed on June 23, 1994 as an Exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement.
(c) Filed on July 28, 1994 as an Exhibit to Pre-Effective Amendment No. 2 to the
Registration Statement.
(d) Filed on October 25, 1995 as an Exhibit to Post-Effective Amendment No. 2 to
the Registration Statement.
(e) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7),
Articles VI, VII and IX of the Registrant's Articles of Incorporation, as
amended and supplemented, filed as Exhibits 1(a), (b), (c), (d), (e) and (f)
to the Registration Statement and to Article II, Article III (Sections 1, 3,
5 and 6) and Articles VI, VII, XIII and XIV of the Registrant's By-Laws,
filed as Exhibit 2 to the Registration Statement.
(f) Filed on October 19, 1994 as an Exhibit to Post-Effective Amendment No. 1 to
the Registration Statement.
(g) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996, relating to shares of Merrill Lynch
New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
(h) Previously filed as Exhibit 10 to the Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS AUGUST 31, 1997*
- ---------------------------------------------------------------- -----------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share....... 956
Class B Shares of Common Stock, par value $0.10 per share....... 8,129
Class C Shares of Common Stock, par value $0.10 per share....... 708
Class D Shares of Common Stock, par value $0.10 per share....... 1,460
</TABLE>
- ---------
* Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a defense
to the action, including costs connected with the preparation of a settlement;
(ii) advances may be made only on receipt of a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the amount
which it is ultimately determined he or she is entitled to receive from the
Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assumes that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance and (b) a majority of a quorum
of the Registrant's disinterested, non-party Directors, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "1933 Act"), against certain types of
civil liabilities arising in connection with the Registration Statement or the
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager") acts as
the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Corporate High Yield Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/ Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., and Merrill Lynch Variable Series Funds, Inc.; and Hotchkis and Wiley
Funds (advised by Hotchkis and Wiley, a division of MLAM) and for the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
C-3
<PAGE>
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc.,
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund
III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured Fund
II, Inc, MuniHoldings California Insured Fund III, Inc., MuniHoldings Florida
Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc, MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund
II Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest
New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona
Fund, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., Senior High Income Portfolio, Inc. and Worldwide DollarVest Fund,
Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2665. The address of MLAM, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. is also P.O. Box 9011, Princeton,
New Jersey 08543-9011. The address of Princeton Funds Distributor, Inc. ("PFD")
and of Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081, Princeton,
New Jersey 08543-9081. The address of Merrill Lynch and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of the Fund's transfer agent, Financial Data
Services, Inc. ("FDS") is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
July 1, 1996, for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the first two paragraphs of this Item 28,
and Messrs. Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
ML & Co. ................... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services ......... General Partner General Partner of FAM
Arthur Zeikel .............. Chairman Chairman of FAM; President of MLAM and
FAM from 1977 to
1997; Chairman and
Director of
Princeton Services;
President of
Princeton Services
from 1993 to 1997;
Executive Vice
President of ML &
Co.
Jeffrey Peek ............... President President of FAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co.; Managing Director and
Co-Head of the Investment Banking Division of
Merrill Lynch (in 1997); Senior Vice President
and Director of the Global Securities and
Economics Division of Merrill Lynch (from 1995
to 1997).
C-4
<PAGE>
Terry K. Glenn ............. Executive Vice President Executive Vice President of FAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators, L.P.
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- -------------------------------- ----------------------- ---------------------------------------------
<S> <C> <C>
Linda L. Federici .............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Vincent R. Giordano ............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin ........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Norman R. Harvey ............... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel ......... Senior Vice President Senior Vice President and General Counsel of
and General Counsel FAM; Senior Vice President of Princeton
Services
Philip L. Kirstein ............. Senior Vice President Senior Vice President and Secretary of FAM;
and Secretary Senior Vice President, Director and
Secretary of Princeton Services
Ronald M. Kloss ................ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Debra Landsman-Yaros ........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Vice
President of PFD
Stephen M.M. Miller ............ Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. ......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Brian A. Murdock ............... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Director of
PFD
Michael L. Quinn ............... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of Merrill
Lynch from 1989 to 1995
Gerald M. Richard .............. Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of PFD
Gregory D. Upah ................ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Ronald L. Welburn .............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc.,
Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill
Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value Fund, Inc.,
Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults International
Portfolio, Merrill Lynch
C-5
<PAGE>
Convertible Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special
Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Fund, Inc., Merrill Lynch World Income Fund, Inc., The Municipal
Fund Accumulation Program, Inc., Senior Floating Rate Fund, Inc. and Worldwide
DollarVest Fund, Inc. The address of each of these registered investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1, 1996
for his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert and Richard are officers of one or
more of the registered investment companies listed in the first two paragraphs
of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- ----------------------------- ------------------------------------------
<S> <C> <C>
Arthur Zeikel ............. Director and Chairman Chairman of MLAM and FAM; President of
MLAM and FAM from 1977 to 1997;
Chairman and Director of Princeton
Services; President of Princeton Services
from 1993 to 1997; Executive Vice
President of ML & Co.
Alan J. Albert. ........... Senior Managing Director Vice President of MLAM
Nicholas C.D. Hall ........ Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Gerald M. Richard ......... Senior Vice President Senior Vice President and Treasurer of
MLAM and FAM; Senior Vice President
and Treasurer of Princeton Services; Vice
President and Treasurer of PFD
Carol Ann Langham ......... Company Secretary None
Debra Anne Searle ......... Assistant Company Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies referred
to in the first two paragraphs of Item 28 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc. and The Municipal Fund Accumulation Program, Inc., and MLFD also acts as
the principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
C-6
<PAGE>
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH PFD WITH THE REGISTRANT
- --------------------------------- ------------------------------ --------------------------
<S> <C> <C>
Terry K. Glenn .................. President and Director Executive Vice President
Brian A. Murdock ................ Director None
Thomas J. Verage ................ Director None
William E. Aldrich .............. Senior Vice President None
Robert W. Crook ................. Senior Vice President None
Michael J. Brady ................ Vice President None
William M. Breen ................ Vice President None
Michael G. Clark ................ Vice President None
James T. Fatseas ................ Vice President None
Debra W. Landsman-Yaros ......... Vice President None
Michelle T. Lau ................. Vice President None
Gerald M. Richard ............... Vice President and Treasurer Treasurer
Salvatore Venezia ............... Vice President None
William Wasel ................... Vice President None
Robert Harris ................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey
08536), and its transfer agent, Financial Data Services, Inc. (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484).
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the Fund --
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Fund -- Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a prospectus
is delivered a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro and the State of New Jersey, on the 30th day of
September, 1998.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.
(Registrant)
By: /S/ GERALD M. RICHARD
-------------------------------------
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE(S)
- ------------------------------------------- ------------------------------- ----------------
<S> <C> <C>
ARTHUR ZEIKEL* President (Principal Executive
---------------------------------- Officer) and Director
(ARTHUR ZEIKEL)
GERALD M. RICHARD* Treasurer (Principal Financial
---------------------------------- and Accounting Officer)
(GERALD M. RICHARD)
DONALD CECIL* Director
----------------------------------
(DONALD CECIL)
EDWARD H. MEYER* Director
----------------------------------
(EDWARD H. MEYER)
CHARLES C. REILLY* Director
----------------------------------
(CHARLES C. REILLY)
RICHARD R. WEST* Director
----------------------------------
(RICHARD R. WEST)
EDWARD D. ZINBARG* Director
----------------------------------
(EDWARD D. ZINBARG)
*By: /S/ GERALD M. RICHARD September 30, 1998
------------------------------
(GERALD M. RICHARD, ATTORNEY-IN-FACT)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ---------------------------------------------------------------------------
<S> <C> <C>
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17(a) -- Financial Data Schedule for Class A Shares.
17(b) -- Financial Data Schedule for Class B Shares.
17(c) -- Financial Data Schedule for Class C Shares.
17(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.--CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 69,703,616
<INVESTMENTS-AT-VALUE> 75,647,735
<RECEIVABLES> 2,216,609
<ASSETS-OTHER> 424,144
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78,288,488
<PAYABLE-FOR-SECURITIES> 526,255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 624,461
<TOTAL-LIABILITIES> 1,150,716
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 88,787,610
<SHARES-COMMON-STOCK> 463,145
<SHARES-COMMON-PRIOR> 515,134
<ACCUMULATED-NII-CURRENT> 2,013,949
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (15,639,304)
<OVERDISTRIBUTION-GAINS> (4,101,895)
<ACCUM-APPREC-OR-DEPREC> 6,077,412
<NET-ASSETS> 4,376,230
<DIVIDEND-INCOME> 1,225,146
<INTEREST-INCOME> 274,359
<OTHER-INCOME> 0
<EXPENSES-NET> (2,652,422)
<NET-INVESTMENT-INCOME> (1,152,917)
<REALIZED-GAINS-CURRENT> (13,369,173)
<APPREC-INCREASE-CURRENT> 2,345,451
<NET-CHANGE-FROM-OPS> (12,176,639)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (179,237)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 249,406
<NUMBER-OF-SHARES-REDEEMED> (321,602)
<SHARES-REINVESTED> 20,207
<NET-CHANGE-IN-ASSETS> (65,034,437)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 896,735
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 894,653
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,652,422
<AVERAGE-NET-ASSETS> 4,393,068
<PER-SHARE-NAV-BEGIN> 10.69
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> (.81)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.42)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.45
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.--CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 69,703,616
<INVESTMENTS-AT-VALUE> 75,647,735
<RECEIVABLES> 2,216,609
<ASSETS-OTHER> 424,144
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78,288,488
<PAYABLE-FOR-SECURITIES> 526,255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 624,461
<TOTAL-LIABILITIES> 1,150,716
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 88,787,610
<SHARES-COMMON-STOCK> 6,189,230
<SHARES-COMMON-PRIOR> 10,558,477
<ACCUMULATED-NII-CURRENT> 2,013,949
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (15,639,304)
<OVERDISTRIBUTION-GAINS> (4,101,895)
<ACCUM-APPREC-OR-DEPREC> 6,077,412
<NET-ASSETS> 57,423,535
<DIVIDEND-INCOME> 1,225,146
<INTEREST-INCOME> 274,359
<OTHER-INCOME> 0
<EXPENSES-NET> (2,652,422)
<NET-INVESTMENT-INCOME> (1,152,917)
<REALIZED-GAINS-CURRENT> (13,369,173)
<APPREC-INCREASE-CURRENT> 2,345,451
<NET-CHANGE-FROM-OPS> (12,176,639)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (3,120,853)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 806,805
<NUMBER-OF-SHARES-REDEEMED> (5,408,795)
<SHARES-REINVESTED> 232,743
<NET-CHANGE-IN-ASSETS> (65,034,437)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 896,735
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 894,653
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,652,422
<AVERAGE-NET-ASSETS> 81,113,522
<PER-SHARE-NAV-BEGIN> 10.54
<PER-SHARE-NII> (.12)
<PER-SHARE-GAIN-APPREC> (.78)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.28
<EXPENSE-RATIO> 2.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.--CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 69,703,616
<INVESTMENTS-AT-VALUE> 75,647,735
<RECEIVABLES> 2,216,609
<ASSETS-OTHER> 424,144
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78,288,488
<PAYABLE-FOR-SECURITIES> 526,255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 624,461
<TOTAL-LIABILITIES> 1,150,716
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 88,787,610
<SHARES-COMMON-STOCK> 465,918
<SHARES-COMMON-PRIOR> 566,674
<ACCUMULATED-NII-CURRENT> 2,013,949
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (15,639,304)
<OVERDISTRIBUTION-GAINS> (4,101,895)
<ACCUM-APPREC-OR-DEPREC> 6,077,412
<NET-ASSETS> 4,311,668
<DIVIDEND-INCOME> 1,225,146
<INTEREST-INCOME> 274,359
<OTHER-INCOME> 0
<EXPENSES-NET> (2,652,422)
<NET-INVESTMENT-INCOME> (1,152,917)
<REALIZED-GAINS-CURRENT> (13,369,173)
<APPREC-INCREASE-CURRENT> 2,345,451
<NET-CHANGE-FROM-OPS> (12,176,639)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (186,701)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 130,137
<NUMBER-OF-SHARES-REDEEMED> (251,350)
<SHARES-REINVESTED> 20,457
<NET-CHANGE-IN-ASSETS> (65,034,437)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 896,735
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 894,653
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,652,422
<AVERAGE-NET-ASSETS> 4,942,341
<PER-SHARE-NAV-BEGIN> 10.52
<PER-SHARE-NII> (.12)
<PER-SHARE-GAIN-APPREC> (.79)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.25
<EXPENSE-RATIO> 2.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH GLOBAL SMALLCAP FUND, INC.--CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 69,703,616
<INVESTMENTS-AT-VALUE> 75,647,735
<RECEIVABLES> 2,216,609
<ASSETS-OTHER> 424,144
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78,288,488
<PAYABLE-FOR-SECURITIES> 526,255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 624,461
<TOTAL-LIABILITIES> 1,150,716
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 88,787,610
<SHARES-COMMON-STOCK> 1,171,871
<SHARES-COMMON-PRIOR> 1,824,208
<ACCUMULATED-NII-CURRENT> 2,013,949
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (15,639,304)
<OVERDISTRIBUTION-GAINS> (4,101,895)
<ACCUM-APPREC-OR-DEPREC> 6,077,412
<NET-ASSETS> 11,026,339
<DIVIDEND-INCOME> 1,225,146
<INTEREST-INCOME> 274,359
<OTHER-INCOME> 0
<EXPENSES-NET> (2,652,422)
<NET-INVESTMENT-INCOME> (1,152,917)
<REALIZED-GAINS-CURRENT> (13,369,173)
<APPREC-INCREASE-CURRENT> 2,345,451
<NET-CHANGE-FROM-OPS> (12,176,639)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (615,104)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 966,990
<NUMBER-OF-SHARES-REDEEMED> (1,665,808)
<SHARES-REINVESTED> 46,481
<NET-CHANGE-IN-ASSETS> (65,034,437)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 896,735
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 894,653
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,652,422
<AVERAGE-NET-ASSETS> 14,804,351
<PER-SHARE-NAV-BEGIN> 10.66
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> (.79)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.41)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.41
<EXPENSE-RATIO> 1.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global SmallCap Fund, Inc:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 5 to Registration Statement No. 33-53399 of our report dated August 15, 1998
appearing in the annual report to shareholders of the Merrill Lynch Global
SmallCap Fund, Inc. for the year ended June 30, 1998, and to the reference to
us under the caption "Financial Highlights" in the Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
September 28, 1998
