As filed with the Securities and Exchange Commission on March 22, 2000
Securities Act File No. 333-96005
Investment Company Act File No. 811-5723
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
[X] Pre-Effective Amendment No.1 [ ] Post-Effective Amendment No.
(Check appropriate box or boxes)
------------------------------
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
(Exact Name Of Registrant As Specified In Its Charter)
------------------------------
(609) 282-2800
(Area Code And Telephone Number)
------------------------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address Of Principal Executive Offices:
Number, Street, City, State, Zip Code)
------------------------------
Terry K. Glenn
Merrill Lynch Developing Capital Markets Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name And Address Of Agent For Service)
------------------------------
Copies to:
FRANK P. BRUNO, ESQ. MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
One World Trade Center 800 Scudders Mill Road
New York, NY 10048-0557 Plainsboro, NJ 08536
------------------------------
Approximate Date Of Proposed Public Offering: As soon as practicable
after the Registration Statement becomes effective under the Securities Act of
1933.
------------------------------
Title of Securities Being Registered: Common Stock, Par Value $.10 per
share.
No filing fee is required because of reliance on Section 24(f) under the
Investment Company Act of 1940, as amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
P.O. Box 9011
Princeton, New Jersey 08543-9011
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On April 26, 2000
TO THE STOCKHOLDERS OF
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Meeting") of Merrill Lynch Middle East/Africa Fund, Inc. ("Middle East/Africa
Fund") will be held at the offices of Merrill Lynch Asset Management, L.P.,
800 Scudders Mill Road, Plainsboro, New Jersey on Wednesday, April 26, 2000 at
11:15 a.m., Eastern time, for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization
(the "Agreement and Plan of Reorganization") providing for the
acquisition of substantially all of the assets of Middle East/Africa Fund
by Merrill Lynch Developing Capital Markets Fund, Inc. ("Developing
Capital Markets Fund"), and the assumption of substantially all of the
liabilities of Middle East/Africa Fund by Developing Capital Markets
Fund, in exchange solely for an equal aggregate value of newly-issued
shares of Developing Capital Markets Fund. The Agreement and Plan of
Reorganization also provides for distribution of such shares of
Developing Capital Markets Fund to stockholders of Middle East/Africa
Fund in liquidation of Middle East/Africa Fund. A vote in favor of this
proposal will constitute a vote in favor of the liquidation and
dissolution of Middle East/Africa Fund and the termination of its
registration under the Investment Company Act of 1940, as amended; and
(2) To transact such other business as properly may come before the
Meeting or any adjournment thereof.
The Board of Directors of Middle East/Africa Fund has fixed the close of
business on March 15, 2000 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof.
A complete list of the stockholders of Middle East/Africa Fund entitled
to vote at the Meeting will be available and open to the examination of any
stockholders of Middle East/Africa Fund for any purpose germane to the Meeting
during ordinary business hours from and after April 12, 2000 at the offices of
Middle East/Africa Fund, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meeting. Stockholders who do
not expect to attend the Meeting in person are requested to complete, date and
sign the enclosed form of proxy and return it promptly in the envelope
provided for that purpose. The enclosed proxy is being solicited on behalf of
the Board of Directors of Middle East/Africa Fund.
By Order of the Board of Directors,
SUSAN B. BAKER
Secretary
Plainsboro, New Jersey
Dated: March 22, 2000
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011
(609) 282-2800
SPECIAL MEETING OF STOCKHOLDERS OF
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
This Proxy Statement and Prospectus is being sent to you because you are
a stockholder of Merrill Lynch Middle East/Africa Fund, Inc. ("Middle
East/Africa Fund"), a Maryland corporation. Middle East/Africa Fund has called
a Special Meeting of its stockholders to approve the acquisition of its assets
and the assumption of its liabilities by Merrill Lynch Developing Capital
Markets Fund, Inc. ("Developing Capital Markets Fund") in exchange for shares
of Developing Capital Markets Fund. After the completion of these
transactions, Middle East/Africa Fund will terminate its registration under
the Investment Company Act of 1940, as amended, and will dissolve in
accordance with the laws of the State of Maryland.
Both Middle East/Africa Fund and Developing Capital Markets Fund are
open-end management investment companies with similar, though not identical,
investment objectives. Each Fund seeks long term capital appreciation.
Developing Capital Markets Fund invests in securities, principally equities,
of issuers in countries having smaller capital markets. Middle East/Africa
Fund invests primarily in equity and debt securities of corporations and
government issuers in the Middle East and Africa.
The current prospectus relating to Developing Capital Markets Fund, dated
October 29, 1999 (the "Developing Capital Markets Fund Prospectus"),
accompanies this Proxy Statement and Prospectus and is incorporated herein by
reference. The Annual Report to Stockholders of Developing Capital Markets
Fund as of June 30, 1999 and the Semi-Annual Report to Stockholders of
Developing Capital Markets Fund as of December 31, 1999 also accompany this
Proxy Statement and Prospectus.
-------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Proxy Statement and
Prospectus. Any representation to the contrary is a criminal offense.
--------------------------------------------------
This Proxy Statement and Prospectus sets forth concisely the information
about Developing Capital Markets Fund that a stockholder of Middle East/Africa
Fund should know before considering this reorganization transaction and should
be retained for future reference. Middle East/Africa Fund has authorized the
solicitation of proxies in connection with the Reorganization solely on the
basis of this Proxy Statement and Prospectus and the accompanying documents.
A statement of additional information relating to this reorganization
transaction (the "Statement of Additional Information") is on file with the
Commission. It is available from Developing Capital Markets Fund without
charge, upon oral request by calling 1-800-456-4587, ext. 123 or upon written
request by writing Developing Capital Markets Fund at its principal executive
offices. The Statement of Additional Information, dated March 22, 2000 is
incorporated by reference into this Proxy Statement and Prospectus. The
Commission maintains a web site (http://www.sec.gov) that contains the
Statement of Additional Information, other material incorporated herein by
reference and other information regarding the Funds.
The address of the principal executive offices of both Middle East/Africa
Fund and Developing Capital Markets Fund is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.
--------------------------------------------------
The date of this Proxy Statement and Prospectus is March 22, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INTRODUCTION.................................................................................3
SUMMARY......................................................................................3
The Reorganization.......................................................................4
Pro Forma Fee Tables.....................................................................5
RISK FACTORS AND SPECIAL CONSIDERATIONS.....................................................13
COMPARISON OF THE FUNDS.....................................................................16
Financial Highlights....................................................................16
Investment Objectives and Policies......................................................20
Other Investment Policies...............................................................22
Information Regarding Options, Futures and Foreign Exchange Transactions................23
Investment Restrictions.................................................................23
Management..............................................................................23
Purchase of Shares......................................................................25
Redemption of Shares....................................................................25
Performance.............................................................................26
Stockholder Rights......................................................................26
Dividends...............................................................................27
Automatic Dividend Reinvestment Plan....................................................27
Tax Information.........................................................................27
Portfolio Transactions..................................................................27
Portfolio Turnover......................................................................27
Additional Information..................................................................27
THE REORGANIZATION..........................................................................28
General.................................................................................28
Procedure...............................................................................29
Terms of the Agreement and Plan.........................................................29
Potential Benefits to Stockholders as a Result of the Reorganization....................30
Tax Consequences of the Reorganization..................................................31
Capitalization..........................................................................32
INFORMATION CONCERNING THE SPECIAL MEETING..................................................33
Date, Time and Place of Meeting.........................................................33
Solicitation, Revocation and Use of Proxies.............................................33
Record Date and Outstanding Shares......................................................34
Security Ownership of Certain Beneficial Owners and Management of Middle
East/Africa Fund and Developing Capital Markets Fund....................................34
Voting Rights and Required Vote.........................................................34
ADDITIONAL INFORMATION......................................................................34
LEGAL PROCEEDINGS...........................................................................35
LEGAL OPINIONS..............................................................................35
EXPERTS.....................................................................................35
STOCKHOLDER PROPOSALS.......................................................................35
AGREEMENT AND PLAN OF REORGANIZATION........................................................I-1
</TABLE>
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Middle
East/Africa Fund for use at a special meeting of stockholders of Middle
East/Africa Fund (the "Meeting") to be held at the offices of Merrill Lynch
Asset Management ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey on
April 26, 2000, at 11:15 a.m., Eastern time. The mailing address for Middle
East/Africa Fund is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
approximate mailing date of this Proxy Statement and Prospectus is March 24,
2000.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation
to the Secretary of Middle East/Africa Fund at the address indicated above or
by voting in person at the Meeting. All properly executed proxies received
prior to the Meeting will be voted at the Meeting in accordance with the
instructions marked thereon or otherwise as provided therein. Unless
instructions to the contrary are marked, properly executed proxies will be
voted "FOR" the proposal to approve the Agreement and Plan of Reoganization
between Developing Capital Markets Fund and Middle East/Africa Fund (the
"Agreement and Plan").
Stockholders of Middle East/Africa Fund will be entitled to receive the
same class of shares of Developing Capital Markets Fund (i.e., Class A, Class
B, Class C or Class D) (the "Corresponding Shares") as they held in Middle
East/Africa Fund immediately prior to the Reorganization. The same
distribution fees, account maintenance fees and sales charges (including
contingent deferred sales charges ("CDSCs")), if any, shall apply to
Corresponding Shares as applied to shares of Middle East/Africa Fund
immediately prior to the Reorganization. The aggregate net asset value of the
Corresponding Shares of Developing Capital Markets Fund to be issued to the
stockholders of Middle East/Africa Fund will equal the aggregate net asset
value of the outstanding shares of Middle East/Africa Fund as set forth in the
Agreement and Plan. Middle East/Africa Fund and Developing Capital Markets
Fund sometimes are referred to herein collectively as the "Funds" and
individually as a "Fund," as the context requires. The fund resulting from the
Reorganization is sometimes referred to herein as the "Combined Fund."
Approval of the Agreement and Plan will require the affirmative vote of
Middle East/Africa Fund stockholders representing a majority of the total
number of votes entitled to be cast thereon. Stockholders will vote as a
single class on the proposal to approve the Agreement and Plan. See
"Information Concerning the Special Meeting."
The Board of Directors of Middle East/Africa Fund knows of no business
other than that discussed above which will be presented for consideration at
the Meeting. If any other matter is properly presented, it is the intention of
the persons named in the enclosed proxy to vote in accordance with their best
judgment.
This Proxy Statement and Prospectus serves as a prospectus of Developing
Capital Markets Fund under the Securities Act of 1933, as amended (the
"Securities Act"), in connection with the issuance of shares of Developing
Capital Markets Fund to Middle East/Africa Fund pursuant to the terms of the
Agreement and Plan.
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus (including documents incorporated by
reference) and is qualified in its entirety by reference to the more complete
information contained in this Proxy Statement and Prospectus and in the
Agreement and Plan, attached hereto as Exhibit I.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of Middle East/Africa Fund
by Developing Capital Markets Fund in exchange for the Corresponding Shares
and the subsequent distribution of Corresponding Shares to the stockholders of
Middle East/Africa Fund; and (ii) the subsequent deregistration and
dissolution of Middle East/Africa Fund.
The Reorganization
At a meeting of the Board of Directors of Middle East/Africa Fund held on
January 20, 2000, the Board of Directors approved a proposal that Developing
Capital Markets Fund acquire substantially all of the assets, and assume
substantially all of the liabilities, of Middle East/Africa Fund in exchange
solely for shares of Developing Capital Markets Fund to be distributed to the
stockholders of Middle East/Africa Fund.
Based upon their evaluation of all relevant information, the Directors of
Middle East/Africa Fund have determined that the Reorganization will
potentially benefit the stockholders of Middle East/Africa Fund. Specifically,
the Directors considered that after the Reorganization, Middle East/Africa
Fund stockholders will remain invested in an open-end fund with a
substantially larger net asset value. As part of a larger fund (as of February
29, 2000 the net assets of Developing Capital Markets Fund were approximately
$230.1 million) Middle East/Africa Fund stockholders are likely to benefit
from reduced overall operating expenses per share on a pro forma basis as a
result of certain economies of scale expected after the Reorganization.
Additionally, the Corresponding Shares received by Middle East/Africa Fund
stockholders will not be subject to the redemption fee that is applicable to
any Middle East/Africa Fund shares redeemed within 12 months of purchase. In
addition, as stockholders of Developing Capital Markets Fund, they will have
an exchange privilege with certain other funds utilizing the Merrill Lynch
Select Pricing(SM) System ("Select Pricing") which is not available to Middle
East/Africa Fund stockholders. See "Summary--Pro Forma Fee Tables" and "The
Reorganization--Potential Benefits to Stockholders as a Result of the
Reorganization."
The Board of Directors of Middle East/Africa Fund, including all of the
Directors who are not "interested persons," as defined in the Investment
Company Act, has determined that the Reorganization is in the best interests
of Middle East/Africa Fund and that the interests of existing Middle
East/Africa Fund stockholders will not be diluted as a result of effecting the
Reorganization.
If all of the requisite approvals are obtained, it is anticipated that
the Reorganization will occur as soon as practicable after such approval,
provided that Middle East/Africa Fund and Developing Capital Markets Fund have
obtained prior to that time either (a) a favorable private letter ruling from
the Internal Revenue Service (the "IRS") or (b) an opinion of counsel
concerning the tax consequences of the Reorganization as set forth in the
Agreement and Plan. The Agreement and Plan may be terminated, and the
Reorganization abandoned, whether before or after approval by the stockholders
of Middle East/Africa Fund, at any time prior to the Exchange Date (as defined
below), (i) by mutual consent of the Board of Directors of Middle East/Africa
Fund and the Board of Directors of Developing Capital Markets Fund; (ii) by
the Board of Directors of Middle East/Africa Fund if any condition to Middle
East/Africa Fund's obligations has not been fulfilled or waived by such Board;
or (iii) by the Board of Directors of Developing Capital Markets Fund if any
condition to Developing Capital Markets Fund's obligations has not been
fulfilled or waived by such Board.
<PAGE>
Pro Forma Fee Tables
The tables below provide information about the fees and expenses
attributable to shares of each Fund and, assuming the Reorganization takes
place, the estimated annualized fees and expenses attributable to shares of
the Combined Fund.
<TABLE>
<CAPTION>
Pro Forma Fee Table for Class A and Class B Stockholders of Middle East/Africa Fund,
Developing Capital Markets Fund and the Combined Fund*
as of November 30, 1999 (unaudited)
Class A Shares Class B Shares (b)
------------------------------------- -------------------------------------
Actual Actual
------------------------- ------------------------
Middle Developing Developing
East/Africa Capital Middle Capital
Fund Markets Combined East/Africa Markets Combined
Fund Fund* Fund* Fund Fund*
------------ ------------------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stockholder Fees (fees paid
directly from a stockholder's
investment) (a):
Maximum Sales Charge
(Load) imposed on
purchases (as a
percentage of
offering price)...... 5.25%(c) 5.25%(c) 5.25%(c) None None None
Maximum Deferred Sales
Charge (Load) (as a
percentage of
original purchase
price or redemption
proceeds,
whichever is lower).. None(d) None(d) None(d) 4.0%(c) 4.0%(c) 4.0%(c)
Maximum Sales Charge
(Load) Imposed on
Dividend
Reinvestments........ None None None None None None
Redemption Fee (as a
percentage of net
asset value of
shares redeemed
within 12 months of
purchase)............ 2.0% None None 2.0% None None
Exchange Fee............. None None None None None None
Annual Fund Operating Expenses
(expenses that are
deducted from Fund
assets):
Management Fee......... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Distribution and/or
Service (12b-1)
Fees(e)............ None None None 1.00% 1.00% 1.00%
Other Expenses
(including
transfer agent
fees) (f).......... 9.74% 0.79% 0.79% 9.74% 0.79% 0.79%
---- ---- ---- ---- ---- ----
Total Annual Fund
Operating Expenses. 10.74%(g) 1.79% 1.79% 11.74%(g) 2.79% 2.79%
===== ==== ==== ===== ==== ====
- -----------------
Footnotes appear on next page
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Fee Table for Class C and Class D Stockholders of Middle East/Africa Fund,
Developing Capital Markets Fund and the Combined Fund*
as of November 30, 1999 (unaudited)
Class C Shares Class D Shares
------------------------------------- -------------------------------------
Actual Actual
------------------------- ------------------------
Developing Developing
Middle Capital Middle Capital
East/Africa Markets Combined East/Africa Markets Combined
Fund Fund Fund* Fund* Fund Fund*
------------ ------------------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stockholder Fees (fees paid
directly from a stockholder's
investment) (a):
Maximum Sales Charge
(Load) imposed on
purchases (as a
percentage of
offering price)...... None None None 5.25%(c) 5.25%(c) 5.25%(c)
Maximum Deferred Sales
Charge (Load) (as a
percentage of
original purchase
price or redemption
proceeds,
whichever is lower).. 1.0%(c) 1.0%(c) 1.0%(c) None(d) None(d) None(d)
Maximum Sales Charge
(Load) Imposed on
Dividend
Reinvestments........ None None None None None None
Redemption Fee (as a
percentage of net
asset value of
shares redeemed
within 12 months of
purchase)............ 2.0% None None 2.0% None None
Exchange Fee............. None None None None None None
Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets):
Management Fee......... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Distribution and/or
Service (12b-1)
Fees(e)............ 1.00% 1.00% 1.00% 0.25% 0.25% 0.25%
Other Expenses
(including
transfer agent
fees) (f).......... 9.74% 0.79% 0.79% 9.74% 0.79% 0.79%
---- ---- ---- ---- ---- ----
Total Annual Fund
Operating Expenses. 11.74%(g) 2.79% 2.79% 10.99%(g) 2.04% 2.04%
===== ==== ==== ===== ==== ====
</TABLE>
- -----------
* The expenses for the Combined Fund represent the estimated annualized
expenses assuming Developing Capital Markets Fund had acquired the assets
and assumed the liabilities of Middle East/Africa Fund as of November 30,
1999.
(a) In addition, Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("
Merrill Lynch") may charge clients a processing fee (currently $5.35) when
a client buys or sells shares.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase and will no longer be subject to distribution
fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) A stockholder may pay a deferred sales charge if such stockholder
purchases $1 million or more and redeems within one year.
(e) The Funds call the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in the Prospectuses of the Funds and all
other Fund materials. If a stockholder holds Class B or Class C shares for
a long time, it may cost that stockholder more in distribution (12b-1)
fees than the maximum sales charge that such stockholder would have paid
if he or she had bought one of the other classes.
(f) The Funds pay the Transfer Agent $11.00 for each Class A and Class D
stockholder account and $14.00 for each Class B and Class C stockholder
account and reimburse the Transfer Agent's out-of-pocket expenses. The
Funds pay a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Funds also pay a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. MLAM provides
accounting services to the Funds at cost. For the fiscal year ended June
30, 1999, Developing Capital Markets Fund reimbursed MLAM $205,571 for
these services; for the fiscal year ended November 30, 1999, Middle
East/Africa Fund reimbursed MLAM $77,575 for these services.
(g) For the fiscal year ended November 30, 1999, MLAM voluntarily waived the
entire management fee due from Middle East/Africa Fund and voluntarily
reimbursed such Fund for a portion of its other expenses (excluding Rule
12b-1 fees). MLAM may reduce or discontinue any waiver of the management
fee or reimbursement of expenses at any time without notice. Total Annual
Fund Operating Expenses, after giving effect to this waiver of fees and
reimbursement of expenses, were 0.50% for Class A shares, 1.50% for Class
B shares, 1.50% for Class C shares and 0.75% for Class D shares.
<PAGE>
EXAMPLES:
These examples assume that you invest $10,000 in the relevant Fund for the
time periods indicated, that your investment has a 5% return each year, that
you pay the sales charges, if any, that apply to the particular class and that
the Fund's operating expenses remain the same. This assumption is not meant to
indicate you will receive a 5% annual rate of return. Your annual return may
be more or lass than the 5% used in these examples. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
---
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------- ------------- ------------- ------------ -------------
Class A
- ----------------------------------------- ------------- ------------- ------------ -------------
Middle East/Africa Fund $1,692* $3,323 $4,931 $8,210
Developing Capital Markets Fund $697 $1,059 $1,444 $2,520
Combined Fund+ $697 $1,059 $1,444 $2,520
- ----------------------------------------- ------------- ------------- ------------ -------------
Class B
- ----------------------------------------- ------------- ------------- ------------ -------------
Middle East/Africa Fund $1,734* $3,379 $4,957 $8,455**
Developing Capital Markets Fund $682 $1,065 $1,474 $2,940**
Combined Fund+ $682 $1,065 $1,474 $2,940**
- ----------------------------------------- ------------- ------------- ------------ -------------
Class C
- ----------------------------------------- ------------- ------------- ------------ -------------
Middle East/Africa Fund $1,434* $3,179 $4,957 $8,455
Developing Capital Markets Fund $382 $865 $1,474 $3,119
Combined Fund+ $382 $865 $1,474 $3,119
- ----------------------------------------- ------------- ------------- ------------ -------------
Class D
- ----------------------------------------- ------------- ------------- ------------ -------------
Middle East/Africa Fund $1,713* $3,377 $5,006 $8,296
Developing Capital Markets Fund $721 $1,131 $1,566 $2,770
Combined Fund+ $721 $1,131 $1,566 $2,770
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
-------
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------- ------------- ------------- ------------ -------------
Class A
- ----------------------------------------- ------------- ------------- ------------ -------------
Middle East/Africa Fund $1,513 $3,323 $4,931 $8,210
Developing Capital Markets Fund $697 $1,059 $1,444 $2,520
Combined Fund+ $697 $1,059 $1,444 $2,520
- ----------------------------------------- ------------- ------------- ------------ -------------
Class B
- ----------------------------------------- ------------- ------------- ------------ -------------
Middle East/Africa Fund $1,134 $3,179 $4,957 $8,455**
Developing Capital Markets Fund $282 $865 $1,474 $2,940**
Combined Fund+ $282 $865 $1,474 $2,940**
- ----------------------------------------- ------------- ------------- ------------ -------------
Class C
- ----------------------------------------- ------------- ------------- ------------ -------------
Middle East/Africa Fund $1,134 $3,179 $4,957 $8,455
Developing Capital Markets Fund $282 $865 $1,474 $3,119
Combined Fund+ $282 $865 $1,474 $3,119
- ----------------------------------------- ------------- ------------- ------------ -------------
Class D
- ----------------------------------------- ------------- ------------- ------------ -------------
Middle East/Africa Fund $1,535 $3,377 $5,006 $8,296
Developing Capital Markets Fund $721 $1,131 $1,566 $2,770
Combined Fund+ $721 $1,131 $1,566 $2,770
</TABLE>
- -----------
+ Assuming the Reorganization had taken place on November 30, 1999.
* Reflects the 2% redemption fee charged on redemptions made within one year
of purchase.
** Assumes conversion of Class B shares to Class D shares approximately eight
years after initial purchase.
<PAGE>
The foregoing Pro Forma Fee Tables and Examples are intended to assist
investors in understanding the costs and expenses that a Middle East/Africa
Fund or Developing Capital Markets Fund stockholder bears directly or
indirectly as compared to the costs and expenses that would be borne by such
investors taking into account the Reorganization. The Examples set forth above
assume reinvestment of all dividends and utilize a 5% annual rate of return as
mandated by Commission regulations. The Examples 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 Examples. See "Summary," "The
Reorganization--Potential Benefits to Stockholders as a Result of the
Reorganization" and "Comparison of the Funds--Management," "--Purchase of
Shares" and "--Redemption of Shares."
Middle East/Africa Fund Middle East/Africa Fund was incorporated
under the laws of the State of Maryland
on March 15, 1994 and commenced
operations on December 30, 1994. Middle
East/Africa Fund is a non-diversified,
open-end management investment company.
As of February 29, 2000, Middle
East/Africa Fund had net assets of
approximately $3,489,196.
Developing Capital Markets Fund Developing Capital Markets Fund was
incorporated under the laws of the State
of Maryland on April 14, 1989 and
commenced operations on September 1,
1989. Developing Capital Markets Fund is
a non-diversified, open-end management
investment company.
As of February 29, 2000, Developing
Capital Markets Fund had net assets of
approximately $230,140,117.
Comparison of the Funds Investment Objectives. The investment
objectives of Developing Capital Markets
Fund and Middle East/Africa Fund are
similar, though not identical.
Developing Capital Markets Fund seeks
long-term capital appreciation by
investing in securities, principally
equities, of issuers in countries having
smaller capital markets. Developing
Capital Markets Fund considers all
countries other than Japan, the United
Kingdom, the United States and Germany
to be countries having smaller capital
markets. Middle East/Africa Fund also
seeks long-term capital appreciation but
may invest more heavily in debt
securities than can Developing Capital
Markets Fund and is limited to investing
in issuers located in the Middle East
and Africa.
Under normal circumstances, Developing
Capital Markets Fund will invest at
least 65% of its assets in equity
securities of countries having smaller
capital markets. Developing Capital
Markets Fund may invest in debt
securities of companies and governments
in these countries and has not
established any rating or maturity
criteria for such debt securities.
Middle East/Africa Fund may invest in
both equity and debt securities and may
vary the balance between equity and debt
securities as Fund management deems
advisable. Under normal circumstances,
Middle East/Africa Fund will tend to
invest more heavily in equity
securities. Like Developing Capital
Markets Fund, Middle East/Africa Fund
has established no rating criteria for
the debt securities in which it may
invest.
Management Fees. The manager for both
Middle East/Africa Fund and Developing
Capital Markets Fund is MLAM. MLAM is
responsible for the management of each
Fund's investment portfolio and for
providing administrative services to
each Fund. Pursuant to a separate
management agreement between each Fund
and MLAM, each Fund pays MLAM a monthly
fee at the annual rate of 1.00% of the
average daily net assets of the Fund.
After the Reorganization, the advisory
fee paid by the Combined Fund would be
1.00% of the average daily net assets of
the Combined Fund. See "Summary--Pro
Forma Fee Tables" and "Comparison of the
Funds--Management."
A. Grace Pineda serves as portfolio
manager for both Funds. Ms. Pineda has
served as Portfolio Manager of
Developing Capital Markets Fund since
its inception (September 1, 1989) and
has served as Portfolio Manager of
Middle East/Africa Fund since its
inception (December 30, 1994).
MLAM has retained Merrill Lynch Asset
Management U.K. Limited ("MLAM U.K.") as
sub-adviser to each of the Funds.
Pursuant to a separate sub-advisory
agreement between MLAM and MLAM U.K.
with respect to each Fund, MLAM pays
MLAM U.K. a fee for providing investment
advisory services to MLAM with respect
to each Fund, in an amount to be
determined from time to time by MLAM and
MLAM U.K. but in no event in excess of
the amount MLAM actually receives for
providing services to each Fund pursuant
to such Fund's management agreement.
Class Structure. Each Fund offers four
classes of shares under the Select
Pricing System. The Class A, Class B,
Class C and Class D shares issued by
Developing Capital Markets Fund are
identical in all respects to the Class
A, Class B, Class C and Class D shares
issued by Middle East/Africa Fund,
except that (a) they represent ownership
interests in a different investment
portfolio, (b) all classes of Middle
East/Africa Fund shares are subject to a
redemption fee of 2.0% of the net asset
value of any shares redeemed within 12
months of purchase and (c) Developing
Capital Markets Fund shares have an
exchange privilege with certain other
funds utilizing the Select Pricing
System. See "Comparison of the
Funds--Purchase of Shares,"
"--Redemption of Shares" and "Additional
Information--Stockholder Services."
Overall Expense Ratio. As of November
30, 1999, the overall operating expense
ratio (excluding class specific
distribution and account maintenance
fees) for Middle East/Africa Fund was
10.74% (based on net assets of
approximately $3.3 million and without
giving effect to any fee waiver or
reimbursement of expenses) and for
Developing Capital Markets Fund was
1.79% (based on net assets of
approximately $200.8 million). If the
Reorganization had taken place on that
date, the estimated overall operating
expense ratio (excluding class specific
distribution and account maintenance
fees) for the Combined Fund would have
been 1.79% (based on net assets of
approximately $204.1 million).
The foregoing expense ratios are for
each Fund on an overall basis. Such
ratios differ among Class A, Class B,
Class C and Class D shares as a result
of class specific distribution and
account maintenance expenditures. See
"Summary--Pro Forma Fee Tables."
<PAGE>
Purchase of Shares. Shares of Developing
Capital Markets Fund are offered
continuously for sale to the public in
substantially the same manner as shares
of Middle East/Africa Fund. See
"Comparison of the Funds--Purchase of
Shares."
Redemption of Shares. The redemption
procedures for shares of Developing
Capital Markets Fund are substantially
the same as the redemption procedures
for shares of Middle East/Africa Fund
except that all classes of shares of
Middle East/Africa Fund are subject to a
redemption fee of 2.0% of the net asset
value of any shares redeemed within 12
months of purchase. For purposes of
computing any CDSC that may be payable
upon disposition of Corresponding Shares
of Developing Capital Markets Fund
acquired by Middle East/Africa Fund
stockholders in the Reorganization, the
holding period of Middle East/Africa
Fund shares outstanding on the date the
Reorganization takes place will be
"tacked" onto the holding period of the
Corresponding Shares of Developing
Capital Markets Fund acquired in the
Reorganization. See "Comparison of the
Funds--Redemption of Shares."
Dividends. Middle East/Africa Fund's
policies with respect to dividends are
substantially the same as those of
Developing Capital Markets Fund. See
"Comparison of the Funds--Dividends."
Net Asset Value. Both Middle East/Africa
Fund and Developing Capital Markets Fund
determine net asset value of each class
of shares once daily as of the close of
business on the New York Stock Exchange
(the "NYSE") on each day the NYSE is
open for trading based on prices at the
time of closing. The NYSE generally
closes at 4:00 p.m., Eastern time. Both
Funds compute net asset value per share
in the same manner. See "Comparison of
the Funds--Additional Information--Net
Asset Value."
Voting Rights. The corresponding voting
rights of the holders of shares of
common stock of each Fund are
substantially the same. See "Comparison
of the Funds -- Additional Information
-- Capital Stock."
Other Significant Considerations.
Stockholder services available to Middle
East/Africa Fund stockholders, such as
providing the annual and semi-annual
reports, are substantially the same as
those available to Developing Capital
Markets Fund stockholders, however,
Developing Capital Markets Fund
stockholders have an exchange privilege
with certain other funds utilizing the
Select Pricing System that is not
available to Middle East/Africa Fund
stockholders. This exchange privilege
will be available for the Corresponding
Shares acquired by Middle East/Africa
Fund stockholders in the Reorganization.
See "Comparison of the Funds--Additional
Information--Stockholder Services." An
automatic dividend reinvestment plan is
available to stockholders of each Fund.
The plans are identical. See "Comparison
of the Funds -- Automatic Dividend
Reinvestment Plan" and "Comparison of
the Funds -- Additional
Information--Stockholder Services."
Tax Considerations Middle East/Africa Fund and Developing
Capital Markets Fund jointly have
requested a private letter ruling from
the IRS with respect to the
Reorganization to the effect that, among
other things, neither Middle East/Africa
Fund nor Developing Capital Markets Fund
will recognize gain or loss on the
transaction, and Middle East/Africa Fund
stockholders will not recognize gain or
loss on the exchange of their shares of
Middle East/Africa Fund stock for
Corresponding Shares of Developing
Capital Markets Fund. The consummation
of the Reorganization is subject to the
receipt of such ruling or receipt of an
opinion of counsel to the same effect.
The Reorganization will not affect the
status of Developing Capital Markets
Fund as a regulated investment company.
Developing Capital Markets Fund has
significant net realized capital losses.
After the Reorganization, Middle
East/Africa Fund stockholders may
benefit from the ability of Developing
Capital Markets Fund to offset these
capital losses against its realized
capital gains, if any, subject to
certain limitations. See "The
Reorganization--Tax Consequences of the
Reorganization."
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Many of the investment risks associated with an investment in Developing
Capital Markets Fund are substantially similar to the investment risks
associated with an investment in Middle East/Africa Fund. Such risks include
investing in (a) securities issued by companies located in foreign emerging
markets, (b) derivative instruments, (c) illiquid securities and (d) "junk"
bonds. The primary difference in risk stems from Middle East/Africa Fund's
ability to invest in debt securities without limitation, its ability to invest
in debt securities that are the subject of bankruptcy proceedings or that are
in default, and its emphasis on the securities of issuers located in the
Middle East and Africa. As a result of the Reorganization, the risk factors
applicable to an investment in Middle East/Africa Fund will be modified by the
ability of Developing Capital Markets Fund to invest in more markets over a
wider geographical area and the greater emphasis placed by Developing Capital
Markets Fund on equity securities. The risk factors to which an investment in
Developing Capital Markets is subject are set forth in the Developing Capital
Markets Fund Prospectus under the caption "Details About the Fund--Investment
Risks."
Investing on an International Basis. Because a substantial portion of
each Fund's assets may be invested in securities of non-U.S. issuers,
investors should be aware of certain risk factors and special considerations
relating to international investing, which may involve risks that are not
typically associated with investments in securities of U.S. issuers, including
fluctuations in foreign exchange rates, future political and economic
developments, different legal systems and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. Securities prices
in different countries are subject to different economic, financial, political
and social factors. Since both Funds invest heavily 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 each Fund and
the unrealized appreciation or depreciation of investments so far as U.S.
investors are concerned. Currencies of certain countries may be volatile and,
therefore, may affect the value of securities denominated in such currencies.
In addition, with respect to certain foreign countries, there is the
possibility of expropriation of assets, confiscatory taxation, difficulty in
obtaining or enforcing a court judgment, economic, political or social
instability or diplomatic developments that could affect investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rates of inflation, capital reinvestment, resources, self-sufficiency
and balance of payments position. Certain foreign investments also may be
subject to foreign withholding taxes. These risks often are heightened for
investments in smaller, emerging capital markets.
As a result of these potential risks, MLAM may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. Both Funds may
invest in countries in which foreign investors, including MLAM, have had no or
limited prior experience.
Many of the foreign securities held by the Funds 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 issuer than about a U.S. issuer and such foreign
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of U.S. issuers. As a result,
traditional investment measurements, such as price/earnings ratios, as used in
the United States, may not be applicable to certain smaller, emerging foreign
capital markets. Foreign issuers, and issuers in smaller, emerging capital
markets in particular, may not be subject to uniform accounting, auditing and
financial reporting standards or to practices and requirements comparable to
those applicable to domestic issuers.
Foreign financial markets, while often growing in trading volume, have,
for the most part, substantially less volume than U.S. markets, and securities
of many foreign companies are less liquid and their prices may be more
volatile than securities of comparable domestic companies. Foreign markets
also have different clearance and settlement procedures, and in certain
markets there have been times when settlements have failed 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 that have smaller, emerging
capital markets, which may result in the Funds incurring additional costs and
delays in transporting and custodying such securities outside such countries.
Delays in settlement could result in periods when assets of the Funds are
uninvested and no return is earned thereon. The inability of the Funds to make
intended security purchases due to settlement problems or the risk of
intermediary counterparty failures could cause the Funds to miss attractive
investment opportunities. The inability to dispose of a portfolio security due
to settlement problems could result either in losses to the Funds due to
subsequent declines in the value of such portfolio security or, if a contract
to sell the security has been entered, could result in possible liability to
the purchaser.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the
United States. For example, there may be no comparable provisions under
certain foreign laws to insider trading and similar investor protection
securities laws that apply with respect to securities transactions consummated
in the United States. Further, brokerage commissions and other transaction
costs on foreign securities exchanges generally are higher than in the United
States.
Some countries prohibit or impose substantial restrictions on investments
in their capital markets, particularly their equity markets, by foreign
entities such as Developing Capital Markets 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 company to
only a specific class of securities that 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.
Debt Securities. Middle East/Africa Fund may invest in debt securities
without limitation while Developing Capital Markets Fund may only invest up to
35% of its total assets in debt securities. Debt securities, such as bonds,
involve credit risk. This is the risk that the borrower will not make timely
payments of principal and interest. The degree of credit risk depends on the
issuer's financial condition and on the terms of the bonds. These securities
are also subject to interest rate risk. This is the risk that the value of the
security may fall when interest rates rise. In general, the market price of
debt securities with longer maturities will go up or down more in response to
changes in interest rates than the market price of shorter term securities.
Since Middle East/Africa Fund may invest in debt securities without
limitation, Middle East/Africa Fund may be more subject to interest rate risk
and credit risk than Developing Capital Markets Fund.
Borrowing. Each Fund may borrow up to 331/3% of its total assets
(including the amount borrowed), taken at market value, but only from banks as
a temporary measure for extraordinary or emergency purposes, including to meet
redemptions (so as not to force a Fund to liquidate securities at a
disadvantageous time) or to settle securities transactions. Neither Fund will
purchase securities at any time when borrowings exceed 5% of its total assets.
Developing Capital Markets Fund is further limited by a non-fundamental
investment restriction that it may not borrow amounts in excess of 20% of its
total assets and then only from banks as a temporary measure for extraordinary
or emergency purposes.
Derivative Investments. Each Fund may engage in transactions in certain
instruments that may be characterized as derivatives. These instruments
include options on portfolio positions or currencies, options on stock or
other financial indices, financial and currency futures, options on such
futures and forward foreign currency transactions. The Funds may engage in
these transactions for hedging purposes, including anticipatory hedges and
Developing Capital Markets Fund may use derivatives to seek to increase its
return.
Transactions involving options, futures, options on futures or currencies
may involve the loss of an opportunity to profit from a price movement in the
underlying asset beyond certain levels or a price increase on other portfolio
assets (in the case of transactions for hedging purposes) or expose the Funds
to potential losses that exceed the amount originally invested by the Fund in
such instruments.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. Liquidity of a security relates to the ability to dispose
easily of the security and the price to be obtained upon disposition of the
security, which may be less than would be obtained for a comparable more
liquid security. Investment of a Fund's assets in illiquid securities may
restrict the ability of a Fund to dispose of its investments in a timely
fashion and for a fair price as well as its ability to take advantage of
market opportunities. The risks associated with illiquidity will be
particularly acute in situations in which a Fund's operations require cash,
such as when a Fund redeems shares or pays dividends, and could result in a
Fund borrowing to meet short term cash requirements or incurring capital
losses on the sale of illiquid investments. Further, issuers whose securities
are not publicly traded are not subject to the disclosure and other investor
protection requirements that would be applicable if their securities were
publicly traded. In making investments in such securities, a Fund may obtain
access to material nonpublic information which may restrict the Fund's ability
to conduct portfolio transactions in such securities. In addition, each of the
Funds may invest in privately placed securities (including securities
restricted to "qualified institutional buyers" under Rule 144A under the
Securities Act) that may or may not be freely transferable under the laws of
the applicable jurisdiction or due to contractual restrictions on resale.
Withholding and Other Taxes. Income and capital gains on securities held
by the Funds may be subject to withholding and other taxes imposed by certain
jurisdictions, which would reduce the return to the respective Fund on those
securities. The Funds intend, unless ineligible, to elect to "pass-through" to
their respective stockholders the amount of foreign taxes paid by that Fund.
If certain holding period requirements are met, the taxes passed through to
stockholders will be included in each stockholder's income and could
potentially be offset by either a deduction or a credit. Certain stockholders,
including non-U.S. stockholders, will not be entitled to the benefit of a
deduction or credit with respect to foreign taxes paid at the Fund level.
Non-U.S. stockholders may nevertheless be subject to withholding tax on the
foreign taxes included in their income. Other taxes, such as transfer taxes,
may be imposed on the Funds, but would not give rise to a credit or deduction
for stockholders.
<PAGE>
COMPARISON OF THE FUNDS
Financial Highlights
Developing Capital Markets Fund The financial information in the table
below, except for the six months ended December 31, 1999, which is unaudited,
has been audited in conjunction with the annual audits of the financial
statements of Developing Capital Markets Fund by Deloitte & Touche LLP,
independent auditors.
The following per share data and ratios have been derived from information
provided in the financial statements
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
For the
Six
Months Ended For the Year Ended June 30,
December 31, --------------------------------------------
1999++ 1999++ 1998++ 1997++ 1996++ 1995++
------------ ------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
Per Share Operating
Performance:
Net asset value,
beginning
of period $ 11.88 $ 10.44 $ 17.23 $ 15.05 $ 13.35 $ 14.61
-------- -------- -------- -------- -------- --------
Investment income
(loss)--net (.03) .18 .08 .36 .23 .24
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net 2.63 1.32 (6.18) 2.21 1.71 (.40)
------- ------- -------- -------- --------- --------
Total from investment
operations 2.60 1.50 (6.10) 2.57 1.94 (.16)
------- ------- -------- -------- --------- --------
Less dividends and
distributions:
Investment income--net -- -- (.12) (.28) (.24) (.04)
In excess of
investment income--net -- -- (.09) -- -- --
Realized gain on
investments--net -- -- -- (.11) -- (.60)
In excess of
realized gain on
investments--net (.06) (.48) -- -- (.46)
------ -------- ------- -------- --------- --------
Total dividends and
distributions -- (.06) (.69) (.39) (.24) (1.10)
------ -------- ------- -------- --------- --------
Net asset value, end
of period $ 14.48 $ 11.88 $ 10.44 $ 17.23 $ 15.05 $ 13.35
======== ======== ======== ======== ======== ========
Total Investment
Return:**
Based on net asset
value per share 21.89%# 14.60% (36.00)% 17.66% 14.82% (1.67)%
======== ======== ======== ========= ======= =======
Ratios to Average Net
Assets:
Expenses 1.87%* 1.97% 1.63% 1.53% 1.54% 1.62%
======== ======== ===== ======== ======== ======
Investment income
(loss)--net (.54)%* 1.94% .53 2.32% 1.66% 1.56%
======== ======== ===== ======== ======== ======
Supplemental Data:
Net assets, end of
period (in thousands) $89,440 $83,115 $219,422 $471,790 $342,884 $350,081
======= ======= ======== ======== ======== =======
Portfolio turnover 29.08% 84.92% 98.16% 86.68% 71.01% 63.37%
======= ======= ======== ======== ======== ========
</TABLE>
(table continued...
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------
For the For the
Six Period
Months Ended For the Year Ended June 30, July 1, 1994 +
December 31, -------------------------------- to June
1999++ 1999++ 1998++ 1997++ 1996++ 30, 1995
------------ ------ ------ ------ ------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
Per Share Operating
Performance:
Net asset value,
beginning
of period $ 11.57 $ 10.28 $ 17.04 $14.90 $13.24 $ 14.54
-------- ------- ------- ------- ------ -------
Investment income
(loss)--net (.09) .08 (.07) .19 .09 .08
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net 2.56 1.27 (6.08) 2.20 1.69 (.32)
------- ----- -------- ------ ------ --------
Total from investment
operations 2.47 1.35 (6.15) 2.39 1.78 (.24)
------- ----- -------- ------ ------ --------
Less dividends and
distributions:
Investment income--net -- -- (.07) (.14) (.12) --
In excess of
investment income--net -- -- (.06) -- -- --
Realized gain on
investments--net -- -- -- (.11) -- (.60)
In excess of
realized gain on
investments--net (.06) (.48) -- -- (.46)
------ ------- ----- ------- ------ --------
Total dividends and
distributions -- (.06) (.61) (.25) (.12) (1.06)
------ -------- ------ ------- ------ --------
Net asset value, end
of period $14.04 $11.57 $10.28 $17.04 $14.90 $13.24
======== ======= ======= ======= ======== ========
Total Investment
Return:**
Based on net asset
value per share 21.35%# 13.37% (36.68)% 16.39% 13.63% (2.22)%#
====== ===== ======= ===== ===== ======
Ratios to Average Net
Assets:
Expenses 2.92%* 3.04% 2.67% 2.57% 2.56% 2.79%*
====== ===== ======= ===== ===== =====
Investment income
(loss)--net (1.59)%* .91% (.53)% 1.22% .65% 1.01%*
======= ===== ========= ===== ===== =====
Supplemental Data:
Net assets, end of
period (in thousands) $96,906 $ 92,104 $164,929 $398,468 $302,183 $162,774
======= ======== ======== ======== ======== ========
Portfolio turnover 29.08% 84.92% 98.16% 86.68% 71.01% 63.37%
======= ======== ======== ======== ======== ========
</TABLE>
- ---------
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales charges.
<PAGE>
Developing Capital Markets Fund-Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------------
For the
For the Period
Six October 21,
Months Ended For the Year Ended June 30, 1994+
December 31, ----------------------------------- to June 30,
1999++ 1999++ 1998++ 1997++ 1996++ 1995
------------ ------ ------ ------ ------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
Per Share Operating
Performance:
Net asset value, beginning
of period $11.53 $10.24 $16.99 $14.87 $13.22 $16.71
------ ------ ------- ------- ------ ------
Investment income (.09) .08 (.07) .18 .09 .08
(loss)-net
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions-net 2.55 1.27 (6.08) 2.20 1.70 (2.50)
---- ------ ------ ----- ---- ------
Total from investment
operations 2.46 1.35 (6.15) 2.38 1.79 (2.42)
---- ------ ------ ----- ---- ------
Less dividends and
distributions:
Investment income-net -- -- (.07) (.15) (.14) (.01)
In excess of investment
income-net -- -- (.05) -- -- --
Realized gain on
investments-net -- -- -- (.11) -- (.60)
In excess of realized
gain on investments-net -- (.06) (.48) -- -- (.46)
----- ------ ------- ------- ------ -------
Total dividends and
distributions -- (.06) (.60) (.26) (.14) (1.07)
----- ------ ------- ------- ------ -------
Net asset value, end of
period $13.99 $11.53 $10.24 $16.99 $14.87 $13.22
====== ======= ======= ====== ======= =======
Total Investment Return:**
Based on net asset value
per share 21.34%# 13.42% (36.69)% 16.37% 13.68% (14.97)%#
===== ====== ======= ====== ======= =======
Ratios to Average Net
Assets:
Expenses 2.93%* 3.04% 2.68% 2.58% 2.56% 2.96%*
==== ====== ====== ====== ====== ======
Investment income
(loss)-net (1.60%)* .90% (.51)% 1.19% .67% 1.32%*
====== ===== ====== ====== ====== ======
Supplemental Data:
Net assets, end of period
(in thousands) $ 19,387 $17,768 $32,339 $71,769 $46,983 $18,573
======= ======= ======= ======= ======= ========
Portfolio turnover 29.08% 84.92% 98.16% 86.68% 71.01% 63.37%
===== ======== ======== ======== ======= ========
</TABLE>
(table continued...)
<TABLE>
<CAPTION>
Class D
---------------------------------------------------------------------
For the
For the Period
Six October 21,
Months Ended For the Year Ended June 30, 1994+ to
December 31, -------------------------------------- June 30,
1999++ 1999++ 1998++ 1997++ 1996++ 1995
------------ ------ ------ ------ -------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
Per Share Operating
Performance:
Net asset value, beginning
of period 11.81 $10.41 $17.19 $15.02 $13.33 $16.77
------ ------ ------- ------- ------- ------
Investment income (0.05) .16 .04 .32 .21 .13
(loss)-net
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions-net 2.63 1.30 (6.15) 2.20 1.69 (2.48)
---- ------- ------- ------ ------ -----
Total from investment
operations 2.58 1.46 (6.11) 2.52 1.90 (2.35)
---- ------- ------- ------ ------ -----
Less dividends and
distributions:
Investment income-net -- -- (.11) (.24) (.21) (.03)
In excess of investment
income-net -- (.08) -- -- --
Realized gain on
investments-net -- -- -- (.11) -- (.60)
In excess of realized
gain on investments-net -- (.06) (.48) -- -- (.46)
---- ------ ------- ----- ------ ------
Total dividends and
distributions -- (.06) (.67) (.35) (.21) (1.09)
---- ------ ------- ----- ------ ------
Net asset value, end of
period $14.39 $11.81 $10.41 $17.19 $15.02 $13.33
======= ====== ======== ======= ====== =======
Total Investment Return:**
Based on net asset value
per share 21.85% 14.26% (36.13)% 17.30% 14.55% (14.49)%#
======= ====== ======= ====== ===== =======
Ratios to Average Net
Assets:
Expenses 2.12%* 2.20% 1.88% 1.78% 1.76% 2.19%*
====== ====== ====== ====== ====== ======
Investment income
(loss)-net (.79)% 1.74% .28% 2.06% 1.48% 2.10%*
======= ====== ====== ====== ====== ======
Supplemental Data:
Net assets, end of period
(in thousands) $22,626 $19,648 $31,686 $73,686 $57,821 $21,899
======= ======= ====== ====== ======= =======
Portfolio turnover 29.08% 84.92% 98.16% 86.68% 71.01% 63.37%
======= ======= ====== ====== ======= =======
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales charges.
# Aggregate total investment return.
+ Commencement of operations.
++ Based on the average shares outstanding.
<PAGE>
Middle East/Africa Fund. The financial information in the table below has
been audited in conjunction with the annual audits of the financial statements
of Middle East/Africa Fund by Deloitte & Touche LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------------- ----------------------------------------------------
For the For the
Period Period
December 30, December 30,
For the Year Ended November 30, 1994+ to For the Year Ended November 30, 1994+ to
-------------------------------------- November 30, -------------------------------------- November 30,
1999++ 1998++ 1997++ 1996++ 1995 1999++ 1998++ 1997++ 1996++ 1995
------ ------ ------ -------- ------------ ------ ------ ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease)
in Net Asset Value:
Per Share Operating
Performance:
Net asset value,
beginning
of period $ 8.18 $ 10.96 $ 9.40 $ 10.66 $10.00 $8.11 $10.87 $9.31 $10.56 10.00
------ ------- ------ ------ ------ ----- ------ ----- ------ ------
Investment income--net .32 .40 .48 .42 .57 .22 .29 .37 .32 .79
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net 1.64 (2.80) 1.52 (.80) .09 1.61 (2.78) 1.51 (.80) (.23)
------ ------- ------ ------ ----- ----- - ------ ------ ------ ------
Total from investment
operations 1.96 (2.40) 2.00 (.38) .66 1.83 (2.49) 1.88 (.48) .56
------ ------- ------ ------ ----- ----- - ------ ------ ------ -----
Less dividends and
distributions:
Investment income--net -- (.38) (.44) (.85) -- -- (.27) (.32) (.74) --
Realized gain on
investments--net -- -- -- (.03) -- -- -- -- (.03) --
---- ---- ---- ----- ----- ---- ---- ---- ------ ----
Total dividends and
distributions -- (.38) (.44) (.88) -- -- (.27) (.32) (.77) --
---- ----- ----- ----- ----- ---- ------ ---- ------ ----
Net asset value, end
of period $10.14 $ 8.18 $10.96 $ 9.40 $10.66 $9.94 $8.11 $10.87 $9.31 $10.56
====== ====== ====== ====== ====== ===== ====== ====== ===== ======
Total Investment
Return:**
Based on net asset
value per share 23.96% (22.59)% 22.43% (4.17)% 6.60%# 22.56% (23.40)% 21.02% (5.14)% 5.60%#
======= ======== ======= ======= ====== ===== ======= ====== ====== ======
Ratios to Average Net
Assets:
Expenses, net of
reimbursement .46% .47% .47% .47% .00%* 1.51% 1.51% 1.51% 1.50% 1.01%*
===== ===== ==== ===== ===== ===== ====== ===== ====== =====
Expenses 12.21% 6.51% 6.36% 4.84% 4.63%* 13.09% 7.51% 7.46% 5.90% 5.68%*
====== ====== ===== ===== ====== ===== ====== ===== ====== =====
Investment income--net 3.55% 3.93% 4.35% 4.24% 8.43%* 2.48% 2.91% 3.40% 3.15% 8.33%*
====== ====== ===== ===== ====== ===== ====== ===== ====== =====
Supplemental Data:
Net assets, end of
period (in thousands) $543 $563 $989 $399 $648 $2,207 $3,096 $5,947 $5,699 $7,701
===== ===== ===== ===== ===== ===== ====== ======= ====== ======
Portfolio turnover 83.78% 17.03% 78.12% 46.36% 40.97% 83.78% 17.03% 78.12% 46.36% 40.97%
===== ===== ===== ===== ===== ===== ====== ======= ====== ======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales charges; results
would be lower if sales charges were included.
# Aggregate total investment return.
+ Commencement of operations.
++ Based on average shares outstanding.
<PAGE>
Middle East/Africa Fund-Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class C Class D
---------------------------------------------------- ---------------------------------------------------
For the For the
Period Period
December 30, December 30,
For the Year Ended November 30, 1994+ to For the Year Ended November 30, 1994+ to
-------------------------------------- November 30, -------------------------------------- November 30,
1999++ 1998++ 1997++ 1996++ 1995 1999++ 1998++ 1997++ 1996++ 1995
------ ------ ------ -------- ------------ ------ ------ ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
Per Share Operating
Performance:
Net asset value,
beginning
of period $ 8.12 $ 10.89 $ 9.31 $ 10.56 $ 10.00 $8.15 $ 10.93 $9.38 $10.63 $ 10.00
------- -------- ------- ------- ------- ------ ------- ------- ------- -------
Investment income--net .22 .30 .36 .31 .83 .29 .37 .46 .40 .77
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net 1.61 (2.79) 1.55 (.79) (.27) 1.64 (2.79) 1.50 (.80) (.14)
------ ------- ------- ------- -------- ------ ------- ------- -------- --------
Total from investment
operations 1.83 (2.49) 1.91 (.48) .56 1.93 (2.42) 1.96 (.40) .63
------ ------- ------- ------- -------- ------ ------- ------- -------- --------
Less dividends and
distributions:
Investment income--net -- (.28) (.33) (.74) -- -- (.36) (.41) (.82) --
Realized gain on
investments--net -- -- -- (.03) -- -- -- -- (.03) --
------ ------- ------ ------- ------ ------ ---- ------- ------- -------
Total dividends and
distributions -- (.28) (.33) (.77) -- -- (.36) (.41) (.85) --
------ -------- ------ ------- ------- ------ ------ ------- ------- -------
Net asset value, end
of period $9.95 $8.12 $10.89 $9.31 $10.56 $10.08 $8.15 $10.93 $9.38 $10.63
====== ======= ===== ======= ======= ====== ======= ======= ======= =======
Total Investment
Return:**
Based on net asset
value per share 22.54% (23.38)% 21.42% (5.16)% 5.60%# 23.68% (22.84)% 21.95% (4.31)% 6.30%#
===== ======= ===== ====== ===== ====== ======= ====== ======= ======
Ratios to Average Net
Assets:
Expenses, net of
reimbursement 1.55% 1.53% 1.52% 1.50% 1.01%* .71% .72% .72% .72% .25%*
====== ==== ==== ===== ===== ===== ====== ===== ======= =====
Expenses 13.13% 7.45% 7.47% 5.91% 5.67%* 12.33% 6.70% 6.67% 5.08% 4.89%*
======= ==== ==== ===== ===== ===== ====== ===== ====== =====
Investment income--net 2.47% 2.90% 3.33% 3.14% 8.45%* 3.23% 3.69% 4.18% 4.01% 9.07%*
======= ==== ==== ===== ===== ===== ====== ===== ====== =====
Supplemental Data:
Net assets, end of
period (in thousands) $215 $317 $723 $ 692 $1,012 $380 $ 550 $1,109 $969 $1,569
======= ====== ==== ===== ====== ===== ===== ====== ====== ======
Portfolio turnover 83.78% 17.03% 78.12% 46.36% 40.97% 83.78% 17.03% 78.12% 46.36% 40.97%
======= ====== ===== ====== ====== ===== ===== ====== ====== =======
</TABLE>
- -------------------
* Annualized.
** Total investment returns exclude the effects of sales charges; results
would be lower if sales charges were included.
# Aggregate total investment return.
+ Commencement of operations.
++ Based on the average shares outstanding.
<PAGE>
Investment Objectives and Policies
The investment objectives of Developing Capital Markets Fund and Middle
East/Africa Fund are similar, though not identical. Each Fund seeks long term
capital appreciation. Developing Capital Markets Fund invests in securities,
principally equities, of issuers in countries having smaller capital markets.
Middle East/Africa Fund invests primarily in equity and debt securities of
issuers in the Middle East and Africa. The investment objective of each Fund
described in this paragraph is a fundamental policy of each Fund and may not
be changed without the approval of the holders of a majority of that Fund's
outstanding voting securities. Each Fund is non-diversified under the
Investment Company Act of 1940, as amended.
No assurance can be given that, after the Reorganization, Developing
Capital Markets Fund will achieve its investment objective.
Each Fund invests in a portfolio of securities primarily of issuers
located outside of the United States. Middle East/Africa Fund invests at least
65% of the Fund's assets in the securities of issuers in all countries in the
Middle East and Africa. Although the Fund is not required to invest in any
particular market within that region, Middle East/Africa Fund currently
emphasizes investments in securities of issuers in Botswana, Ghana, Morocco,
South Africa, Turkey, Israel, Jordan and Zimbabwe. Developing Capital Markets
Fund invests at least 65% of the Fund's assets in equity securities of
countries having smaller capital markets. Developing Capital Markets Fund
considers "smaller capital markets" to be all markets other than the four
largest (based on equity market capitalization). This policy precludes
Developing Capital Markets Fund from investing in Japan, the United Kingdom,
the United States and Germany (except for short term cash positions).
Securities. Developing Capital Markets Fund invests principally in equity
securities including common stock, preferred stock, convertible securities and
derivative securities the value of which is based on a common stock or group
of common stocks. Developing Capital Markets Fund may also invest up to 35% of
its assets in non-convertible debt securities. Although Middle East/Africa
Fund may invest in equity and debt securities without limitation, the Fund
tends to invest primarily in equity securities in order to achieve its goal of
long term capital appreciation. Middle East/Africa Fund can invest in all
types of equity securities including common stock, preferred stock, warrants
and stock purchase rights. Each Fund may also invest in derivative securities
for hedging purposes.
Temporary Investments. Developing Capital Markets Fund reserves the
right, as a temporary defensive measure to hold, without limitation, cash or
cash equivalents and short term securities, including money market instruments
denominated in U.S. dollars or foreign currencies ("Temporary Investments"). A
portion of the Developing Capital Markets Fund may be held in Temporary
Investments in anticipation of investment in equity securities or to provide
for possible redemptions. Middle East/Africa Fund also reserves the right, as
a temporary defensive measure and to provide for redemptions to hold, without
limitation, Temporary Investments in such proportions as, in the opinion of
MLAM, prevailing market or economic conditions warrant.
Depositary Receipts. Developing Capital Markets Fund and Middle
East/Africa Fund may each invest in the securities of foreign issuers in the
form of 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.
American Depositary Receipts ("ADRs") are receipts typically issued by an
American bank or trust company that evidence ownership of underlying
securities issued by a foreign corporation. European Depositary Receipts
("EDRs") are receipts issued in Europe that evidence a similar ownership
arrangement. Global Depositary Receipts ("GDRs") are receipts issued
throughout the world that evidence a similar 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 tradable both in the U.S. and in Europe and are designed for use
throughout the world. Each 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 be less
information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts.
Warrants. Middle East/Africa Fund may invest in warrants. Warrants do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holders to purchase, and they do not
represent any rights in the assets of the issuer. In addition, warrants
involve the risk that the price of the security underlying the warrant may not
exceed the exercise price of the warrant and the warrant may expire without
any value.
Convertible Securities. Each Fund may invest in convertible securities. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the
holder to receive interest generally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have several unique investment
characteristics such as (i) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (ii) a lesser degree of fluctuation
in value than the underlying stock since they have fixed-income
characteristics and (iii) the potential for capital appreciation if the market
price of the underlying common stock increases. A convertible security might
be subject to redemption at the option of the issuer at a price established in
the convertible security's governing instrument. If a convertible security
held by a Fund is called for redemption, that Fund may be required to permit
the issuer to redeem the security, convert it into the underlying common stock
or sell it to a third party.
High Yield or "Junk" Bonds. Each Fund may invest in high yield or "junk"
bonds. Junk bonds are debt securities that are rated below investment grade by
the major rating agencies or are unrated securities that Fund management
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for the Fund. Junk bonds generally
are less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer's bankruptcy, claims of other creditors may have priority
over the claims of junk bond holders, leaving few or no assets available to
repay junk bond holders. Junk bonds may be subject to greater call and
redemption risk than higher rated debt securities.
Distressed Securities. Middle East/Africa Fund may invest in distressed
securities. Distressed securities are securities that are subject to
bankruptcy proceedings or are in default, or at risk of being in default.
Distressed securities are speculative and involve substantial risks. Generally
Middle East/Africa Fund invests in distressed securities when Fund management
believes they offer significant potential for higher returns or can be
exchanged for other securities that offer this potential. However, no
assurance can be given that the issuer will make an exchange offer or adopt a
plan of reorganization. Middle East/Africa Fund generally does not receive
interest payments on the distressed securities and may incur costs to protect
its investment. In addition, principal with respect to distressed securities
may not be repaid. Distressed securities and any securities received in an
exchange may be difficult to sell and may be subject to restriction on resale.
Sovereign Debt. Each Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt are subject to the risk that a government entity
may delay or refuse to pay interest or repay principal on its sovereign debt.
Some of these reasons may include cash flow problems, insufficient foreign
currency reserves, political considerations, the relative size of its debt
position to its economy or its failure to put in place economic reforms
required by the International Monetary Fund or other multilateral agencies. If
a government entity defaults, it may ask for more time in which to pay or for
further loans. There is no legal process for collecting sovereign debts that a
government does not pay or bankruptcy proceeding by which all or part of
sovereign debt that a government entity has not repaid may be collected.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. Liquidity of a security relates to the ability to dispose
easily of the security and the price to be obtained upon disposition of the
security, which may be less than would be obtained for a comparable more
liquid security. Investment of a Fund's assets in illiquid securities may
restrict the ability of that Fund to dispose of its investments in a timely
fashion and for a fair price as well as its ability to take advantage of
market opportunities. Each Fund may invest in securities restricted to
"qualified institutional buyers" under Rule 144A under the Securities Act and
in securities of issuers that are sold in private placement transactions
between the issuers and their purchasers and that are neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities will be subject to contractual or legal restrictions on
transfer.
Indexed and Inverse Securities. Each 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, either 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, each Fund may invest in
securities the potential return on which is based inversely on the change in
an index. For example, either 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 a 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 Funds believe that indexed and inverse securities may provide
portfolio management flexibility that permits the Funds 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.
Investment in Other Investment Companies. Each Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the respective Fund. In accordance with the Investment Company
Act, a Fund may invest up to 10% of its total assets in securities of other
investment companies. In addition, under the Investment Company Act, a Fund
may not own more than 3% of the total outstanding voting stock of any
investment company and not more than 5% of the value of the Fund's total
assets may be invested in the securities of any investment company. If a Fund
acquires shares in investment companies, stockholders would bear both their
proportionate share of expenses in the Fund (including management and advisory
fees) and, indirectly, the expenses of such investment companies (including
management and advisory fees). Investments by a Fund in wholly owned
investment entities created under the laws of certain countries will not be
deemed an investment in other investment companies.
Other Investment Policies
Developing Capital Markets Fund and Middle East/Africa Fund have adopted
certain other investment policies as set forth below:
Borrowings. Developing Capital Markets Fund and Middle East/Africa Fund
are each subject to a fundamental investment restriction, which provides that
the Fund may borrow from banks in amounts up to 331/3% of its total assets
taken at market value and may borrow an additional 5% of its total assets for
temporary purposes. As a non-fundamental restriction, each Fund is further
limited and may not borrow money or pledge its assets, except that either Fund
may borrow from banks (but for Developing Capital Markets Fund only up to 20%
of its total assets) as a temporary measure for extraordinary or emergency
purposes or to meet redemptions. Neither Fund will purchase securities while
borrowings exceed 5% of its total assets.
Hedging Techniques. Both Developing Capital Markets Fund and Middle
East/Africa Fund may engage in various portfolio strategies to hedge their
respective portfolios against investment, interest rate and currency risks.
For a description of hedging instruments and risks associated with investment
in such instruments, see "Details About the Fund -- Investment Risks --
Derivatives" in the Developing Capital Markets Fund Prospectus.
Standby Commitment Agreements. Each Fund may from time to time enter into
standby commitment agreements. For a description of standby commitment
agreements and the risks associated with investment in such agreements, see
"Details About the Fund -- Investment Risks -- Standby Commitment Agreements"
in the Developing Capital Markets Fund Prospectus.
Repurchase Agreements and Purchase and Sale Contracts. Each Fund may
enter into repurchase agreements and purchase and sale contracts. For a
description of repurchase agreements and the risks associated with investment
in such agreements, see "Details About the Fund -- Investment Risks --
Repurchase Agreements; Purchase and Sale Contracts" in the Developing Capital
Markets Fund Prospectus.
When-Issued Securities and Delayed Delivery Transactions. Each Fund may
purchase or sell securities on a delayed delivery basis or on a when-issued
basis at fixed purchase or sale terms. For a description of when-issued
securities and delayed delivery transactions, including the risks associated
with investment therein, see "Details About the Fund -- Investment Risks --
When Issued Securities, Delayed Delivery Securities and Forward Commitments"
in the Developing Capital Markets Fund Prospectus.
Lending of Portfolio Securities. Each Fund may from time to time lend
securities from its portfolio with a value not exceeding 331/3% of its total
assets in the case of Middle East/Africa Fund, or 10% of total assets in the
case of Developing Capital Markets Fund, to banks, brokers and other financial
institutions and receive collateral in cash or securities issued or guaranteed
by the U.S. Government, see "Details About the Fund -- Investment Risks --
Securities Lending" in the Developing Capital Markets Fund Prospectus.
Non-Diversified Status. Each Fund is classified as a non-diversified fund
under the Investment Company Act, which means that it may invest more of its
assets in securities of a single issuer than if it were a diversified fund. If
a Fund invests in a smaller number of issuers, the Fund's risk is increased
because developments affecting an individual issuer may have a greater impact
on the Fund's performance.
Information Regarding Options, Futures and Foreign Exchange Transactions
Each Fund may engage in certain investment practices including the use of
options, futures and foreign exchange. Middle East/Africa Fund may utilize
these strategies for hedging purposes, including anticipatory hedges.
Developing Capital Markets Fund may engage in such transactions for hedging
purposes, including anticipatory hedges and to seek to increase its return.
Each Fund has authority to write (i.e., sell) put or call options, purchase
put or call options on securities and engage in transactions in stock index
options, stock index futures and financial futures, and related options on
such futures. Each Fund may also deal in forward foreign exchange transactions
and foreign currency options and futures, and related options on such futures.
The investment policies of each Fund with respect to futures and options
transactions are not fundamental policies and may be modified by the Board of
Directors of each Fund without the approval of the Fund's stockholders. Each
Fund is subject to the restrictions of the Commodity Futures Trading
Commission with respect to its investments in futures and options thereon.
For a detailed discussion of the Funds' investment policies regarding
futures and options, including the risks associated therewith, see "Investment
Objective and Policies -- Derivatives" in the Developing Capital Markets Fund
Statement.
Investment Restrictions
Other than as noted above, Developing Capital Markets Fund and Middle
East/Africa Fund have identical investment restrictions. See "Investment
Objective and Policies -- Investment Restrictions" in the Developing Capital
Markets Fund Statement.
Management
Directors. The Boards of Directors of Developing Capital Markets Fund and
Middle East/Africa Fund consist of the same five individuals, three of whom
are not "interested persons" as defined in the Investment Company Act. The
Directors are responsible for the overall supervision of the operation of each
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.
Information about the Directors of Developing Capital Markets 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
Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
TERRY K. GLENN (59) -- President and Director (1)(2) -- Executive Vice
President of the Manager and Fund Asset Management, L.P. ("FAM") (which terms
as used herein include their corporate predecessors) since 1983; President of
Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director thereof
since 1991; Executive Vice President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of Princeton Administrators, L.P.
since 1988.
CHARLES C. REILLY (68) -- Director (2)(3) -- 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; Senior Vice President of Arnold 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 (62)-- Director (2)(3)-- 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), Vornado Operating Company,
Inc. and Alexander's, Inc. (real estate company).
ARTHUR ZEIKEL (67) -- Director (1)(2) -- 300 Woodland Avenue, Westfield,
New Jersey 07090. Chairman of the Manager and FAM from 1997 to 1999 and
President thereof from 1977 to 1997; Chairman of Princeton Services from 1997
to 1999, Director thereof from 1993 to 1999 and President thereof from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from
1990 to 1999.
EDWARD D. ZINBARG (65) -- Director (2)(3) -- 5 Hardwell Road, Short
Hills, New Jersey 07078. Executive Vice President of The Prudential Insurance
Company of America 1988 to 1994; former Director of Prudential Reinsurance
Company and former Trustee of The Prudential Foundation.
- ------------------
(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 FAM acts a the
investment adviser or manager.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Directors.
Management and Advisory Arrangements. MLAM serves as the manager for both
Developing Capital Markets Fund and Middle East/Africa Fund pursuant to
separate management agreements (each, a "Management Agreement") that, except
for certain minor differences, are identical.
Pursuant to the separate Management Agreement between each Fund and MLAM,
each Fund pays MLAM a management fee at the annual rate of 1.00% of the
average daily net assets of the Fund. After the Reorganization, the Combined
Fund will pay the management fee at the current rate of 1.00%. See
"Summary--Pro Forma Fee Tables."
MLAM has retained MLAM U.K. as sub-adviser to each of Middle East/Africa
Fund and Developing Capital Markets Fund. Pursuant to a separate sub-advisory
agreement between MLAM and MLAM U.K. with respect to each Fund, MLAM pays MLAM
U.K. a fee for providing investment advisory services to MLAM with respect to
each Fund, in an amount to be determined from time to time by MLAM and MLAM
U.K. but in no event in excess of the amount MLAM actually receives for
providing services to each Fund pursuant to its Management Agreement. The
address of MLAM U.K. is 33 King William Street, London EC4R 9AS, England.
Purchase of Shares
The class structure and purchase and distribution procedures for shares
of Middle East/Africa Fund are substantially the same as those of Developing
Capital Markets Fund. For a complete discussion of the four classes of shares
and the purchase and distribution procedures related thereto see "Your Account
- -- Merrill Lynch Select Pricing (SM) System" and "-- Participation in Merrill
Lynch Fee Based Programs" in the Developing Capital Markets Fund Prospectus
and "Your Account -- How to Buy, Sell, Transfer and Exchange Shares" in the
Developing Capital Markets Fund Prospectus.
Redemption of Shares
The procedure for redeeming shares of Developing Capital Markets Fund is
substantially the same as the procedure for redeeming shares of Middle
East/Africa Fund except that all classes of shares of Middle East/Africa Fund
are subject to a redemption fee of 2.0% of the net asset value of any shares
redeemed within 12 months of purchase. The exchange of shares in the
Reorganization and the Corresponding Shares received by Middle East/Africa
Fund stockholders in the Reorganization will not be subject to this redemption
fee. For purposes of computing any CDSC that may be payable upon disposition
of Corresponding Shares of Developing Capital Markets Fund acquired by Middle
East/Africa Fund stockholders in the Reorganization, the holding period of
Middle East/Africa Fund shares outstanding on the date the Reorganization
takes place will be tacked onto the holding period of the Corresponding Shares
of Developing Capital Markets Fund acquired in the Reorganization. See "Your
Account -- Merrill Lynch Select Pricing (SM) System" and "-- Participation in
Merrill Lynch Fee Based Programs" in the Developing Capital Markets Fund
Prospectus and "Your Account -- How to Buy, Sell, Transfer and Exchange
Shares" in the Developing Capital Markets Fund Prospectus.
<PAGE>
Performance
General. The following tables provide performance information for each
class of shares of Middle East/Africa Fund and Developing Capital Markets
Fund, including and excluding maximum applicable sales charges, for the
periods indicated. Past performance is not indicative of future performance.
Developing Capital Markets Fund
Average Annual Total Return
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares Class D Shares
---------------- ---------------- ---------------- ----------------
Without With Without With Without With Without With
Sales Sales Sales Sales Sales Sales Sales Sales
Period Charge Charge* Charge Charge* Charge Charge* Charge Charge*
------ ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended 11/30/99 43.12% 35.60% 41.63% 37.63% 41.54% 40.54% 42.85% 35.35%
Five Years Ended -1.37% -2.42% -2.40% -2.40% -2.41% -2.41% -1.62% -2.67%
11/30/99
Ten Years Ended 6.40% 5.83% N/A N/A N/A N/A N/A N/A
11/30/99
Inception+
through 11/30/99 6.38% 5.83% -0.62% -0.62% -3.34% -3.34% -2.56% -3.58%
</TABLE>
- -------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 5.25%. The maximum CDSC on Class B
shares is 4.0% and is reduced to 0% after four years. Class C shares are
subject to a 1.0% CDSC for one year.
+ Class A shares commenced operations on September 1, 1989. Class B shares
commenced operations on July 1, 1994. Class C and Class D shares commenced
operations on October 21, 1994.
Middle East/Africa Fund
Average Annual Total Return
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares Class D Shares
---------------- ---------------- ---------------- ----------------
Without With Without With Without With Without With
Sales Sales Sales Sales Sales Sales Sales Sales
Period Charge Charge* Charge Charge* Charge Charge* Charge Charge*
------ ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended 11/30/99 23.96% 15.10% 22.56% 16.11% 22.54% 19.09% 23.68% 14.84%
Inception+ 3.78% 2.64% 2.67% 2.67% 2.73% 2.73% 3.49% 2.36%
through 11/30/99
</TABLE>
- -----------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 5.25%. The maximum CDSC on Class B
shares is 4.0% and is reduced to 0% after four years. Class C shares are
subject to a 1.0% CDSC for one year.
+ All classes commenced operations on December 30, 1994.
Stockholder Rights
Stockholders of Developing Capital Markets Fund 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 matter submitted to a
stockholder vote. Developing Capital Markets Fund does not intend to hold
meetings of stockholders in any year in which the Investment Company Act does
not require stockholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of a management agreement; (iii) approval
of distribution arrangements; and (iv) ratification of selection of
independent accountants. Voting rights for Directors are not cumulative.
Shares of Developing Capital Markets Fund to be issued to Middle East/Africa
Fund stockholders in the Reorganization will be fully paid and non-assessable,
will have no preemptive rights and will have the conversion rights described
in this Prospectus and Proxy Statement and in the Developing Capital Markets
Fund Prospectus. Each share of Developing Capital Markets Fund common stock is
entitled to participate equally in dividends declared by the Fund and in the
net assets of the Fund on liquidation or dissolution after satisfaction of
outstanding liabilities, except that Class B, Class C and Class D shares bear
certain additional expenses. Rights attributable to shares of Middle
East/Africa Fund are substantially identical to those described above.
Dividends
The current policy of Middle East/Africa Fund with respect to dividends
is substantially identical to the policy of Developing Capital Markets Fund.
It is each Fund's intention to distribute all of its net investment income, if
any. In addition, each Fund distributes all net realized capital gains, if
any, to stockholders at least annually.
Automatic Dividend Reinvestment Plan
Each of the Funds offers its stockholders an Automatic Dividend
Reinvestment Plan (the "Plan") with substantially similar terms. Pursuant to
the Plans, dividends will be automatically reinvested, without sales charge,
in additional full and fractional shares of the relevant Fund unless a
stockholder has elected to receive such dividends in cash. For further
information about the Plans, see "Shareholder Services -- Automatic Dividend
Reinvestment Plan" in the Developing Capital Markets Fund Statement.
After the Reorganization, a Middle East/Africa Fund stockholder who has
elected to receive dividends in cash will continue to receive dividends in
cash; all other Middle East/Africa Fund stockholders will have their dividends
automatically reinvested in shares of the Combined Fund. However, if a
stockholder owns shares of both Funds, after the Reorganization the
stockholder's election with respect to the dividends of Developing Capital
Markets Fund will control unless the stockholder specifically elects a
different option at that time.
Tax Information
The tax consequences associated with investment in shares of Middle
East/Africa Fund are substantially identical to the tax consequences
associated with investment in shares of Developing Capital Markets Fund. See
"Your Account--Dividends and Taxes" in the Developing Capital Markets Fund
Prospectus.
Portfolio Transactions
The procedures for engaging in portfolio transactions are generally the
same for both Middle East/Africa Fund and Developing Capital Markets Fund. For
a discussion of these procedures, see "Portfolio Transactions and Brokerage"
in the Developing Capital Markets Fund Statement.
Each Fund may effect portfolio transactions on foreign securities
exchanges and may incur settlement delays on certain of such exchanges. In
addition, costs associated with transactions in foreign securities are
generally higher than such costs associated with transactions in U.S.
securities.
Portfolio Turnover
Generally, neither Middle East/Africa Fund nor Developing Capital Markets
Fund purchases securities for short term trading profits. However, either Fund
may dispose of securities without regard to the time that they have been held
when such action, for defensive or other reasons, appears advisable to MLAM.
Neither Fund has any limit on its rate of portfolio turnover. The portfolio
turnover rates for Middle East/Africa Fund for its fiscal years ended November
30, 1998 and 1999 were 17.03% and 83.78%, respectively. The portfolio turnover
rates for Developing Capital Markets Fund for its fiscal years ended June 30,
1998 and 1999 were 98.16% and 84.92%, respectively. A high portfolio turnover
involves certain tax consequences, and correspondingly greater transaction
costs in the form of dealer spreads and brokerage commissions which are borne
directly by the Fund such as an increase in capital gain dividends or in
ordinary income dividends of accrued market discount.
Additional Information
Net Asset Value. Both Developing Capital Markets Fund and Middle
East/Africa Fund determine net asset value of each class of its shares once
daily as of the close of business on the NYSE on each day during which the
NYSE is open for trading based on prices at the time of closing. The NYSE
generally closes at 4:00 p.m., Eastern time. Net asset value is computed by
dividing the market 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.
Stockholder Services. Developing Capital Markets Fund offers a number of
stockholder services and investment plans designed to facilitate investment in
shares of the Fund. In addition, U.S. stockholders of each class of shares of
Developing Capital Markets Fund have an exchange privilege with certain other
funds utilizing Select Pricing. Stockholder services available to stockholders
of Middle East/Africa Fund are substantially identical to the stockholder
services of Developing Capital Markets Fund except that Middle East/Africa
Fund stockholders do not have an exchange privilege. For a description of
these services, see "Shareholder Services" in the Developing Capital Markets
Fund Prospectus.
Custodian. Brown Brothers Harriman & Co. ("Brown Brothers") acts as
custodian of the cash and securities of both Developing Capital Markets Fund
and Middle East/Africa Fund. The principal business address of Brown Brothers
is 40 Water Street, Boston, MA 02109. It is presently anticipated that Brown
Brothers will serve as the custodian of the Combined Fund.
Transfer Agent, Dividend Disbursing Agent and Stockholder Servicing
Agent. Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, an affiliate of MLAM and FAM, serves as the transfer
agent, dividend disbursing agent and stockholder servicing agent with respect
to each Fund (the "Transfer Agent"), at the same fee schedule, pursuant to
separate agreements with each of the Funds. For the fiscal year ended June 30,
1999, Developing Capital Markets Fund paid the Transfer Agent fees totalling
$1,005,323; for the fiscal year ended November 30, 1999, Middle East/Africa
Fund paid the Transfer Agent fees totalling $10,337.
Capital Stock. Middle East/Africa Fund has an authorized capital of
400,000,000 shares of common stock, par value $.10 per share, divided into
four classes, designated Class A, Class B, Class C and Class D shares each of
which consists of 100,000,000 shares. Developing Capital Markets Fund has an
authorized capital of 400,000,000 shares of common stock, par value $.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D shares each of which consists of 100,000,000 shares. The rights,
preferences and expenses attributable to the Class A, Class B, Class C and
Class D shares of Middle East/Africa Fund are identical in all respects to
those of the Class A, Class B, Class C and Class D shares of Developing
Capital Markets Fund except as described in "Comparison of the Funds --
Redemption of Shares" and "Comparison of the Funds -- Additional Information
- -- Stockholder Services" above.
Stockholder Inquiries. Stockholder inquiries with respect to Middle
East/Africa Fund and Developing Capital Markets Fund may be addressed to
either Fund by telephone at (609) 282-2800 or at the address set forth on the
cover page of this Proxy Statement and Prospectus.
THE REORGANIZATION
General
Under the Agreement and Plan (attached hereto as Exhibit I), Developing
Capital Markets Fund will acquire substantially all of the assets, and will
assume substantially all of the liabilities, of Middle East/Africa Fund, in
exchange solely for an equal aggregate value of shares to be issued by
Developing Capital Markets Fund. Upon receipt by Middle East/Africa Fund of
such shares, Middle East/Africa Fund will distribute the shares to the holders
of shares of Middle East/Africa Fund, as described below.
Generally, the assets transferred by Middle East/Africa Fund to
Developing Capital Markets Fund will equal all investments of Middle
East/Africa Fund held in its portfolio as of the Valuation Time (as defined in
the Agreement and Plan) and all other assets of Middle East/Africa Fund as of
such time.
Middle East/Africa Fund will distribute the shares of Developing Capital
Markets Fund received by it pro rata to its stockholders in exchange for such
stockholders' proportional interests in Middle East/Africa Fund. The shares of
Developing Capital Markets Fund received by Middle East/Africa Fund
stockholders will be of the same class and have the same aggregate net asset
value as each such stockholder's interest in Middle East/Africa Fund as of the
Valuation Time (previously defined as the "Corresponding Shares"). (See "Terms
of the Agreement and Plan -- Valuation of Assets and Liabilities" for
information concerning the calculation of net asset value.) The distribution
will be accomplished by opening new accounts on the books of Developing
Capital Markets Fund in the names of all stockholders of Middle East/Africa
Fund, including stockholders holding Middle East/Africa Fund shares in
certificate form, and transferring to each stockholder's account the
Corresponding Shares of Developing Capital Markets Fund representing such
stockholder's interest previously credited to the account of Middle
East/Africa Fund. Stockholders holding Middle East/Africa Fund shares in
certificate form may receive certificates representing the Corresponding
Shares of Developing Capital Markets Fund credited to their account in respect
of such Middle East/Africa Fund shares by sending the certificates to the
Transfer Agent accompanied by a written request for such exchange.
Since the Corresponding Shares of Developing Capital Markets Fund will be
issued at net asset value and the shares of Middle East/Africa Fund will be
valued at net asset value for the purposes of the exchange by the stockholders
of Middle East/Africa Fund of such shares for the Corresponding Shares, the
holders of shares of Middle East/Africa Fund will not be diluted as a result
of the Reorganization. However, as a result of the Reorganization, a
stockholder of Middle East/Africa Fund or Developing Capital Markets Fund
would hold a reduced percentage of ownership in the Combined Fund than he or
she did in Middle East/Africa Fund or Developing Capital Markets Fund prior to
the Reorganization.
Procedure
On January 20, 2000, the Board of Directors of Middle East/Africa Fund,
including all of the Directors who are not "interested persons," as defined by
the Investment Company Act, approved the Agreement and Plan and the submission
of such Agreement and Plan to Middle East/Africa Fund stockholders for
approval. The Board of Directors of Developing Capital Markets Fund, including
all of the Directors who are not interested persons, also approved the
Agreement and Plan on January 20, 2000.
If the stockholders of Middle East/Africa Fund approve the Reorganization
at the Meeting, all required regulatory approvals are obtained and certain
conditions are either met or waived, it is presently anticipated that the
Reorganization will take place during the second calendar quarter of 2000.
The Board of Directors of Middle East/Africa Fund recommends that Middle
East/Africa Fund stockholders approve the Agreement and Plan.
Terms of the Agreement and Plan
The following is a summary of the significant terms of the Agreement and
Plan. This summary is qualified in its entirety by reference to the Agreement
and Plan, attached hereto as Exhibit I.
Valuation of Assets and Liabilities. The respective assets of Middle
East/Africa Fund and Developing Capital Markets Fund will be valued as of the
Valuation Time. The assets in each Fund will be valued according to the
procedures set forth under "Your Account -- How Shares are Priced" in the
Developing Capital Markets Fund Prospectus. Purchase orders for Middle
East/Africa Fund shares which have not been confirmed as of the Valuation Time
will be treated as assets of Middle East/Africa Fund for purposes of the
Reorganization; redemption requests with respect to Middle East/Africa Fund
shares which have not settled as of the Valuation Time will be treated as
liabilities of Middle East/Africa Fund for purposes of the Reorganization.
Distribution of Developing Capital Markets Fund Shares. On the next full
business day following the Valuation Time (the "Exchange Date"), Developing
Capital Markets Fund will issue to Middle East/Africa Fund a number of shares
the aggregate net asset value of which will equal the aggregate net asset
value of shares of Middle East/Africa Fund as of the Valuation Time. Each
holder of Middle East/Africa Fund shares will receive, in exchange for his or
her proportionate interest in Middle East/Africa Fund, Corresponding Shares of
Developing Capital Markets Fund of the same class and having the same
aggregate net asset value as the Middle East/Africa Fund shares held by such
stockholder as of the Valuation Time.
Expenses. The expenses of the Reorganization that are directly
attributable to Middle East/Africa Fund and the conduct of its business will
be deducted from the assets of Middle East/Africa Fund as of the Valuation
Time. These expenses are expected to include the expenses incurred in
preparing, printing and mailing the proxy materials to be utilized in
connection with the Meeting and the expenses related to the solicitation of
proxies to be voted at that Meeting. The expenses attributable to Developing
Capital Markets Fund include the costs of printing sufficient copies of its
Prospectus, Annual Report and Semi-Annual Report to accompany the Proxy
Statement and Prospectus. The expenses of the Reorganization, including
expenses in connection with obtaining the IRS ruling, the preparation of the
Agreement and Plan, legal fees and audit fees, will be borne equally by each
Fund. The expenses attributable to Middle East/Africa Fund are currently
estimated to be approximately $51,000. MLAM has agreed to bear the expenses of
the Reorganization attributable to Developing Capital Markets Fund, which
expenses are currently estimated to be approximately $45,000.
Required Approvals. Under Middle East/Africa Fund's Articles of
Incorporation (as amended to date) and relevant Maryland law, stockholder
approval of the Agreement and Plan requires the affirmative vote of Middle
East/Africa Fund stockholders representing a majority of the total number of
votes entitled to be cast thereon.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of Middle East/Africa Fund to Developing Capital Markets Fund and
the distribution of Corresponding Shares of Developing Capital Markets Fund to
Middle East/Africa Fund stockholders, Middle East/Africa Fund will terminate
its registration under the Investment Company Act and its incorporation under
Maryland law and will withdraw its authority to do business in any state where
it is required to do so.
Amendments and Conditions. The Agreement and Plan may be amended at any
time prior to the Exchange Date with respect to any of the terms therein. The
obligations of Middle East/Africa Fund and Developing Capital Markets Fund
pursuant to the Agreement and Plan are subject to various conditions,
including a registration statement on Form N-14 being declared effective by
the Commission, approval of the Reorganization by Middle East/Africa Fund
stockholders, a favorable IRS ruling or an opinion of counsel being received
as to tax matters, an opinion of counsel being received as to securities
matters and the continuing accuracy of various representations and warranties
of Middle East/Africa Fund and Developing Capital Markets Fund being confirmed
by the respective parties.
Termination, Postponement and Waivers. The Agreement and Plan may be
terminated, and the Reorganization abandoned at any time, whether before or
after adoption thereof by the Middle East/Africa Fund stockholders, prior to
the Exchange Date, or the Exchange Date may be postponed: (i) by mutual
consent of the Boards of Directors of Middle East/Africa Fund and Developing
Capital Markets Fund; (ii) by the Board of Directors of Middle East/Africa
Fund if any condition to Middle East/Africa Fund's obligations has not been
fulfilled or waived by such Board; or (iii) by the Board of Directors of
Developing Capital Markets Fund if any condition to Developing Capital Markets
Fund's obligations has not been fulfilled or waived by such Board.
Potential Benefits to Stockholders as a Result of the Reorganization
MLAM and the Board of Directors of Middle East/Africa Fund have
determined that stockholders are likely to benefit from the Reorganization.
First, following the Reorganization, Middle East/Africa Fund stockholders will
remain invested in an open-end fund that has investment objectives and
policies similar, though not identical, to that of Middle East/Africa Fund. In
addition, Middle East/Africa Fund stockholders are likely to experience
certain additional benefits, including lower expenses per share, economies of
scale and greater flexibility in portfolio management. Additionally, the
Corresponding Shares received by Middle East/Africa Fund stockholders will not
be subject to the redemption fee of 2.0% of the net asset value that is
applicable to any Middle East/Africa Fund shares redeemed within 12 months of
purchase and will have an exchange privilege with certain other funds
utilizing Select Pricing. See "Comparison of the Funds -- Redemption of
Shares" and "-- Additional Information -- Stockholder Services."
Specifically, after the Reorganization the total operating expenses of
the Combined Fund, as a percent of net assets, are estimated to be less than
the current operating expenses for Middle East/Africa Fund (excluding any fee
waiver or expense reimbursement). See "Summary -- Pro Forma Fee Tables." In
addition, certain fixed costs, such as costs of printing stockholder reports
and proxy statements, legal expenses, audit fees, registration fees, mailing
costs and other expenses would be spread across a larger asset base, thereby
lowering the expense ratio borne by Middle East/Africa Fund stockholders. To
illustrate the potential economies of scale for Middle East/Africa Fund, on
November 30, 1999, the total operating expense ratio (excluding class specific
distribution and account maintenance fees) for Middle East/Africa Fund was
10.74% (based on fund net assets of approximately $3.3 million and without
giving effect to any fee waiver or expense reimbursement) and for Developing
Capital Markets Fund was 1.79% (based on fund net assets of approximately
$200.8 million). If the Reorganization had taken place on that date, the total
operating expense ratio (excluding class specific distribution and account
maintenance fees) for the Combined Fund would have been 1.79% (based on fund
net assets of approximately $204.1 million).
The following table sets forth (i) the net assets of Middle East/Africa
Fund as of the last three fiscal year ends and as of February 29, 2000 and
(ii) the net assets of Developing Capital Markets Fund as of the last three
fiscal year ends and as of February 29, 2000.
Developing Capital Markets Fund Middle East/Africa Fund
------------------------------------ ----------------------------------
Date Net Assets Date Net Assets
-------------- -------------- ----------------- --------------
As of 6/30/97 $1,015,713,159 As of 11/30/97 $ 8,767,500
As of 6/30/98 $ 448,376,235 As of 11/30/98 $ 4,525,878
As of 6/30/99 $ 212,634,936 As of 11/30/99 $ 3,344,748
As of 2/29/00 $ 230,140,117 As of 2/29/00 $ 3,489,196
The net assets of Middle East/Africa Fund have never reached a level at
which that Fund was able to enjoy economies of scale. Moreover, the net assets
of Middle East/Africa Fund experienced an almost steady decline since November
30, 1997 due to market volatility in the developing market countries in which
that Fund invests. As of February 29, 2000, the net assets of Middle
East/Africa Fund are substantially smaller than the net assets of Developing
Capital Markets Fund. MLAM believes that the economies of scale that may be
realized as a result of the Reorganization would be beneficial to Middle
East/Africa Fund stockholders.
Based on the foregoing, the Board of Directors of Middle East/Africa Fund
concluded that the Reorganization presents no significant risks or costs
(including legal, accounting and administrative costs) that would outweigh the
benefits discussed above. In approving the Reorganization, the Board of
Directors of each Fund determined that the interests of existing stockholders
of that Fund would not be diluted as a result of the Reorganization.
Tax Consequences of the Reorganization
General. The Reorganization has been structured with the intention that
it qualify for Federal income tax purposes as a tax-free reorganization under
Section 368 (a) (1) (C) of the Code. Middle East/Africa Fund and Developing
Capital Markets Fund have elected and qualified for the special tax treatment
afforded "regulated investment companies" under the Code, and Developing
Capital Markets Fund intends to continue to so qualify after the
Reorganization. Middle East/Africa Fund and Developing Capital Markets Fund
have jointly requested a private letter ruling from the IRS to the effect that
for Federal income tax purposes: (i) the transfer of substantially all of the
assets of Middle East/Africa Fund to Developing Capital Markets Fund in
exchange solely for shares of Developing Capital Markets Fund as provided in
this Agreement will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and Middle East/Africa Fund and Developing Capital
Markets Fund will each be deemed to be a "party" to the Reorganization within
the meaning of Section 368(b) of the Code; (ii) in accordance with Section
361(a) of the Code, no gain or loss will be recognized to Middle East/Africa
Fund as a result of the asset transfer solely in exchange for Developing
Capital Markets Fund shares or on the distribution of the Developing Capital
Markets Fund stock to Middle East/Africa Fund stockholders under Section
361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss
will be recognized to Developing Capital Markets Fund on the receipt of assets
of Middle East/Africa Fund in exchange for Developing Capital Markets Fund
shares; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss
will be recognized to the stockholders of Middle East/Africa Fund on the
receipt of Corresponding Shares of Developing Capital Markets Fund in exchange
for their shares of Middle East/Africa Fund; (v) in accordance with Section
362(b) of the Code, the tax basis of the Middle East/Africa Fund assets in the
hands of Developing Capital Markets Fund will be the same as the tax basis of
such assets in the hands of Middle East/Africa Fund immediately prior to the
consummation of the Reorganization; (vi) in accordance with Section 358 of the
Code, immediately after the Reorganization, the tax basis of the Corresponding
Shares of Developing Capital Markets Fund received by the stockholders of
Middle East/Africa Fund in the Reorganization will be equal, to the tax basis
of the shares of Middle East/Africa Fund surrendered in exchange; (vii) in
accordance with Section 1223 of the Code, a stockholder's holding period for
the Corresponding Shares of Developing Capital Markets Fund will be determined
by including the period for which such stockholder held the shares of Middle
East/Africa Fund exchanged therefor, provided, that such Middle East/Africa
Fund shares were held as a capital asset; (viii) in accordance with Section
1223 of the Code, Developing Capital Market Fund's holding period with respect
to the Middle East/Africa Fund assets transferred will include the period for
which such assets were held by Middle East/Africa Fund; and (ix) the taxable
year of Middle East/Africa Fund will end on the effective date of the
Reorganization, and pursuant to Section 381(a) of the Code and regulations
thereunder, Developing Capital Markets Fund will succeed to and take into
account certain tax attributes of Middle East/Africa Fund, such as earnings
and profits, capital loss carryovers and method of accounting. If the IRS does
not issue a favorable private letter ruling in advance of the selected closing
date, the Funds may proceed with the closing of the Reorganization upon
receipt of an opinion of counsel regarding the tax matters covered by the
ruling request.
As of November 30, 1999, Developing Capital Markets Fund has significant
per share net realized capital losses. After the Reorganization, Middle
East/Africa Fund stockholders may benefit from the ability of Developing
Capital Markets Fund to offset these capital losses against its realized
capital gains, if any, subject to certain limitations. Stockholders should
consult their tax advisers regarding the effect of the Reorganization in light
of their individual circumstances. As the foregoing relates only to Federal
income tax consequences, stockholders also should consult their tax advisers
as to the foreign, state and local tax consequences of the Reorganization.
Status as a Regulated Investment Company. Both Middle East/Africa Fund
and Developing Capital Markets Fund have elected and qualified to be taxed as
regulated investment companies under Sections 851-855 of the Code, and after
the Reorganization, Developing Capital Markets Fund intends to continue to
operate so as to qualify as a regulated investment company. Following the
liquidation and dissolution of Middle East/Africa Fund and distribution of
shares of Developing Capital Markets Fund to Middle East/Africa Fund
stockholders, Middle East/Africa Fund will terminate its registration under
the Investment Company Act and its incorporation under Maryland law.
Capitalization
The following table sets forth as of November 30, 1999: (i) the
capitalization of Middle East/Africa Fund, (ii) the capitalization of
Developing Capital Markets Fund and (iii) the capitalization of the Combined
Fund as adjusted to give effect to the Reorganization.
<PAGE>
Pro Forma Capitalization of Developing Capital Markets Fund, Middle
East/Africa Fund and
the Combined Fund as of November 30, 1999
Developing Capital Markets Fund
Class A Class B Class C Class D
----------- ----------- ---------- ----------
Total Net Assets: $78,023,697 $86,002,740 $17,044,464 $19,750,823
Shares Outstanding: 6,281,596 7,136,667 1,419,816 1,600,295
Net Asset Value Per $ 12.42 $ 12.05 $ 12.00 $ 12.34
Share:
Middle East/Africa Fund
Class A Class B Class C Class D
----------- ----------- ---------- ----------
Total Net Assets: $ 542,947 $ 2,206,954 $ 214,681 $ 380,166
Shares Outstanding: 53,567 222,014 21,578 37,722
Net Asset Value Per $ 10.14 $ 9.94 $ 9.95 $ 10.08
Share:
Combined Fund*
Class A Class B Class C Class D
----------- ----------- ---------- ----------
Total Net Assets*: $78,566,644 $88,209,694 $17,259,145 $20,130,989
Shares Outstanding: 6,325,817 7,320,307 1,438,262 1,631,361
Net Asset Value Per $ 12.42 $ 12.05 $ 12.00 $ 12.34
Share*:
- ----------------
* Total Net Assets and Net Asset Value Per Share include the aggregate value
of Middle East/Africa Fund's net assets which would have been transferred
to Developing Capital Markets Fund had the Reorganization been consummated
on November 30, 1999. The data does not take into account expenses
incurred in connection with the Reorganization or the actual number of
shares that would have been issued. No assurance can be given as to how
many shares of Developing Capital Markets Fund the Middle East/Africa Fund
stockholders will receive on the date the Reorganization takes place, and
the foregoing should not be relied upon to reflect the number of shares of
Developing Capital Markets Fund that actually will be received on or after
such date.
INFORMATION CONCERNING THE SPECIAL MEETING
Date, Time and Place of Meeting
The Meeting will be held on April 26, 2000, at the offices of Merrill
Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey
at 11:15 a.m., Eastern time.
Solicitation, Revocation and Use of Proxies
A stockholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of Middle East/Africa Fund.
Although mere attendance at the Meeting will not revoke a proxy, a stockholder
present at the Meeting may withdraw his proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meeting in accordance with
the directions on the proxies; if no direction is indicated on a properly
executed proxy, such shares will be voted "FOR" approval of the Agreement and
Plan.
It is not anticipated that any matters other than the adoption of the
Agreement and Plan will be brought before the Meeting. If, however, any other
business properly is brought before the Meeting, proxies will be voted in
accordance with the judgment of the persons designated on such proxies.
Record Date and Outstanding Shares
Only holders of record of shares of Middle East/Africa Fund at the close
of business on March 15, 2000 (the "Record Date") are entitled to vote at the
Meeting or any adjournment thereof. At the close of business on the Record
Date, there were 292,516 shares of Middle East/Africa Fund common stock
issued and outstanding and entitled to vote.
Security Ownership of Certain Beneficial Owners and Management of Middle
East/Africa Fund and Developing Capital Markets Fund
To the knowledge of Middle East/Africa Fund, no person or entity owned
beneficially or of record 5% or more of the shares of Middle East/Africa Fund
outstanding on the Record Date.
At the Record Date, the Directors and officers of Middle East/Africa Fund
as a group (9 persons) owned an aggregate of approximately 11.4% of the
outstanding shares of Middle East/Africa Fund and owned an aggregate of less
than 1% of the outstanding shares of common stock of ML & Co.
To the knowledge of Developing Capital Markets Fund, no person or entity
owned beneficially or of record 5% or more of the shares of Developing Capital
Markets Fund outstanding on the Record Date.
At the Record Date, the Directors and officers of Developing Capital
Markets Fund as a group (9 persons) owned an aggregate of less than 1% of the
outstanding shares of Developing Capital Markets Fund and owned less than 1%
of the outstanding shares of common stock of ML & Co.
Voting Rights and Required Vote
For purposes of this Proxy Statement and Prospectus, each share of each
class of Middle East/Africa Fund is entitled to one vote. Approval of the
Agreement and Plan requires the affirmative vote of Middle East/Africa Fund
stockholders representing a majority of the total votes entitled to be cast
thereon, with all shares voting as a single class.
Under Maryland law, stockholders of a registered open-end investment
company such as Middle East/Africa Fund are not entitled to demand the fair
value of their shares upon a transfer of assets and will be bound by the terms
of the Reorganization if approved at the Meeting. However, any stockholder of
Middle East/Africa Fund may redeem his or her Middle East/Africa Fund shares
prior to the Reorganization.
A quorum for purposes of the Meeting consists of one-third of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the
time scheduled for the Meeting, a quorum of Middle East/Africa Fund's
stockholders is not present or if a quorum is present but sufficient votes in
favor of the Agreement and Plan are not received from the stockholders of
Middle East/Africa Fund, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies from
stockholders. Any such adjournment will require the affirmative vote of a
majority of the shares of Middle East/Africa Fund present in person or by
proxy and entitled to vote at the session of the Meeting to be adjourned. The
persons named as proxies will vote in favor of any such adjournment if they
determine that adjournment and additional solicitation are reasonable and in
the interests of the stockholders of Middle East/Africa Fund.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by Middle East/Africa Fund.
Middle East/Africa Fund will reimburse banks, brokers and others for
their reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of Middle East/Africa Fund and will reimburse
certain persons that Middle East/Africa Fund may employ for their reasonable
expenses in assisting in the solicitation of proxies from such beneficial
owners of shares of Middle East/Africa Fund.
In order to obtain the necessary quorum at the Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of Middle East/Africa Fund.
Broker-dealer firms, including Merrill Lynch, holding shares of Middle
East/Africa Fund in "street name" for the benefit of their customers and
clients will request the instructions of such customers and clients on how to
vote their shares before the Meeting. Broker-dealer firms, including Merrill
Lynch, will not be permitted to vote without instructions with respect to the
approval of the Agreement and Plan. Properly executed proxies that are
returned but that are marked "abstain" or with respect to which a
broker-dealer has received no instructions and therefore has declined to vote
on the proposal ("broker non-votes") will be counted as present for the
purposes of determining a quorum. However, abstentions and broker non-votes
will have the same effect as a vote against approval of the Agreement and
Plan.
This Proxy Statement and Prospectus does not contain all of the
information set forth in the registration statements and the exhibits relating
thereto, which Middle East/Africa Fund and Developing Capital Markets Fund,
respectively, have filed with the Commission under the Securities Act and the
Investment Company Act, to which reference is hereby made.
Middle East/Africa Fund and Developing Capital Markets Fund both file
reports and other information with the Commission. Reports, proxy statements,
registration statements and other information filed by Middle East/Africa Fund
and Developing Capital Markets Fund can be inspected and copied at the public
reference facilities of the Commission in Washington, D.C. and at the New York
Regional Office of the Commission at Seven World Trade Center, New York, New
York 10048. Copies of such materials also can be obtained by mail from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549, at prescribed
rates. The Commission maintains a web site (http://www.sec.gov) that contains
the Statement of Additional Information, the Developing Capital Markets Fund
Prospectus, the prospectus relating to Middle East/Africa Fund, dated April 1,
1999, the statement of additional Information relating to Middle East/Africa
Fund, dated April 1, 1999, other material incorporated herein by reference and
other information regarding the Funds.
LEGAL PROCEEDINGS
There are no material legal proceedings to which Middle East/Africa Fund
or Developing Capital Markets Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be
passed upon for Middle East/Africa Fund and Developing Capital Markets Fund by
Brown & Wood LLP, One World Trade Center, New York, New York 10048.
EXPERTS
The financial highlights of Middle East/Africa Fund and Developing
Capital Markets Fund included in this Proxy Statement and Prospectus have been
so included in reliance on the reports of Deloitte & Touche LLP ("D&T"),
independent auditors, given on their authority as experts in auditing and
accounting. The principal business address of D&T is Princeton Forrestal
Village, 116-300 Village Boulevard, Princeton, New Jersey 08540. D&T will
serve as the independent auditors for the Combined Fund after the
Reorganization.
STOCKHOLDER PROPOSALS
A stockholder proposal intended to be presented at any subsequent meeting
of stockholders of Middle East/Africa Fund must be received by Middle
East/Africa Fund in a reasonable time before Middle East/Africa Fund begins to
print and mail the proxy solicitation materials to be utilized in connection
with such meeting in order to be considered in Middle East/Africa Fund's proxy
statement and form of proxy relating to the meeting.
By Order of the Board of Directors,
Susan B. Baker
Secretary, Merrill Lynch Middle East/Africa
Fund, Inc.
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the 21st day of March, 2000, by and between Merrill Lynch Developing Capital
Markets Fund, Inc., a Maryland corporation ("Developing Capital Markets"), and
Merrill Lynch Middle East/Africa Fund, Inc., a Maryland corporation ("Middle
East/Africa" and, together with Developing Capital Markets, the "Funds").
PLAN OF REORGANIZATION
The reorganization will comprise the acquisition by Developing Capital
Markets of substantially all of the assets, and the assumption of
substantially all of the liabilities, of Middle East/Africa in exchange solely
for an equal aggregate value of newly issued shares, with a par value of $.10
per share, of Developing Capital Markets and the subsequent distribution of
Corresponding Shares (defined below) of Developing Capital Markets to the
stockholders of Middle East/Africa in exchange for their shares of common
stock, par value $.10 per share, of Middle East/Africa, in liquidation of
Middle East/Africa, all upon and subject to the terms hereinafter set forth
(the "Reorganization").
In the course of the Reorganization, shares of Developing Capital Markets
will be distributed to Middle East/Africa stockholders as follows: each holder
of Middle East/Africa shares will be entitled to receive the same class of
shares of Developing Capital Markets (i.e., Class A, Class B, Class C or Class
D) (the "Corresponding Shares") as they held in Middle East/Africa immediately
prior to the Reorganization. The same distribution fees, account maintenance
fees and sales charges (including contingent deferred sales charges), if any,
shall apply to the Corresponding Shares as applied to shares of Middle
East/Africa immediately prior to the Reorganization except that the redemption
fee applicable to shares of Middle East/Africa shall not apply to the
Corresponding Shares. The aggregate net asset value of the Corresponding
Shares of Developing Capital Markets to be received by each stockholder of
Middle East/Africa will equal the aggregate net asset value of the Middle
East/Africa shares owned by such stockholder on the Exchange Date (defined
below). In consideration therefor, on the Exchange Date, Developing Capital
Markets shall acquire substantially all of Middle East/Africa's assets and
assume substantially all of Middle East/Africa's obligations and liabilities
then existing, whether absolute, accrued, contingent or otherwise. It is
intended that the Reorganization described in this Plan shall be a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.
As promptly as practicable after the consummation of the Reorganization,
Middle East/Africa shall be dissolved in accordance with the laws of the State
of Maryland and will terminate its registration under the Investment Company
Act of 1940, as amended (the "1940 Act").
AGREEMENT
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Developing Capital Markets and Middle East/Africa hereby
agree as follows:
1. Representations and Warranties of Developing Capital Markets.
Developing Capital Markets represents and warrants to, and agrees with,
Middle East/Africa that:
(a) Developing Capital Markets is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. Developing Capital Markets has all necessary Federal, state and
local authorizations to carry on its business as it is now being conducted and
to carry out this Agreement.
(b) Developing Capital Markets is duly registered under the 1940 Act as a
non-diversified, open-end management investment company (File No. 811-5723),
and such registration has not been revoked or rescinded and is in full force
and effect. Developing Capital Markets has elected and qualified for the
special tax treatment afforded regulated investment companies ("RICs") under
Sections 851-855 of the Code at all times since its inception and intends to
continue to so qualify until consummation of the Reorganization and
thereafter.
(c) Middle East/Africa has been furnished with a statement of assets and
liabilities and a schedule of investments of Developing Capital Markets, each
as of June 30, 1999, said financial statements having been audited by Deloitte
& Touche LLP, independent public accountants. An unaudited statement of assets
and liabilities of Developing Capital Markets and an unaudited schedule of
investments of Developing Capital Markets, each as of the Valuation Time
(defined below), will be furnished to Middle East/Africa at or prior to the
Exchange Date for the purpose of determining the number of shares of
Developing Capital Markets to be issued pursuant to Section 4 of this
Agreement; and each will fairly present the financial position of Developing
Capital Markets as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(d) Middle East/Africa has been furnished with Developing Capital
Markets' Annual Report to Stockholders for the year ended June 30, 1999 and
Semi-Annual Report to Stockholders for the six month period ended December 31,
1999 and the financial statements appearing therein fairly present the
financial position of Developing Capital Markets as of the dates indicated in
conformity with generally accepted accounting principles applied on a
consistent basis.
(e) Middle East/Africa has been furnished with the prospectus and
statement of additional information of Developing Capital Markets, each dated
October 29, 1999, and said prospectus and statement of additional information
do not contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) Developing Capital Markets has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Developing Capital Markets, threatened against
it which assert liability on the part of Developing Capital Markets or which
materially affect its financial condition or its ability to consummate the
Reorganization. Developing Capital Markets is not charged with or, to the best
of its knowledge, threatened with any violation or investigation of any
possible violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(h) Developing Capital Markets is not a party to or obligated under any
provision of its Articles of Incorporation, or its by-laws, or any contract or
other commitment or obligation, and is not subject to any order or decree
which would be violated by its execution of or performance under this
Agreement.
(i) There are no material contracts outstanding to which Developing
Capital Markets is a party that have not been disclosed in the N-14
Registration Statement (as defined in subsection (l) below) or will not
otherwise be disclosed to Middle East/Africa prior to the Valuation Time.
(j) Developing Capital Markets has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements of
assets and liabilities referred to above, those incurred in the ordinary
course of its business as an investment company since the date of Developing
Capital Markets' most recent annual or semi-annual report to stockholders; and
those incurred in connection with the Reorganization. As of the Valuation
Time, Developing Capital Markets will advise Middle East/Africa in writing of
all known liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Developing Capital
Markets of the Reorganization, except such as may be required under the
Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange
Act of 1934, as amended (the "1934 Act") and the 1940 Act or state securities
laws (which term as used herein shall include the laws of the District of
Columbia and Puerto Rico).
(l) The registration statement filed by Developing Capital Markets on Form
N-14 relating to the shares of Developing Capital Markets to be issued
pursuant to this Agreement which includes the proxy statement of Middle
East/Africa and the prospectus of Developing Capital Markets with respect to
the transaction contemplated herein, and any supplement, or amendment thereto
or to the documents therein (as amended, the "N-14 Registration Statement"),
on its effective date, at the time of the stockholders' meeting referred to in
Section 6(a) of this Agreement and at the Exchange Date, insofar as it relates
to Developing Capital Markets (i) complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act
and the rules and regulations thereunder and (ii) did not or will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and the prospectus included therein did not or will not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Developing
Capital Markets for use in the N-14 Registration Statement as provided in
Section 6(e) of this Agreement.
(m) Developing Capital Markets is authorized to issue 400,000,000 shares
of common stock, par value $.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; each outstanding share is fully paid and
nonassessable and has full voting rights.
(n) Developing Capital Markets shares to be issued to Middle East/Africa
pursuant to this Agreement will have been duly authorized and, when issued and
delivered pursuant to this Agreement, will be legally and validly issued and
will be fully paid and nonassessable and will have full voting rights, and no
stockholder of Developing Capital Markets will have any preemptive right of
subscription or purchase in respect thereof.
(o) At or prior to the Exchange Date, Developing Capital Markets shares to
be transferred to Middle East/Africa for distribution to the stockholders of
Middle East/Africa on the Exchange Date will be duly qualified for offering to
the public in all states of the United States in which the sale of shares of
Middle East/Africa presently are qualified, and there are a sufficient number
of such shares registered under the 1933 Act and, as may be necessary, with
each pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Exchange Date, Developing Capital Markets will have
obtained any and all regulatory, Director and stockholder approvals necessary
to issue the shares of Developing Capital Markets to Middle East/Africa.
2. Representations and Warranties of Middle East/Africa.
Middle East/Africa represents and warrants to, and agrees with,
Developing Capital Markets that:
(a) Middle East/Africa is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland, and
has the power to own all of its assets and to carry out this Agreement. Middle
East/Africa has all necessary Federal, state and local authorizations to carry
on its business as it is now being conducted and to carry out this Agreement.
(b) Middle East/Africa is duly registered under the 1940 Act as a
non-diversified, open-end management investment company (File No. 811-07155),
and such registration has not been revoked or rescinded and is in full force
and effect. Middle East/Africa has elected and qualified for the special tax
treatment afforded RICs under Sections 851-855 of the Code at all times since
its inception, and intends to continue to so qualify for its taxable year
ending upon liquidation.
(c) As used in this Agreement, the term "Investments" shall mean (i) the
investments of Middle East/Africa shown on the schedule of its investments as
of the Valuation Time (as defined in Section 3(c) of this Agreement) furnished
to Developing Capital Markets, and (ii) all other assets owned by Middle
East/Africa or liabilities incurred as of the Valuation Time.
(d) Middle East/Africa has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) Developing Capital Markets has been furnished with a statement of
assets and liabilities and a schedule of investments of Middle East/Africa,
each as of November 30, 1999, said financial statements having been audited by
Deloitte & Touche LLP, independent public accountants. An unaudited statement
of assets and liabilities of Middle East/Africa and an unaudited schedule of
investments of Middle East/Africa, each as of the Valuation Time, will be
furnished to Developing Capital Markets at or prior to the Exchange Date for
the purpose of determining the number of shares of Developing Capital Markets
to be issued pursuant to Section 4 of this Agreement; and each will fairly
present the financial position of Middle East/Africa as of the Valuation Time
in conformity with generally accepted accounting principles applied on a
consistent basis.
(f) Developing Capital Markets has been furnished with Middle
East/Africa's Annual Report to Stockholders for the year ended November 30,
1999 and the financial statements appearing therein fairly present the
financial position of Middle East/Africa as of the dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(g) Developing Capital Markets has been furnished with the prospectus and
statement of additional information of Middle East/Africa, each dated April 1,
1999, and said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Middle East/Africa, threatened against it
which assert liability on the part of Middle East/Africa or which materially
affect its financial condition or its ability to consummate the
Reorganization. Middle East/Africa is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which Middle
East/Africa is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to Developing Capital Markets
prior to the Valuation Time.
(j) Middle East/Africa is not a party to or obligated under any provision
of its Articles of Incorporation, as amended and restated, or its by-laws, as
amended, or any contract or other commitment or obligation, and is not subject
to any order or decree which would be violated by its execution of or
performance under this Agreement.
(k) Middle East/Africa has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets
and liabilities referred to above, those incurred in the ordinary course of
its business as an investment company since November 30, 1999 and those
incurred in connection with the Reorganization. As of the Valuation Time,
Middle East/Africa will advise Developing Capital Markets in writing of all
known liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time.
(l) Middle East/Africa has filed, or has obtained extensions to file, all
Federal, state and local tax returns which are required to be filed by it, and
has paid or has obtained extensions to pay, all Federal, state and local taxes
shown on said returns to be due and owing and all assessments received by it,
up to and including the taxable year in which the Exchange Date occurs. All
tax liabilities of Middle East/Africa have been adequately provided for on its
books, and no tax deficiency or liability of Middle East/Africa has been
asserted and no question with respect thereto has been raised by the Internal
Revenue Service or by any state or local tax authority for taxes in excess of
those already paid, up to and including the taxable year in which the Exchange
Date occurs.
(m) At both the Valuation Time and the Exchange Date, Middle East/Africa
will have full right, power and authority to sell, assign, transfer and
deliver the Investments. At the Exchange Date, subject only to the delivery of
the Investments as contemplated by this Agreement, Middle East/Africa will
have good and marketable title to all of the Investments, and Developing
Capital Markets will acquire all of the Investments free and clear of any
encumbrances, liens or security interests and without any restrictions upon
the transfer thereof (except those imposed by the Federal or state securities
laws and those imperfections of title or encumbrances as do not materially
detract from the value or use of the Investments or materially affect title
thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Middle East/Africa
of the Reorganization, except such as may be required under the 1933 Act, the
1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the time of
the stockholders' meeting referred to in Section 6(a) of this Agreement and on
the Exchange Date, insofar as it relates to Middle East/Africa (i) complied or
will comply in all material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder, and (ii)
did not or will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading; and the prospectus included therein did not
or will not contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
apply only to statements in or omissions from the N-14 Registration Statement
made in reliance upon and in conformity with information furnished by Middle
East/Africa for use in the N-14 Registration Statement as provided in Section
6(e) of this Agreement.
(p) Middle East/Africa is authorized to issue 400,000,000 shares of common
stock, par value $.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; each outstanding share is fully paid and nonassessable and
has full voting rights.
(q) The books and records of Middle East/Africa made available to
Developing Capital Markets and/or its counsel are substantially true and
correct and contain no material misstatements or omissions with respect to the
operations of Middle East/Africa.
(r) Middle East/Africa will not sell or otherwise dispose of any of the
shares of Developing Capital Markets to be received in the Reorganization,
except in distribution to the stockholders of Middle East/Africa.
3. The Reorganization.
(a) Subject to receiving the requisite approval of the stockholders of
Middle East/Africa, and to the other terms and conditions contained herein,
Middle East/Africa agrees to convey, transfer and deliver to Developing
Capital Markets and Developing Capital Markets agrees to acquire from Middle
East/Africa, on the Exchange Date, all of the Investments (including interest
accrued as of the Valuation Time on debt instruments) of Middle East/Africa,
and assume substantially all of the liabilities of Middle East/Africa, in
exchange solely for that number of shares of Developing Capital Markets
provided in Section 4 of this Agreement. Pursuant to this Agreement, as soon
as practicable on or after the Exchange Date Middle East/Africa will
distribute all shares of Developing Capital Markets received by it to its
stockholders in exchange for their corresponding Middle East/Africa shares.
Such distribution shall be accomplished by the opening of stockholder accounts
on the stock ledger records of Developing Capital Markets in the amounts due
the stockholders of Middle East/Africa based on their respective holdings in
Middle East/Africa as of the Valuation Time.
(b) Middle East/Africa will pay or cause to be paid to Developing Capital
Markets any interest or dividends it receives on or after the Exchange Date
with respect to the Investments transferred to Middle East/Africa hereunder.
(c) The Valuation Time shall be 4:00 P.M., Eastern time, on June 2, 2000,
or such earlier or later day and time as may be mutually agreed upon in
writing (the "Valuation Time").
(d) Developing Capital Markets will acquire substantially all of the
assets of, and assume substantially all of the known liabilities of, Middle
East/Africa, except that recourse for such liabilities will be limited to the
net assets of Middle East/Africa acquired by Developing Capital Markets. The
known liabilities of Middle East/Africa as of the Valuation Time shall be
confirmed in writing to Developing Capital Markets by Middle East/Africa
pursuant to Section 2(k) of this Agreement.
(e) Developing Capital Markets and Middle East/Africa will jointly file
Articles of Transfer with the State Department of Assessments and Taxation of
Maryland and any other such instrument as may be required by the State of
Maryland to effect the transfer of the Investments of Middle East/Africa to
Developing Capital Markets.
(f) Middle East/Africa will be dissolved following the Exchange Date by
filing Articles of Dissolution with the State Department of Assessments and
Taxation of Maryland.
4. Issuance and Valuation of Shares of Developing Capital Markets in
the Reorganization.
Full shares of Developing Capital Markets, and to the extent necessary,
fractional shares of Developing Capital Markets, of an aggregate net asset
value equal to the net asset value of the assets of Middle East/Africa
acquired, determined as hereinafter provided, reduced by the amount of
liabilities of Middle East/Africa assumed by Developing Capital Markets, shall
be issued by Developing Capital Markets in exchange for such assets of Middle
East/Africa. The net asset value of Middle East/Africa and Developing Capital
Markets shall be determined in accordance with the procedures described in the
prospectus of Developing Capital Markets as of the Valuation Time. Such
valuation and determination shall be made by Developing Capital Markets in
cooperation with Middle East/Africa. Developing Capital Markets shall issue
its Class A, Class B, Class C and Class D shares to Middle East/Africa in
certificates or share deposit receipts (one in respect of each class)
registered in the name of Middle East/Africa. Middle East/Africa shall
distribute Corresponding Shares of Developing Capital Markets to its
stockholders by redelivering such certificates to Financial Data Services,
Inc.
5. Payment of Expenses.
(a) With respect to expenses incurred in connection with the
Reorganization, the expenses of the Reorganization that are directly
attributable to Middle East/Africa and the conduct of its business will be
deducted from the assets of Middle East/Africa as of the Valuation Time. These
expenses are expected to include the expenses incurred in preparing, printing
and mailing the proxy materials to be utilized in connection with the special
meeting of stockholders and the expenses related to the solicitation of
proxies to be voted at that meeting. The expenses attributable to Developing
Capital Markets include the costs of printing sufficient copies of its
Prospectus, Annual Report and Semi-Annual Report to accompany the Proxy
Statement and Prospectus. The expenses of the Reorganization, including
expenses in connection with obtaining the IRS ruling, the preparation of this
Agreement, legal fees and audit fees, will be borne equally by each Fund.
(b) If for any reason the Reorganization is not consummated, no party
shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.
6. Covenants of Developing Capital Markets and Middle East/Africa.
(a) Middle East/Africa agrees to call a special meeting of the
stockholders of Middle East/Africa to be held as soon as is practicable after
the effective date of the N-14 Registration Statement for the purpose of
considering the Reorganization as described in this Agreement, and it shall be
a condition to the obligations of each of the parties hereto that the holders
of a majority of the shares of Middle East/Africa issued and outstanding and
entitled to vote thereon, shall have approved this Agreement at such a meeting
at or prior to the Valuation Time.
(b) Developing Capital Markets and Middle East/Africa each covenants to
operate the business of Developing Capital Markets and Middle East/Africa,
respectively, as presently conducted between the date hereof and the Exchange
Date.
(c) Middle East/Africa agrees that following the consummation of the
Reorganization, it will dissolve in accordance with the laws of the State of
Maryland and any other applicable law, it will not make any distributions of
any Developing Capital Markets shares other than to the stockholders of Middle
East/Africa and without first paying or adequately providing for the payment
of all of Middle East/Africa's liabilities not assumed by Developing Capital
Markets, if any, and on and after the Exchange Date it shall not conduct any
business except in connection with its dissolution.
(d) Middle East/Africa undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section 8(f) of the 1940
Act for an order declaring that Middle East/Africa has ceased to be a
registered investment company.
(e) Developing Capital Markets will file the N-14 Registration Statement
with the Securities and Exchange Commission (the "Commission") and will use
its best efforts to provide that the N-14 Registration Statement becomes
effective as promptly as practicable. Developing Capital Markets and Middle
East/Africa agree to cooperate fully with each other, and each will furnish to
the other the information relating to itself to be set forth in the N-14
Registration Statement as required by the 1933 Act, the 1934 Act and the 1940
Act, and the rules and regulations thereunder and the state securities laws.
(f) Developing Capital Markets has no plan or intention to sell or
otherwise dispose of the assets of Middle East/Africa to be acquired in the
Reorganization, except for dispositions made in the ordinary course of
business.
(g) Middle East/Africa and Developing Capital Markets each agrees that by
the Exchange Date all of its Federal and other tax returns and reports
required to be filed on or before such date shall have been filed and all
taxes shown as due on said returns either have been paid or adequate liability
reserves have been provided for the payment of such taxes. In connection with
this covenant, the Funds agree to cooperate with each other in filing any tax
return, amended return or claim for refund, determining a liability for taxes
or a right to a refund of taxes or participating in or conducting any audit or
other proceeding in respect of taxes. Developing Capital Markets agrees to
retain for a period of ten (10) years following the Exchange Date all returns,
schedules and work papers and all material records or other documents relating
to tax matters of Middle East/Africa for its taxable period first ending after
the Exchange Date and for all prior taxable periods. Any information obtained
under this subsection shall be kept confidential except as otherwise may be
necessary in connection with the filing of returns or claims for refund or in
conducting an audit or other proceeding. After the Exchange Date, Middle
East/Africa shall prepare, or cause its agents to prepare, any Federal, state
or local tax returns, including any Forms 1099, required to be filed by Middle
East/Africa with respect to Middle East/Africa's final taxable year ending
with its complete liquidation and for any prior periods or taxable years and
further shall cause such tax returns and Forms 1099 to be duly filed with the
appropriate taxing authorities. Notwithstanding the aforementioned provisions
of this subsection, any expenses incurred by Middle East/Africa (other than
for payment of taxes) in connection with the preparation and filing of said
tax returns and Forms 1099 after the Exchange Date shall be borne by Middle
East/Africa to the extent such expenses have been accrued by Middle
East/Africa in the ordinary course without regard to the Reorganization; any
excess expenses shall be borne by Merrill Lynch Asset Management, L.P.
("MLAM") at the time such tax returns and Forms 1099 are prepared.
(h) Middle East/Africa agrees to mail to its stockholders of record
entitled to vote at the special meeting of stockholders at which action is to
be considered regarding this Agreement, in sufficient time to comply with
requirements as to notice thereof, a combined Proxy Statement and Prospectus
which complies in all material respects with the applicable provisions of
Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules
and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, Developing Capital
Markets expects to stay in existence and continue its business as a
non-diversified, open-end management investment company registered under the
1940 Act.
7. Exchange Date.
(a) Delivery of the assets of Middle East/Africa to be transferred,
together with any other Investments, and the Developing Capital Markets shares
to be issued, shall be made at the offices of Brown & Wood LLP, One World
Trade Center, New York, New York 10048, at 10:00 A.M. on the next full
business day following the Valuation Time, or at such other place, time and
date agreed to by Middle East/Africa and Developing Capital Markets, the date
and time upon which such delivery is to take place being referred to herein as
the "Exchange Date." To the extent that any Investments, for any reason, are
not transferable on the Exchange Date, Middle East/Africa shall cause such
Investments to be transferred to Developing Capital Markets' account with
Brown Brothers Harriman & Co. at the earliest practicable date thereafter.
(b) Middle East/Africa will deliver to Developing Capital Markets on the
Exchange Date confirmations or other adequate evidence as to the tax basis of
each of the Investments delivered to Developing Capital Markets hereunder,
certified by Deloitte & Touche LLP.
(c) As soon as practicable after the close of business on the Exchange
Date, Middle East/Africa shall deliver to Developing Capital Markets a list of
the names and addresses of all of the stockholders of record of Middle
East/Africa on the Exchange Date and the number of shares of Middle
East/Africa owned by each such stockholder, certified to the best of their
knowledge and belief by the transfer agent for Middle East/Africa or by its
President.
8. Middle East/Africa Conditions.
The obligations of Middle East/Africa hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of the holders of a majority
of the shares of Middle East/Africa, issued and outstanding and entitled to
vote thereon, voting together as a single class, and by the Board of Directors
of Developing Capital Markets; and that Developing Capital Markets shall have
delivered to Middle East/Africa a copy of the resolution approving this
Agreement adopted by Developing Capital Markets' Board of Directors, certified
by the Secretary of Developing Capital Markets.
(b) That Developing Capital Markets shall have furnished to Middle
East/Africa a statement of Developing Capital Markets' assets and liabilities,
with values determined as provided in Section 4 of this Agreement, together
with a schedule of its investments, all as of the Valuation Time, certified on
Developing Capital Markets' behalf by its President (or any Vice President)
and its Treasurer, and a certificate signed by Developing Capital Markets'
President (or any Vice President) and its Treasurer, dated as of the Exchange
Date, certifying that as of the Valuation Time and as of the Exchange Date
there has been no material adverse change in the financial position of
Developing Capital Markets since the date of Developing Capital Markets' most
recent annual or semi-annual report to stockholders, other than changes in its
portfolio securities since the date of such report or changes in the market
value of its portfolio securities.
(c) That Developing Capital Markets shall have furnished to Middle
East/Africa a certificate signed by Developing Capital Markets' President (or
any Vice President) and its Treasurer, dated as of the Exchange Date,
certifying that, as of the Valuation Time and as of the Exchange Date all
representations and warranties of Developing Capital Markets made in this
Agreement are true and correct in all material respects with the same effect
as if made at and as of such dates, and that Developing Capital Markets has
complied with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That Middle East/Africa shall have received an opinion of Brown & Wood
LLP, as counsel to both Developing Capital Markets and Middle East/Africa, in
form and substance satisfactory to Middle East/Africa and dated the Exchange
Date, to the effect that (i) each of Developing Capital Markets and Middle
East/Africa is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) the
Corresponding Shares of Developing Capital Markets to be issued pursuant to
this Agreement are duly authorized and, upon delivery, will be validly issued
and fully paid and nonassessable by Developing Capital Markets, and no
stockholder of Developing Capital Markets has any preemptive right to
subscription or purchase in respect thereof (pursuant to the Articles of
Incorporation or the by-laws of Developing Capital Markets or, to the best of
such counsel's knowledge, otherwise); (iii) this Agreement has been duly
authorized, executed and delivered by each of Developing Capital Markets and
Middle East/Africa, and represents a valid and binding contract, enforceable
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization or other similar laws pertaining to the
enforcement of creditors' rights generally and court decisions with respect
thereto; provided, such counsel shall express no opinion with respect to the
application of equitable principles in any proceeding, whether at law or in
equity; (iv) the execution and delivery of this Agreement does not, and the
consummation of the Reorganization will not, violate any material provisions
of Maryland law or the Articles of Incorporation, as amended, restated and
supplemented, the by-laws, as amended, or any agreement (known to such
counsel) to which either Developing Capital Markets or Middle East/Africa is a
party or by which either Developing Capital Markets or Middle East/Africa is
bound, except insofar as the parties have agreed to amend such provision as a
condition precedent to the Reorganization; (v) Middle East/Africa has the
power to sell, assign, transfer and deliver the assets transferred by it
hereunder and, upon consummation of the Reorganization in accordance with the
terms of this Agreement, Middle East/Africa will have duly transferred such
assets and liabilities in accordance with this Agreement; (vi) to the best of
such counsel's knowledge, no consent, approval, authorization or order of any
United States federal court, Maryland state court or governmental authority is
required for the consummation by Developing Capital Markets and Middle
East/Africa of the Reorganization, except such as have been obtained under the
1933 Act, the 1934 Act and the 1940 Act and the published rules and
regulations of the Commission thereunder and under Maryland law and such as
may be required under state securities laws; (vii) the N-14 Registration
Statement has become effective under the 1933 Act, no stop order suspending
the effectiveness of the N-14 Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and the N-14 Registration Statement, and each
amendment or supplement thereto, as of their respective effective dates,
appear on their face to be appropriately responsive in all material respects
to the requirements of the 1933 Act, the 1934 Act and the 1940 Act and the
published rules and regulations of the Commission thereunder; (viii) the
descriptions in the N-14 Registration Statement of statutes, legal and
governmental proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; (ix) such counsel does
not know of any statutes, legal or governmental proceedings or contracts or
other documents related to the Reorganization of a character required to be
described in the N-14 Registration Statement which are not described therein
or, if required to be filed, filed as required; (x) neither Developing Capital
Markets nor Middle East/Africa, to the knowledge of such counsel, is required
to qualify to do business as a foreign corporation in any jurisdiction except
as may be required by state securities laws, and except where each has so
qualified or the failure so to qualify would not have a material adverse
effect on Developing Capital Markets, Middle East/Africa or their respective
stockholders; (xi) such counsel does not have actual knowledge of any material
suit, action or legal or administrative proceeding pending or threatened
against Developing Capital Markets or Middle East/Africa, the unfavorable
outcome of which would materially and adversely affect Developing Capital
Markets or Middle East/Africa; (xii) all corporate actions required to be
taken by Developing Capital Markets and Middle East/Africa to authorize this
Agreement and to effect the Reorganization have been duly authorized by all
necessary corporate actions on the part of Developing Capital Markets and
Middle East/Africa; and (xiii) such opinion is solely for the benefit of
Developing Capital Markets and Middle East/Africa and their Directors and
officers. Such opinion also shall state that (x) while such counsel cannot
make any representation as to the accuracy or completeness of statements of
fact in the N-14 Registration Statement or any amendment or supplement
thereto, nothing has come to their attention that would lead them to believe
that, on the respective effective dates of the N-14 Registration Statement and
any amendment or supplement thereto, (1) the N-14 Registration Statement or
any amendment or supplement thereto contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2)
the prospectus included in the N-14 Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (y) such counsel does not
express any opinion or belief as to the financial statements or other
financial or statistical data relating to Developing Capital Markets or Middle
East/Africa contained or incorporated by reference in the N-14 Registration
Statement. In giving the opinion set forth above, Brown & Wood LLP may state
that it is relying on certificates of officers of Developing Capital Markets
and Middle East/Africa with regard to matters of fact and certain certificates
and written statements of governmental officials with respect to the good
standing of Developing Capital Markets and Middle East/Africa.
(f) That Middle East/Africa shall have received either (a) a private
letter ruling from the Internal Revenue Service or (b) an opinion of Brown &
Wood LLP, to the effect that for Federal income tax purposes (i) the transfer
of substantially all of the Investments of Middle East/Africa to Developing
Capital Markets in exchange solely for shares of Developing Capital Markets as
provided in this Agreement will constitute a reorganization within the meaning
of Section 368(a)(1)(C) of the Code, and Middle East/Africa and Developing
Capital Markets will each be deemed to be a "party" to the Reorganization
within the meaning of Section 368(b) of the Code; (ii) in accordance with
Section 361(a) of the Code, no gain or loss will be recognized to Middle
East/Africa as a result of the asset transfer solely in exchange for
Developing Capital Markets shares or on the distribution of the Developing
Capital Markets stock to Middle East/Africa stockholders under Section
361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss
will be recognized to Developing Capital Markets on the receipt of assets of
Middle East/Africa in exchange for Developing Capital Markets shares; (iv) in
accordance with Section 354(a)(1) of the Code, no gain or loss will be
recognized to the stockholders of Middle East/Africa on the receipt of
Corresponding Shares of Developing Capital Markets in exchange for their
shares of Middle East/Africa; (v) in accordance with Section 362(b) of the
Code, the tax basis of the Middle East/Africa assets in the hands of
Developing Capital Markets will be the same as the tax basis of such assets in
the hands of Middle East/Africa immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Corresponding Shares of
Developing Capital Markets received by the stockholders of Middle East/Africa
in the Reorganization will be equal, to the tax basis of the shares of Middle
East/Africa surrendered in exchange; (vii) in accordance with Section 1223 of
the Code, a stockholder's holding period for the Corresponding Shares of
Developing Capital Markets will be determined by including the period for
which such stockholder held the shares of Middle East/Africa exchanged
therefor, provided, that such Middle East/Africa shares were held as a capital
asset; (viii) in accordance with Section 1223 of the Code, Developing Capital
Markets' holding period with respect to the Middle East/Africa assets
transferred will include the period for which such assets were held by Middle
East/Africa; and (ix) the taxable year of Middle East/Africa will end on the
effective date of the Reorganization, and pursuant to Section 381(a) of the
Code and regulations thereunder, Developing Capital Markets will succeed to
and take into account certain tax attributes of Middle East/Africa, such as
earnings and profits, capital loss carryovers and method of accounting.
(g) That all proceedings taken by Developing Capital Markets and its
counsel in connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to Middle East/Africa.
(h) That the N-14 Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of Developing Capital Markets, be contemplated
by the Commission.
(i) That Middle East/Africa shall have received from Deloitte & Touche LLP
a letter dated within three days prior to the effective date of the N-14
Registration Statement and a similar letter dated within five days prior to
the Exchange Date, in form and substance satisfactory to Middle East/Africa,
to the effect that (i) they are independent public accountants with respect to
Developing Capital Markets within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder; (ii) in their opinion,
the financial statements and supplementary information of Developing Capital
Markets included or incorporated by reference in the N-14 Registration
Statement and reported on by them comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder; and (iii) on the basis of limited procedures
agreed upon by Middle East/Africa and Developing Capital Markets and described
in such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of Developing Capital
Markets included in the N-14 Registration Statement, and inquiries of certain
officials of Developing Capital Markets responsible for financial and
accounting matters, nothing came to their attention that caused them to
believe that (a) such unaudited financial statements and related unaudited
supplementary information do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder, or (b) such unaudited financial statements
are not fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the
audited financial statements; and (iv) on the basis of limited procedures
agreed upon by Middle East/Africa and Developing Capital Markets and described
in such letter (but not an examination in accordance with generally accepted
auditing standards), the information relating to Developing Capital Markets
appearing in the N-14 Registration Statement, which information is expressed
in dollars (or percentages derived from such dollars) (with the exception of
performance comparisons, if any), if any, has been obtained from the
accounting records of Developing Capital Markets or from schedules prepared by
officials of Developing Capital Markets having responsibility for financial
and reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(j) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the Reorganization
under Section 25(c) of the 1940 Act, and no other legal, administrative or
other proceeding shall be instituted or threatened which would materially
affect the financial condition of Developing Capital Markets or would prohibit
the Reorganization.
(k) That Middle East/Africa shall have received from the Commission such
orders or interpretations as Brown & Wood LLP, as counsel to Middle
East/Africa, deems reasonably necessary or desirable under the 1933 Act and
the 1940 Act in connection with the Reorganization, provided, that such
counsel shall have requested such orders as promptly as practicable, and all
such orders shall be in full force and effect.
9. Developing Capital Markets Conditions.
The obligations of Developing Capital Markets hereunder shall be subject
to the following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Directors of Middle East/Africa and
by the affirmative vote of the holders of a majority of the shares of common
stock of Middle East/Africa issued and outstanding and entitled to vote
thereon, voting together as a single class; and that Middle East/Africa shall
have delivered to Developing Capital Markets a copy of the resolution
approving this Agreement adopted by Middle East/Africa's Board of Directors,
and a certificate setting forth the vote Middle East/Africa stockholders
obtained, each certified by the Secretary of Middle East/Africa.
(b) That Middle East/Africa shall have furnished to Developing Capital
Markets a statement of Middle East/Africa's assets and liabilities, with
values determined as provided in Section 4 of this Agreement, together with a
schedule of investments with their respective dates of acquisition and tax
costs, all as of the Valuation Time, certified on Middle East/Africa's behalf
by its President (or any Vice President) and its Treasurer, and a certificate
signed by Middle East/Africa's President (or any Vice President) and its
Treasurer, dated as of the Exchange Date, certifying that as of the Valuation
Time and as of the Exchange Date there has been no material adverse change in
the financial position of Middle East/Africa since the date of Middle
East/Africa's most recent annual or semi-annual report to stockholders, other
than changes in the Investments since the date of such report or changes in
the market value of the Investments.
(c) That Middle East/Africa shall have furnished to Developing Capital
Markets a certificate signed by Middle East/Africa's President (or any Vice
President) and its Treasurer, dated the Exchange Date, certifying that as of
the Valuation Time and as of the Exchange Date all representations and
warranties of Middle East/Africa made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of such
dates and Middle East/Africa has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied at or
prior to such dates.
(d) That Middle East/Africa shall have delivered to Developing Capital
Markets a letter from Deloitte & Touche LLP, dated the Exchange Date, stating
that such firm has performed a limited review of the Federal, state and local
income tax returns of Middle East/Africa for the period ended November 30,
1999 (which returns originally were prepared and filed by Middle East/Africa),
and that based on such limited review, nothing came to their attention which
caused them to believe that such returns did not properly reflect, in all
material respects, the Federal, state and local income taxes of Middle
East/Africa for the period covered thereby; and that for the period from
December 1, 1999, to and including the Exchange Date and for any taxable year
of Middle East/Africa ending upon the liquidation of Middle East/Africa, such
firm has performed a limited review to ascertain the amount of applicable
Federal, state and local taxes, and has determined that either such amount has
been paid or reserves have been established for payment of such taxes, this
review to be based on unaudited financial data; and that based on such limited
review, nothing has come to their attention which caused them to believe that
the taxes paid or reserves set aside for payment of such taxes were not
adequate in all material respects for the satisfaction of Federal, state and
local taxes for the period from December 1, 1999, to and including the
Exchange Date and for any taxable year of Middle East/Africa ending upon the
liquidation of Middle East/Africa or that Middle East/Africa would not
continue to qualify as a RIC for Federal income tax purposes for the tax years
in question.
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That Developing Capital Markets shall have received an opinion of
Brown & Wood LLP, as counsel to both Developing Capital Markets and Middle
East/Africa, in form and substance satisfactory to Developing Capital Markets
and dated the Exchange Date, with respect to the matters specified in Section
8(e) of this Agreement and such other matters as Developing Capital Markets
reasonably may deem necessary or desirable.
(g) That Developing Capital Markets shall have received a private letter
ruling from the Internal Revenue Service or an opinion of Brown & Wood LLP
with respect to the matters specified in Section 8(f) of this Agreement.
(h) That Developing Capital Markets shall have received from Deloitte &
Touche LLP a letter dated within three days prior to the effective date of the
N-14 Registration Statement and a similar letter dated within five days prior
to the Exchange Date, in form and substance satisfactory to Developing Capital
Markets, to the effect that (i) they are independent public accountants with
respect to Middle East/Africa within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder; (ii) in their opinion,
the financial statements and supplementary information of Middle East/Africa
included or incorporated by reference in the N-14 Registration Statement and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder; (iii) on the basis of limited procedures agreed upon
by Middle East/Africa and Developing Capital Markets and described in such
letter (but not an examination in accordance with generally accepted auditing
standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of Middle East/Africa
included in the N-14 Registration Statement, and inquiries of certain
officials of Middle East/Africa responsible for financial and accounting
matters, nothing came to their attention that caused them to believe that (a)
such unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder, (b) such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles, applied
on a basis substantially consistent with that of the audited financial
statements, or (c) such unaudited supplementary information is not fairly
stated in all material respects in relation to the unaudited financial
statements taken as a whole; and (iv) on the basis of limited procedures
agreed upon by Developing Capital Markets and Middle East/Africa and described
in such letter (but not an examination in accordance with generally accepted
auditing standards), the information relating to Middle East/Africa appearing
in the N-14 Registration Statement, which information is expressed in dollars
(or percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records of
Middle East/Africa or from schedules prepared by officials of Middle
East/Africa having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations made
therefrom.
(i) That the Investments to be transferred to Developing Capital Markets
shall not include any assets or liabilities which Developing Capital Markets,
by reason of charter limitations or otherwise, may not properly acquire or
assume.
(j) That the N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of Middle East/Africa, be contemplated by the
Commission.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the Reorganization
under Section 25(c) of the 1940 Act, and no other legal, administrative or
other proceeding shall be instituted or threatened which would materially
affect the financial condition of Middle East/Africa or would prohibit the
Reorganization.
(l) That Developing Capital Markets shall have received from the
Commission such orders or interpretations as Brown & Wood LLP, as counsel to
Developing Capital Markets, deems reasonably necessary or desirable under the
1933 Act and the 1940 Act in connection with the Reorganization, provided,
that such counsel shall have requested such orders as promptly as practicable,
and all such orders shall be in full force and effect.
(m) That all proceedings taken by Middle East/Africa and its counsel in
connection with the Reorganization and all documents incidental thereto shall
be satisfactory in form and substance to Developing Capital Markets.
(n) That prior to the Exchange Date, Middle East/Africa shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to its stockholders all of
its investment company taxable income to and including the Exchange Date, if
any (computed without regard to any deduction for dividends paid), and all of
its net capital gain, if any, realized to and including the Exchange Date.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the stockholders of Middle
East/Africa) prior to the Exchange Date, or the Exchange Date may be
postponed, (i) by mutual consent of the Boards of Directors of Middle
East/Africa and Developing Capital Markets; (ii) by the Board of Directors of
Middle East/Africa if any condition of Middle East/Africa's obligations set
forth in Section 8 of this Agreement has not been fulfilled or waived by such
Board; or (iii) by the Board of Directors of Developing Capital Markets if any
condition of Developing Capital Markets' obligations set forth in Section 9 of
this Agreement has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by December 31, 2000, this Agreement automatically shall terminate
on that date, unless a later date is mutually agreed to by the Boards of
Directors of Middle East/Africa and Developing Capital Markets.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Middle East/Africa or
Developing Capital Markets or persons who are their directors, trustees,
officers, agents or stockholders in respect of this Agreement.
(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Directors of either Middle
East/Africa or Developing Capital Markets, respectively (whichever is entitled
to the benefit thereof), if, in the judgment of such Board after consultation
with its counsel, such action or waiver will not have a material adverse
effect on the benefits intended under this Agreement to the stockholders of
their respective fund, on behalf of which such action is taken. In addition,
the Boards of Directors of Middle East/Africa and Developing Capital Markets
have delegated to MLAM the ability to make non-material changes to the
transaction if it deems it to be in the best interests of Middle East/Africa
and Developing Capital Markets to do so.
(e) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither Middle East/Africa nor
Developing Capital Markets nor any of their officers, directors or trustees,
agents or stockholders shall have any liability with respect to such
representations or warranties after the Exchange Date. This provision shall
not protect any officer, director or trustee, agent or stockholder of Middle
East/Africa or Developing Capital Markets against any liability to the entity
for which that officer, director or trustee, agent or stockholder so acts or
to its stockholders, to which that officer, director or trustee, agent or
stockholder otherwise would be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties in the conduct of
such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose any
terms or conditions which are determined by action of the Boards of Directors
of Middle East/Africa and Developing Capital Markets to be acceptable, such
terms and conditions shall be binding as if a part of this Agreement without
further vote or approval of the stockholders of Middle East/Africa unless such
terms and conditions shall result in a change in the method of computing the
number of shares of Developing Capital Markets to be issued to Middle
East/Africa in which event, unless such terms and conditions shall have been
included in the proxy solicitation materials furnished to the stockholders of
Middle East/Africa prior to the meeting at which the Reorganization shall have
been approved, this Agreement shall not be consummated and shall terminate
unless Middle East/Africa promptly shall call a special meeting of
stockholders at which such conditions so imposed shall be submitted for
approval.
11. Indemnification.
(a) Middle East/Africa hereby agrees to indemnify and hold Developing
Capital Markets harmless from all loss, liability and expense (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which Developing Capital Markets may incur or sustain by reason of the
fact that (i) Developing Capital Markets shall be required to pay any
corporate obligation of Middle East/Africa, whether consisting of tax
deficiencies or otherwise, based upon a claim or claims against Middle
East/Africa which were omitted or not fairly reflected in the financial
statements to be delivered to Developing Capital Markets in connection with
the Reorganization; (ii) any representations or warranties made by Middle
East/Africa in this Agreement should prove to be false or erroneous in any
material respect; (iii) any covenant of Middle East/Africa has been breached
in any material respect; or (iv) any claim is made alleging that (a) the N-14
Registration Statement included any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or (b) the Proxy Statement and
Prospectus delivered to the stockholders of Middle East/Africa and forming a
part of the N-14 Registration Statement included any untrue statement of a
material fact or omitted to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as such claim is based on written
information furnished to Middle East/Africa by Developing Capital Markets.
(b) Developing Capital Markets hereby agrees to indemnify and hold Middle
East/Africa harmless from all loss, liability and expenses (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which Middle East/Africa may incur or sustain by reason of the fact
that (i) any representations or warranties made by Developing Capital Markets
in this Agreement should prove false or erroneous in any material respect,
(ii) any covenant of Developing Capital Markets has been breached in any
material respect, or (iii) any claim is made alleging that (a) the N-14
Registration Statement included any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein, not misleading or (b) the Proxy Statement and
Prospectus delivered to stockholders of Middle East/Africa and forming a part
of the N-14 Registration Statement included any untrue statement of a material
fact or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such claim is based on written information
furnished to Developing Capital Markets by Middle East/Africa.
(c) In the event that any claim is made against Developing Capital Markets
in respect of which indemnity may be sought by Developing Capital Markets from
Middle East/Africa under Section 11(a) of this Agreement, or in the event that
any claim is made against Middle East/Africa in respect of which indemnity may
be sought by Middle East/Africa from Developing Capital Markets under Section
11(b) of this Agreement, then the party seeking indemnification (the
"Indemnified Party"), with reasonable promptness and before payment of such
claim, shall give written notice of such claim to the other party (the
"Indemnifying Party"). If no objection as to the validity of the claim is made
in writing to the Indemnified Party by the Indemnifying Party within thirty
(30) days after the giving of notice hereunder, then the Indemnified Party may
pay such claim and shall be entitled to reimbursement therefor, pursuant to
this Agreement. If, prior to the termination of such thirty-day period,
objection in writing as to the validity of such claim is made to the
Indemnified Party, the Indemnified Party shall withhold payment thereof until
the validity of such claim is established (i) to the satisfaction of the
Indemnifying Party, or (ii) by a final determination of a court of competent
jurisdiction, whereupon the Indemnified Party may pay such claim and shall be
entitled to reimbursement thereof, pursuant to this Agreement, or (iii) with
respect to any tax claims, within seven (7) calendar days following the
earlier of (A) an agreement between Middle East/Africa and Developing Capital
Markets that an indemnity amount is payable, (B) an assessment of a tax by a
taxing authority, or (C) a "determination" as defined in Section 1313(a) of
the Code. For purposes of this Section 11, the term "assessment" shall have
the same meaning as used in Chapter 63 of the Code and Treasury Regulations
thereunder, or any comparable provision under the laws of the appropriate
taxing authority. In the event of any objection by the Indemnifying Party, the
Indemnifying Party promptly shall investigate the claim, and if it is not
satisfied with the validity thereof, the Indemnifying Party shall conduct the
defense against such claim. All costs and expenses incurred by the
Indemnifying Party in connection with such investigation and defense of such
claim shall be borne by it. These indemnification provisions are in addition
to, and not in limitation of, any other rights the parties may have under
applicable law.
12. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization pursuant to
Rule 145(c), Developing Capital Markets will cause to be affixed upon the
certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. (OR ITS
STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to Developing
Capital Markets' transfer agent with respect to such shares. Middle
East/Africa will provide Developing Capital Markets on the Exchange Date with
the name of any Middle East/Africa stockholder who is to the knowledge of
Middle East/Africa an affiliate of Middle East/Africa on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be made by hand delivery, prepaid
certified mail or overnight service, addressed to Middle East/Africa or
Developing Capital Markets, in either case at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, Attn: Terry K. Glenn, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, restated and
supplemented, of Middle East/Africa and Developing Capital Markets are on file
with the Department of Assessments and Taxation of the State of Maryland and
notice is hereby given that this instrument is executed on behalf of the
Directors of each Fund.
<PAGE>
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
BY: /s/ TERRY K. GLENN
---------------------------------
(TERRY K. GLENN, PRESIDENT)
ATTEST:
/s/ SUSAN B. BAKER
- -----------------------------
(SUSAN B. BAKER, SECRETARY)
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
BY:/s/ DONALD C. BURKE
------------------------------------
(DONALD C. BURKE, VICE PRESIDENT AND
TREASURER)
ATTEST:
/s/ SUSAN B. BAKER
- -----------------------------
(SUSAN B. BAKER, SECRETARY)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(609) 282-2800
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Proxy Statement and Prospectus of Merrill
Lynch Middle East/Africa Fund, Inc. ("Middle East/Africa Fund") and Merrill
Lynch Developing Capital Markets Fund, Inc. ("Developing Capital Markets
Fund") dated March 22, 2000 (the "Proxy Statement and Prospectus"), which
has been filed with the Securities and Exchange Commission and can be
obtained, without charge, by calling Developing Capital Markets Fund at
1-800-456-4587, ext. 123, or by writing to Developing Capital Markets Fund at
the above address. This Statement of Additional Information has been
incorporated by reference into the Proxy Statement and Prospectus.
Further information about Developing Capital Markets Fund is contained in
and incorporated by reference to its Statement of Additional Information,
dated October 29, 1999, which is incorporated by reference into and
accompanies this Statement of Additional Information.
The Commission maintains a web site (http://www.sec.gov) that contains
the prospectus and statement of additional information of each of Middle
East/Africa Fund and Developing Capital Markets Fund, other material
incorporated by reference and other information regarding Middle East/Africa
Fund and Developing Capital Markets Fund.
The date of this Statement of Additional Information is March 22, 2000.
<PAGE>
TABLE OF CONTENTS
General Information...........................................................2
Financial Statements..........................................................2
GENERAL INFORMATION
The stockholders of Middle East/Africa Fund are being asked to approve
the acquisition of substantially all of the assets of Middle East/Africa Fund,
and the assumption of substantially all of the liabilities of Middle
East/Africa Fund, by Developing Capital Markets Fund in exchange solely for an
equal aggregate value of shares of Developing Capital Markets Fund (the
"Reorganization"). Developing Capital Markets Fund is an open-end management
investment company organized as a Maryland corporation. A Special Meeting of
Stockholders of Middle East/Africa Fund to consider the Reorganization will be
held at 800 Scudders Mill Road, Plainsboro, New Jersey, on April 26, 2000, at
11:15 a.m., Eastern time.
For detailed information about the Reorganization, stockholders of Middle
East/Africa Fund should refer to the Proxy Statement and Prospectus. For
further information about Developing Capital Markets Fund, stockholders should
refer to Developing Capital Markets Fund's Statement of Additional
Information, dated October 29, 1999, which accompanies this Statement of
Additional Information and is incorporated by reference herein.
FINANCIAL STATEMENTS
In accordance with Part B, Item 14(a) of Form N-14, pro forma financial
statements reflecting consummation of the Reorganization are not required to
be provided in this Statement of Additional Information since the net asset
value of Middle East/Africa Fund does not exceed 10% of the net asset value of
Developing Capital Markets Fund as of February 29, 2000.
Developing Capital Markets Fund
Audited financial statements and accompanying notes for the fiscal year
ended June 30, 1999, and the independent auditor's report thereon, dated
August 16, 1999, of Developing Capital Markets Fund are incorporated herein by
reference from Developing Capital Markets Fund's Annual Report to
Shareholders. Unaudited financial statements and accompanying notes for the
six months ended December 31, 1999 of Developing Capital Markets Fund are
incorporated herein by reference from Developing Capital Markets Fund's
Semi-Annual Report to Shareholders.
Middle East/Africa Fund
Audited financial statements and accompanying notes for the fiscal year
ended November 30, 1999, and the independent auditor's report thereon, dated
January 14, 2000, of Middle East/Africa Fund are incorporated herein by
reference from Middle East/Africa Fund's Annual Report to Shareholders.
<PAGE>
PART C
OTHER INFORMATION
Item 15. Indemnification.
Reference is made to Article VI of Registrant's Articles of
Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class
C and Class D Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or
director is not guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-Laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the General Laws of the State of Maryland,
provided, however, that the person seeking indemnification shall provide to
the Registrant a written affirmation of his good faith belief that the
standard of conduct necessary for indemnification by the Registrant has been
met and a written undertaking to repay any such advance, if it should
ultimately be determined that the standard of conduct has not been met, and
provided further that at least one of the following additional conditions is
met: (a) the person seeking indemnification shall provide a security in form
and amount acceptable to the Registrant for his undertaking; (b) the
Registrant is insured against losses arising by reason of the advance; (c) a
majority of a quorum of non-party independent directors, or independent legal
counsel in a written opinion, shall determine, based on a review of facts
readily available to the Registrant at the time the advance is proposed to be
made, that there is reason to believe that the person seeking indemnification
will ultimately be found to be entitled to indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his or her activities as an
officer or director of the Registrant. The Registrant, however, may not
purchase insurance on behalf of any officer or director of the Registrant that
protects or purports to protect such person from liability to the Registrant
or to its stockholders to which such officer or director would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
In Section 9 of the Class A, Class B, Class C and Class D 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 (the "1933 Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement or 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 16. Exhibits.
<TABLE>
<CAPTION>
<S> <C>
(1)(a) -- Articles of Incorporation of the Registrant, dated April 13, 1989.(a)
(1)(b) -- Articles of Amendment to Articles of Incorporation of the Registrant,
dated May 17, 1989.(a)
(c) -- Articles of Amendment to Articles of Incorporation of the Registrant,
dated June 16, 1989.(a)
(d) -- Form of Articles Supplementary to the Articles of Incorporation of the
Registrant. (a)
(e) -- Articles of Amendment to Articles of Incorporation of the Registrant,
dated October 17, 1994. (b)
(f) -- Articles Supplementary to the Articles of Incorporation of the Registrant,
dated October 17, 1994. (b)
(2) -- By-Laws of the Registrant.(b)
(3) -- Not applicable.
(4) -- Form of Agreement and Plan of Reorganization between the Registrant and
Merrill Lynch Middle East/Africa Fund, Inc.(c)
(5) -- Copies of instruments defining the rights of stockholders, including the
relevant portions of the Articles of Incorporation, and the By-Laws of the
Registrant.(d)
(6)(a) -- Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P. ("MLAM").(b)
(6)(b) -- Supplement to Management Agreement between the Registrant and MLAM. (a)
(6)(c) -- Form of Sub-Advisory Agreement between MLAM and Merrill Lynch Asset
Management U.K. Limited.(e)--
(7)(a) -- Class A Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. (now known as Princeton Funds Distributor,
Inc.) (the "Distributor").(f)--
(7)(b) -- Class B Shares Distribution Agreement between the Registrant and the
Distributor.(a)--
(7)(c) -- Class C Shares Distribution Agreement between the Registrant and the
Distributor.(f)--
(7)(d) -- Class D Shares Distribution Agreement between the Registrant and the
Distributor.(f)--
(8) -- None.
(9) -- Form of Custody Agreement between the Registrant and Brown Brothers
Harriman & Co.(g)--
(10)(a) -- Class B Shares Distribution Plan and Class B Shares Distribution Plan
Sub-Agreement of the Registrant.(a)
(10)(b) -- Form of Class C Shares Distribution Plan and Class C Shares Distribution
Plan Sub-Agreement of the Registrant.(f)
(10)(c) -- Form of Class D Shares Distribution Plan and Class D Shares Distribution
Plan Sub-Agreement of the Registrant.(f)
(10)(d) -- Merrill Lynch Select Pricing (SM) System Plan pursuant to Rule
l8f-3.(e)
(11) -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
(12) -- Private Letter Ruling from the Internal Revenue Service.(h)
(13) -- Not applicable.
(14)(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
(14)(b) -- Consent of Deloitte & Touche LLP, independent auditors for Merrill Lynch
Middle East/Africa Fund, Inc.
(15) -- Not applicable.
(16) -- Power of Attorney.(i)
(17)(a) -- Prospectus dated October 29, 1999, and Statement of Additional
Information dated October 29, 1999, of the Registrant.
(17)(b) -- Annual Report to Stockholders of the Registrant, as of June 30, 1999.
(17)(c) -- Semi-Annual Report to Stockholders of the Registrant, as of December 31,
1999.
(17)(d) -- Annual Report to Stockholders of Merrill Lynch Middle East/Africa Fund,
Inc. as of November 30, 1999.
(17)(e) -- Form of Proxy (j)
</TABLE>
- ---------------
(a) Filed on May 13, 1994, as an Exhibit to Post-Effective Amendment No. 7 to
the Registrant's Registration Statement on Form N-1A (File No. 33-28248)
under the Securities Act of 1933, as amended (the "Registration
Statement").
(b) Filed on October 25, 1995 as an Exhibit to Post-Effective Amendment No. 9
to the Registration Statement.
(c) Included as Exhibit 1 to the Proxy Statement and Prospectus contained in
this Registration Statement.
(d) Reference is made to Articles V, VI, VII, VIII and X of the Registrant's
Articles of Incorporation, as amended and supplemented, filed as Exhibits
1(a), 1(b), 1(c), 1(d), 1(e) and 1(f) to the Registration Statement; and
to Articles II, III (Sections 1, 3, 5, 6 and 17), VI, VII, XII, XIII and
XIV of the Registrant's By-Laws, filed as Exhibit 2 to the Registration
Statement.
(e) 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).
(f) Filed on October 17, 1994, as an Exhibit to Post-Effective Amendment No. 8
to the Registration Statement.
(g) Filed on October 28, 1996, as an Exhibit to Post Effective Amendment No.
10 to the Registration Statement.
(h) To be filed by post-effective amendment.
(i) Included on the signature page of the Registrant's Registration Statement
on Form N-14 (File No. 333-96005) under the Securities Act of 1933, as
amended (the "N-14 Registration Statement").
(j) Filed on February 2, 2000, as an Exhibit to the Registrant's N-14
Registration Statement.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
as amended, the reoffering prospectus will contain information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering of
securities at that time shall be deemed to be the initial bona fide offering
of them.
(3) The Registrant undertakes to file, by post-effective amendment,
either a copy of the Internal Revenue Service private letter ruling applied
for or an opinion of counsel as to certain tax matters, within a reasonable
time after receipt of such ruling or opinion.
<PAGE>
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 22nd day of March, 2000.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND,
INC.
(Registrant)
By /s/ DONALD C. BURKE
--------------------------------------------
(Donald C. Burke, Vice President and
Treasurer)
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
--------- ----- ----
TERRY K. GLENN * President and Director
- --------------------------------------- (Principal Executive
(Terry K. Glenn) Officer)
Vice President and
DONALD C. BURKE * Treasurer (Principal
- --------------------------------------- Financial
(Donald C. Burke) and Accounting Officer)
CHARLES C. REILLY * Director
- ---------------------------------------
(Charles C. Reilly)
RICHARD R. WEST * Director
- ---------------------------------------
(Richard R. West)
ARTHUR ZEIKEL * Director
- ---------------------------------------
(Arthur Zeikel)
EDWARD D. ZINBARG * Director
- ---------------------------------------
(Edward D. Zinbarg)
* By: /s/ DONALD C. BURKE
----------------------------------
(Donald C. Burke, Attorney-in-Fact) March 22, 2000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
Exhibit
Number Description
- ------- -----------
(11) -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
(14)(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
(14)(b) -- Consent of Deloitte & Touche LLP, independent auditors for Merrill Lynch Middle
East/Africa Fund, Inc.
(17)(a) -- Prospectus dated October 29, 1999, and Statement of Additional Information
dated October 29, 1999, of the Registrant.
(17)(b) -- Annual Report to Stockholders of the Registrant, as of June 30, 1999.
(17)(c) -- Semi-Annual Report to Stockholders of the Registrant, as of December 31, 1999.
(17)(d) -- Annual Report to Stockholders of Merrill Lynch Middle East/Africa Fund, Inc. as
of November 30, 1999.
</TABLE>
Exhibit 11
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
March 22, 2000
Merrill Lynch Developing Capital Markets Fund, Inc.
800 Scudders Mill Road
Plainsboro, NJ 08536
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch Developing Capital Markets
Fund, Inc., (the "Fund"), in connection with the proposed acquisition by the
Fund of substantially all of the assets and the assumption of substantially
all of the liabilities of Merrill Lynch Middle East/Africa Fund, Inc. ("Middle
East/Africa"), in exchange for newly-issued shares of common stock of the Fund
(the "Reorganization"). This opinion is furnished in connection with the
Fund's Registration Statement on Form N-14 (the "Registration Statement"),
under the Securities Act of 1933, as amended, relating to shares of common
stock, par value $0.10 per share, of the Fund (the "Shares"), to be issued in
the Reorganization.
As counsel for the Fund, we are familiar with the proceedings taken by it
and to be taken by it in connection with the authorization, issuance and sale
of the Shares. In addition, we have examined and are familiar with the
Articles of Incorporation of the Fund, as amended and supplemented, the
By-Laws of the Fund and such other documents as we have deemed relevant to the
matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that subsequent to the
approval of the Agreement and Plan of Reorganization between the Fund and
Middle East/Africa set forth in the proxy statement and prospectus
constituting a part of the Registration Statement (the "Proxy Statement and
Prospectus"), the Shares, upon issuance in the manner referred to in the
Registration Statement, for consideration not less than the par value thereof,
will be legally issued, fully paid and non-assessable shares of common stock
of the Fund.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Proxy Statement and
Prospectus constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
EXHIBIT 14(a)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Developing Capital Markets Fund, Inc.:
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of Merrill Lynch Developing Capital Markets Fund, Inc. of our report
dated August 16, 1999 appearing in the annual report to stockholders of
Merrill Lynch Developing Capital Markets Fund, Inc. for the year ended June 30,
1999 and to the references to us under the captions "COMPARISON OF THE FUNDS -
Financial Highlights" and "EXPERTS" appearing in the Proxy Statement and
Prospectus, which is a part of this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
March 21, 2000
<PAGE>
EXHIBIT 14(b)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Middle East/Africa Fund, Inc.:
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of Merrill Lynch Developing Capital Markets Fund, Inc. of our report
dated January 14, 2000 appearing in the annual report to stockholders of
Merrill Lynch Middle East/Africa Fund, Inc. for the year ended November 30,
1999, and to the references to us under the captions "COMPARISON OF THE FUNDS -
Financial Highlights" and "EXPERTS" appearing in the Proxy Statement and
Prospectus, which is a part of this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
March 21, 2000
Exhibit 17(a)
As filed with the Securities and Exchange Commission on October 29, 1999
Securities Act File No. 33-28248
Investment Company Act File No. 811-5723
================================================================================
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. 14 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 16 |X|
(Check appropriate box or boxes)
--------------------
Merrill Lynch Developing Capital Markets Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (609) 282-2800
Terry K. Glenn
Merrill Lynch Developing Capital Markets Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
--------------------
Copies to:
Counsel for the Fund Michael J. Hennewinkel, Esq.
BROWN & WOOD LLP MERRILL LYNCH
One World Trade Center ASSET MANAGEMENT
New York, New York 10048-0557 P.O. Box 9011
Attention: Thomas R. Smith, Jr., Esq. Princeton, New Jersey 08543-9011
Frank P. Bruno, Esq.
--------------------
It is proposed that this filing will become effective (check appropriate box):
|X| immediately upon filing pursuant to paragraph (b)
|_| on (date) pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| 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: Common Stock, par value $.10 per share.
================================================================================
<PAGE>
[LOGO] Merrill Lynch
Prospectus
Merrill Lynch Developing Capital Markets Fund, Inc.
October 29, 1999
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Table of Contents
PAGE
[ICON] KEY FACTS
----------------------------------------------------------------------
Merrill Lynch Developing Capital Markets Fund at a Glance .......... 3
Risk/Return Bar Chart .............................................. 6
Fees and Expenses .................................................. 7
[ICON] DETAILS ABOUT THE FUND
----------------------------------------------------------------------
How the Fund Invests ............................................... 9
Investment Risks ...................................................12
[ICON] YOUR ACCOUNT
----------------------------------------------------------------------
Merrill Lynch Select Pricing(SM) System ............................20
How to Buy, Sell, Transfer and Exchange Shares .....................25
Participation in Merrill Lynch Fee-Based Programs ..................29
[ICON] MANAGEMENT OF THE FUND
----------------------------------------------------------------------
Merrill Lynch Asset Management .....................................32
Financial Highlights ...............................................33
[ICON] FOR MORE INFORMATION
----------------------------------------------------------------------
Shareholder Reports ........................................Back Cover
Statement of Additional Information ........................Back Cover
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
Key Facts [ICON]
In an effort to help you better
understand the many concepts involved in
making an investment decision, we have
defined highlighted terms in this
prospectus in the sidebar.
Equities -- securities representing
ownership of a company ("stock") or
securities whose price is linked to the
value of securities that represent
company ownership.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND AT A GLANCE
- --------------------------------------------------------------------------------
What is the Fund's investment objective?
The investment objective of the Fund is to seek long term capital appreciation
by investing in securities, principally equities, of issuers in countries having
smaller capital markets.
What are the Fund's main investment strategies?
Under normal circumstances the Fund's management tries to achieve its objective
by investing at least 65% of the Fund's assets in the equity securities of
countries having smaller capital markets. The Fund can also buy fixed-income
securities of companies and governments in these countries. The Fund normally
invests in at least three countries at any given time. Fund management
anticipates that under most circumstances the Fund will have substantial
investments in emerging markets. The Fund can invest in securities denominated
in either U.S. dollars or foreign currencies. Fund management anticipates that
under most circumstances the Fund's investments will primarily be denominated in
foreign currencies. The Fund is a non-diversified fund, which means that it can
invest more of its assets in fewer companies than most other funds.
Fund management currently considers all countries other than Japan, the United
Kingdom, the United States and Germany to be countries having smaller capital
markets. As of December 31, 1998, those countries' equity market capitalizations
totalled approximately 72.66% of the world's equity market capitalization. The
Fund considers an issuer to be located in a country having a smaller capital
market if at least 50% of the issuer's assets, gross revenues or profits in any
one of the last two years represents assets or activities located in such
countries.
Fund management chooses securities using a combination of "top down" and "bottom
up" investment styles. "Top down" means that the Fund seeks to allocate its
investments to markets that Fund management believes have the potential to
outperform other markets due to economic factors, such as government fiscal
policies and the direction of interest rate and currency movements. "Bottom up"
means that the Fund also selects investments based on Fund management's
assessment of the earning prospects of individual companies. When choosing debt
securities, Fund management considers various factors including the operating
history, financial resources and credit quality of issuers and yield analysis.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 3
<PAGE>
[ICON] Key Facts
When assessing individual companies, Fund management seeks to identify companies
engaged in businesses with attractive earning prospects, sound management and a
record of maximizing returns on shareholder equity. Fund management then further
considers which of the companies meeting its criteria would be most likely to
benefit from the economic circumstances anticipated by Fund management. However,
because of the general illiquidity of smaller capital markets, the Fund may
limit its investments to a relatively small number of large, actively-traded
companies.
The Fund has not established any rating or maturity criteria for the debt
securities in which it may invest. The Fund may invest in high yield or "junk
bonds" and in certain types of "derivative" securities.
The Fund may hedge all or a portion of its portfolio against interest rate and
currency risks through the use of "derivative" securities including options,
futures, options on futures and currency transactions. We cannot guarantee that
the Fund will achieve its objective.
What are the main risks of investing in the Fund?
As with any fund, the value of the Fund's investments -- and therefore the value
of Fund shares -- may fluctuate. These changes may occur because a particular
stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the Fund's
investments goes down, you may lose money.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks, including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in countries
having smaller capital markets.
Derivatives and high yield bonds may be volatile and subject to liquidity,
leverage and credit risk. There can be no assurance that the Fund's hedging
strategy will reduce risk or that hedging transactions will be either available
or cost effective.
4 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
Who should invest?
The Fund may be an appropriate investment for you if you:
o Are looking for capital appreciation for long term goals, such as
retirement or funding a child's education
o Want a professionally managed portfolio
o Are looking for exposure to a variety of foreign markets
o Are willing to accept the risks of foreign investing in order to
seek long term capital appreciation
o Are not looking for a significant amount of current income
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 5
<PAGE>
[ICON] Key Facts
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table below provide an indication of the risks of investing in
the Fund. The bar chart shows changes in the Fund's performance for Class A
shares for each complete calendar year since the Fund's inception. Sales charges
are not reflected in the bar chart. If these amounts were reflected, returns
would be less than those shown. The table compares the average annual total
returns for each class of the Fund's shares for the periods shown with those of
the Morgan Stanley Capital International ("MSCI") EAFE Index and the MSCI
Emerging Markets Free Index. How the Fund performed in the past is not
necessarily an indication of how the Fund will perform in the future.
[The following table was represented as a bar chart in the printed material.]
1990 -5.33%
1991 23.35%
1992 0.85%
1993 68.96%
1994 -10.97%
1995 -3.43%
1996 13.30%
1997 -6.81%
1998 -32.13%
During the period shown in the bar chart, the highest return for a quarter was
16.90% (quarter ended December 31, 1993) and the lowest return for a quarter was
- -11.23% (quarter ended September 30, 1990.) The Fund's year-to-date return as of
September 30, 1999 was 27.78%.
<TABLE>
<CAPTION>
Average Annual Total Returns (for the Past Past Since
calendar year ended December 31, 1998) One Year Five Years Inception
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Merrill Lynch Developing Capital Markets Fund* A -35.69% -10.20% 2.36%+
MSCI EAFE Index** 20.00% 9.19% 5.82%++
MSCI Emerging Markets Free Index*** -25.34% -9.26% 8.23%++
- --------------------------------------------------------------------------------------------------
Merrill Lynch Developing Capital Markets Fund* B -35.52% N/A -8.25%+++
MSCI EAFE Index** 20.00% N/A 8.21%++++
MSCI Emerging Markets Free Index*** -25.34% N/A -8.02%++++
- --------------------------------------------------------------------------------------------------
Merrill Lynch Developing Capital Markets Fund* C -33.54% N/A -11.80%#
MSCI EAFE Index** 20.00% N/A 8.02%##
MSCI Emerging Markets Free Index*** -25.34% N/A -12.30%##
- --------------------------------------------------------------------------------------------------
Merrill Lynch Developing Capital Markets Fund* D -35.89% N/A -12.23%#
MSCI EAFE Index** 20.00% N/A 8.02%##
MSCI Emerging Markets Free Index*** -25.34% N/A -12.30%##
- --------------------------------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged Index measures the total returns of developed foreign stock
markets in Europe, Asia and the Far East. Past performance is not
predictive of future performance.
*** This umanaged Index measures the total returns of emerging foreign stock
markets in Europe, Asia and the Far East. Past performance is not
predictive of future performance.
+ Inception date is September 1, 1989.
++ Since August 31, 1989.
+++ Inception date is July 1, 1994.
++++ Since June 30, 1994.
# Inception date is October 21, 1994.
## Since October 31, 1994.
6 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
UNDERSTANDING EXPENSES
Fund investors pay various fees and
expenses, either directly or indirectly.
Listed below are some of the main types
of expenses, which all mutual funds may
charge:
Expenses paid directly by the
shareholder:
Shareholder Fees -- these include sales
charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the
shareholder:
Annual Fund Operating Expenses --
expenses that cover the costs of
operating the Fund.
Management Fee -- a fee paid to the
Manager for managing the Fund.
Distribution Fees -- fees used to
support the Fund's marketing and
distribution efforts, such as
compensating Financial Consultants,
advertising and promotion.
Service (Account Maintenance) Fees --
fees used to compensate securities
dealers for account maintenance
activities.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of the Fund. Future expenses may be greater
or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from
your investment) (a): Class A Class B(b) Class C Class D
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 5.25%(c) None None 5.25%(c)
- -----------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
- -----------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
- -----------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets):
- -----------------------------------------------------------------------------------------------------
Management Fee 1.00% 1.00% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(e) None 1.00% 1.00% 0.25%
- -----------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(f) 0.97% 1.04% 1.04% 0.95%
- -----------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.97% 3.04% 3.04% 2.20%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or sells shares.
(b) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in this Prospectus and in all other Fund
materials. If you hold Class B or Class C shares for a long time, it may
cost you more in distribution (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended June 30, 1999, the Fund paid the Transfer Agent fees totaling
$1,005,323. The Manager provides accounting services to the Fund at its
cost. For the fiscal year ended June 30, 1999, the Fund reimbursed the
Manager $205,571 for these services.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 7
<PAGE>
[ICON] Key Facts
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A $714 $1,111 $1,532 $2,700
- --------------------------------------------------------------------------------
Class B $707 $1,139 $1,596 $3,181*
- --------------------------------------------------------------------------------
Class C $407 $ 939 $1,596 $3,355
- --------------------------------------------------------------------------------
Class D $736 $1,177 $1,643 $2,926
- --------------------------------------------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A $714 $1,111 $1,532 $2,700
- --------------------------------------------------------------------------------
Class B $307 $ 939 $1,596 $3,181*
- --------------------------------------------------------------------------------
Class C $307 $ 939 $1,596 $3,355
- --------------------------------------------------------------------------------
Class D $736 $1,177 $1,643 $2,926
- --------------------------------------------------------------------------------
* Assumes conversion to Class D shares approximately eight years after
purchase. See note (b) to the Fees and Expenses table above.
8 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
Details About the Fund [ICON]
ABOUT THE PORTFOLIO MANAGER
A. Grace Pineda has been portfolio
manager of the Fund since 1989. Ms.
Pineda has been a First Vice President
of Merrill Lynch Asset Management since
1997 and was a Vice President from 1989
to 1997.
ABOUT THE MANAGER
The Fund is managed by Merrill Lynch
Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest in securities, principally equities, of issuers in
countries having smaller capital markets. Under normal circumstances the Fund's
management tries to do this by investing at least 65% of the Fund's assets in
the equity securities of countries having smaller capital markets. Equity
securities consist of:
o Common stock
o Preferred stock
o Securities convertible into common stock
o Derivative securities, such as options and futures, the value of
which is based on a common stock or group of common stocks.
The Fund will focus on investments in common stock.
The Fund considers "smaller capital markets" to be all markets other than the
four largest (based on equity market capitalization). This currently precludes
the Fund from investing in companies in Japan, the United Kingdom, the United
States and Germany (except for short-term cash positions). As of December 31,
1998, these countries' equity market capitalizations totalled approximately
72.66% of the world's equity market capitalization. The Fund considers an issuer
to be located in a country having a smaller capital market if at least 50% of
the issuer's assets, gross revenues or profits in any one of the last two years
represents assets or activities located in such countries. There are no other
limits on the geographic allocation of the Fund's investments. Fund management,
however, anticipates that a substantial portion of the Fund's investments will
be in companies in emerging markets. The Fund may also invest in companies in
developed markets, but Fund management anticipates that a greater portion of the
Fund's investments will be in companies in emerging markets. The Fund normally
invests in securities from at least three countries at any time.
Fund management believes that investment opportunities may result from an
evolving long term international trend favoring more market-oriented economies,
a trend that may especially benefit certain countries having smaller capital
markets. Local or international political, economic or financial developments
that could benefit the capital markets of such countries can increase the effect
of this trend. Certain such countries, particularly so-called "emerging"
countries which may be in the process of developing more market-oriented
economies, may experience relatively high rates of economic growth. Other
countries, although having relatively mature smaller capital markets, may also
be in a position to benefit from local or international developments encouraging
greater market orientation and diminishing governmental intervention in economic
affairs.
Fund management chooses securities using a combination of "top down" and "bottom
up" investment styles. "Top down" means that the Fund seeks to allocate its
investments to markets that Fund management believes have the potential to
outperform other markets due to economic factors, such as government fiscal
policies and the direction of interest rate and currency movements. "Bottom up"
means that the Fund also selects investments based
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 9
<PAGE>
[ICON] Details About the Fund
on Fund management's assessment of the earning prospects of individual
companies.
Investment Grade -- any of the four
highest debt obligation ratings by
recognized rating agencies, including
Moody's Investors Service, Inc.,
Standard & Poor's or Fitch IBCA, Inc.
Liquidity -- the ease with which a
security can be traded. Securities that
are less liquid have fewer potential
buyers and, as a consequence, greater
volatility.
Volatility -- the frequency and amount
of changes to a security's value.
When assessing individual companies, Fund management seeks to identify companies
engaged in businesses with attractive earning prospects, sound management and a
record of maximizing returns on shareholder equity. Fund management then further
considers which of the companies meeting its criteria would be most likely to
benefit from the economic circumstances anticipated by Fund management. Because
of the difficulty of investing substantial sums in many smaller capital markets,
however, in certain markets that Fund management believes are attractive on a
"top down" basis, the Fund may limit its investments to a relatively small
number of large, actively-traded companies.
The Fund may also invest up to 35% of its assets in non-convertible debt
securities. The Fund's investments in non-convertible debt securities will
generally be longer-term securities with the potential for capital appreciation
through changes in interest rates, exchange rates or the general perception of
the creditworthiness of issuers in certain countries. The Fund may also invest
in non-convertible debt securities for income, but this will not be a focus of
the Fund's investments. The Fund may invest in debt securities that are not
rated investment grade, which are commonly known as "junk bonds." Junk bonds
generally are less liquid and experience more price volatility than higher-rated
fixed-income securities.
Because the Fund will invest primarily in foreign securities, it offers the
potential for more diversification than an investment only in the U.S. Foreign
securities have often (although not always) performed differently than U.S.
securities.
The Fund will invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates.
When choosing debt securities, Fund management considers various factors
including the operating history, financial resources and credit quality of
issuers, and yield analysis.
The Fund may borrow money from banks in amounts up to 20% of the Fund's total
assets temporarily for extraordinary or emergency purposes, including to meet
redemptions or to settle securities transactions.
The Fund may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements, that it cannot easily resell. These securities
may include securities for which there is no readily available market. Other
possibly illiquid securities in which the Fund may invest are securities that
10 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
have contractual or legal restrictions on resale, known as restricted
securities, including Rule 144A securities that can be resold to qualified
institutional buyers but not to the general public.
The Fund may use derivatives to hedge its portfolio against interest rate and
currency risks. Derivatives are financial instruments whose value is derived
from another security, a commodity (such as oil or gold), or an index such as
the Standard & Poor's 500 Index. The derivatives that the Fund may use include
options on portfolio positions or currencies, financial and currency futures,
options on such futures and forward foreign exchange transactions.
The Fund may also invest in derivative securities the potential return of which
is based on the change in a specified interest rate or equity index (an "indexed
security"). For example, the Fund may invest in a security that pays a variable
amount of interest or principal based on the current level of the Brazilian or
Korean stock markets. The Fund may also invest in indexed securities the
potential return of which is based inversely on the change in a specified
interest rate or equity index (an "inverse security"). Inverse notes generally
change in value in a manner that is opposite to most fixed-income securities --
that is, interest rates or principal payments on inverse notes increase when the
underlying interest rate or equity index decreases and decrease when the
underlying interest rate or equity index increases. Certain indexed securities
and inverse securities have greater sensitivity to changes in interest rates or
equity index levels than other securities, and the Fund's investments in such
instruments may decline in value significantly if interest rates or equity index
levels move in a manner not anticipated by Fund management.
The Fund may as a temporary defensive measure, and without limitation, hold cash
or cash equivalents and short-term securities, including money market
instruments denominated in U.S. dollars or foreign currencies. Normally a
portion of the Fund's assets would be held in these securities in anticipation
of investment in equities or to meet redemptions. Short-term investments and
temporary defensive positions can be easily sold and have limited risk of loss
but may limit the Fund's ability to meet its investment objective.
The Fund has no minimum holding period for investments, and will buy or sell
securities whenever Fund management sees an appropriate opportunity.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 11
<PAGE>
[ICON] Details About the Fund
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any fund, there can be no guarantee that the Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.
Market and Selection Risk -- Market risk is the risk that the stock market in
one or more countries in which the Fund invests will go down in value, including
the possibility that the market will go down sharply and unpredictably.
Selection risk is the risk that the investments that Fund management selects
will underperform the stock market or other funds with similar investment
objectives and investment strategies.
Foreign Market Risk -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because securities traded on foreign markets have often (though
not always) performed differently than securities in the United States. However,
such investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, the Fund is
subject to the risk that because there are generally fewer investors on foreign
exchanges and a smaller number of securities traded each day, it may make it
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with the economy of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the
12 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
Fund's assets or income back into the United States, or otherwise adversely
affect the Fund's operations. Other foreign market risks include foreign
exchange controls, difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal judgments in
foreign courts, and political and social instability. Legal remedies available
to investors in certain foreign countries may be less extensive than those
available to investors in the United States or other foreign countries.
Emerging Markets Risk -- The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, they may be more likely to suffer sharp and frequent price changes
or long term price depression because of adverse publicity, investor perceptions
or the actions of a few large investors. In addition, traditional measures of
investment value used in the United States, such as price to earnings ratios,
may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt changes
in policies. As a result, their governments are more likely to take actions that
are hostile or detrimental to private enterprise or foreign investment than
those of more developed countries. Certain emerging markets may also face other
significant internal or external risks, including the risk of war, and ethnic,
religious and racial conflicts. In addition, governments in many emerging market
countries participate to a significant degree in their economies and securities
markets, which may impair investment and economic growth.
Currency Risk -- Securities in which the Fund invests are usually denominated or
quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated in
that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 13
<PAGE>
[ICON] Details About the Fund
known as "currency risk," means that a strong U.S. dollar will reduce returns
for U.S. investors while a weak U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the U.S. securities laws do. For example, some
foreign countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities based on
nonpublic information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and
accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher in
foreign countries than they are in the United States. This reduces the amount
the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Fund to buy, sell and
hold securities in certain foreign markets than in the U.S. The increased
expense of investing in foreign markets reduces the amount the Fund can earn on
its investments and typically results in a higher operating expense ratio for
the Fund than investment companies invested only in the U.S.
Settlement Risk -- Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign settlement
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in
14 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
settling a purchase of securities, it may miss attractive investment
opportunities and certain of its assets may be uninvested with no return earned
thereon for some period. If the Fund cannot settle or is delayed in settling a
sale of securities, it may lose money if the value of the security then declines
or, if it has contracted to sell the security to another party, the Fund could
be liable to that party for any losses incurred.
European Economic and Monetary Union ("EMU") -- Certain European countries have
entered into EMU in an effort to, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
countries. EMU established a single common European currency (the "euro") that
was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro,
and are listed, trade and make dividend and other payments only in euros.
Although EMU is generally expected to have a beneficial effect, it could
negatively affect the Fund in a number of situations, including as follows:
o If the transition to euro, or EMU as a whole, does not proceed as
planned, the Fund's investments could be adversely affected. For
example, sharp currency fluctuations, exchange rate volatility and
other disruptions of the markets could occur.
o Withdrawal from EMU by a participating country could also have a
negative effect on the Fund's investments, for example if securities
redenominated in euros are transferred back into that country's
national currency.
Sovereign Debt -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt are subject to the risk that a government entity may delay or
refuse to pay interest or repay principal on its sovereign debt. Some of these
reasons may include cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of its debt position to its economy
or its failure to put in place economic reforms required by the International
Monetary Fund or other multilateral agencies. If a government entity defaults,
it may ask for more time in which to pay or for further loans. There is no legal
process for collecting sovereign debts that a government does not pay or
bankruptcy proceeding by which all or part of sovereign debt that a government
entity has not repaid may be collected.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 15
<PAGE>
[ICON] Details About the Fund
Junk Bonds -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally pay
higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. Junk bonds
generally are less liquid and experience more price volatility than higher rated
debt securities. The issuers of junk bonds may have a larger amount of
outstanding debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, claims of other creditors may
have priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.
Borrowing and Leverage Risk -- The Fund may borrow for temporary emergency
purposes including to meet redemptions. Borrowing may exaggerate changes in the
net asset value of Fund shares and in the yield on the Fund's portfolio.
Borrowing will cost the Fund interest expense and other fees. The cost of
borrowing may reduce the Fund's return. Certain derivative securities that the
Fund buys may create leverage including, for example, when issued securities,
forward commitments, options and warrants.
Concentration Risk -- The Fund is a non-diversified fund. By concentrating in a
smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
Securities Lending -- The Fund may lend securities to financial institutions
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events could
trigger adverse tax consequences to the Fund.
Risks associated with certain types of securities in which the Fund may invest
include:
Illiquid Securities --The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
16 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They may include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
Rule 144A Securities -- Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market, but carry the risk that the
active trading market may not continue.
Derivatives -- The Fund may use derivative instruments including options on
portfolio positions or currencies, options on stock or other financial indices,
financial and currency futures, options on such futures and forward foreign
currency transactions. Derivatives are financial instruments whose value is
derived from another security, a commodity (such as gold or oil), or an index
such as Standard & Poor's 500 Index. Derivatives allow the Fund to increase or
decrease its risk exposure more quickly and efficiently than other types of
instruments.
Derivatives are volatile and involve significant risks, including:
Credit risk -- the risk that the counterparty (the party on the other side
of the transaction) on a derivative transaction will be unable to honor
its financial obligation to the Fund.
Currency risk -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large
changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly exceed
the amount originally invested.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 17
<PAGE>
[ICON] Details About the Fund
Liquidity risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price
that the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory hedges
and to seek to increase its return. Hedging is a strategy in which the Fund uses
a derivative to offset the risk that other Fund holdings may decrease in value.
While hedging can reduce losses, it can also reduce or eliminate gains if the
market moves in a different manner than anticipated by the Fund or if the cost
of the derivative outweighs the benefit of the hedge. Hedging also involves the
risk that changes in the value of the derivative will not match those of the
holdings being hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced. There can be no assurance that the
Fund's hedging strategy will reduce risk or that hedging transactions will be
either available or cost effective. The Fund is not required to use hedging and
may choose not to do so.
Depositary Receipts -- The Fund may invest in securities of foreign issuers in
the form of Depositary Receipts or other securities that are convertible into
securities of foreign issuers. American Depositary Receipts are receipts
typically issued by an American bank or trust company that show evidence of
underlying securities issued by a foreign corporation. European Depositary
Receipts and Global Depositary Receipts each evidence a similar ownership
arrangement. The Fund may also invest in unsponsored Depositary Receipts. The
issuers of such unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and therefore, there may be less
information available regarding such issuers.
Repurchase Agreements; Purchase and Sale Contracts -- The Fund may enter into
certain types of repurchase agreements or purchase and sale contracts. Under a
repurchase agreement, the seller agrees to repurchase a security (typically a
security issued or guaranteed by the U.S. Government) at a mutually agreed upon
time and price. This insulates the Fund from changes in the market value of the
security during the period, except for currency fluctuations. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts provide that the purchaser receives any interest on the security paid
during the period. If the seller fails to repurchase the security in either
situation and the market value declines, the Fund may lose money.
18 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
Standby Commitment Agreements -- Standby commitment agreements involve the risk
that the security will lose value prior to its delivery to the Fund. These
agreements also involve the risk that if the security goes up in value, the
counterparty will decide not to issue the security, in which case the Fund has
lost the investment opportunity for the assets it had set aside to pay for the
security and any gain in the security's price.
When Issued Securities, Delayed Delivery Securities and Forward Commitments --
When issued and delayed delivery securities and forward commitments involve the
risk that the security the Fund buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or that the other
party will not meet its obligation. If this occurs, the Fund both loses the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price.
Investment in Other Investment Companies -- If the Fund acquires shares of
investment companies, shareholders will bear both their proportionate share of
expenses in the Fund (including management and advisory fees) and, indirectly,
the expenses of those investment companies.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 19
<PAGE>
[ICON] Your Account
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales charge
at the time of purchase. If you buy Class D shares, you also pay an ongoing
account maintenance fee of 0.25%. You may be eligible for a sales charge
reduction or waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
20 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
o Current Class A Limited availability Limited availability Limited availability
shareholders through other through other through other
o Certain Retirement Plans securities dealers. securities dealers. securities dealers.
o Participants in
certain Merrill Lynch-
sponsored programs
o Certain affiliates of
Merrill Lynch
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
Charge? of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges available shares of the Fund. shares of the Fund. sales charges available
for larger investments. for larger investments.
- --------------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one or purchases over
$1 million that are years of purchase. years of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- --------------------------------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.75% Distribution 0.75% Distribution No Distribution
Fee. Fee. Fee.
- --------------------------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
eight years.
</TABLE>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 21
<PAGE>
[ICON] Your Account
Right of Accumulation -- permits you to
pay the sales charge that would apply to
the cost or value (whichever is higher)
of all shares you own in the Merrill
Lynch mutual funds that offer Select
Pricing options.
Letter of Intent -- permits you to pay
the sales charge that would be
applicable if you add up all shares of
Merrill Lynch Select Pricing(SM) System
funds that you agree to buy within a 13
month period. Certain restrictions
apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* Offering Price
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. 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.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
o Purchases under a Right of Accumulation or Letter of Intent
o TMA(SM) Managed Trusts
o Certain Merrill Lynch investment or central asset accounts
o Certain employer-sponsored retirement or savings plans
22 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
o Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances
o Certain investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees
o Certain Merrill Lynch fee-based programs
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.25% account maintenance fee, while Class
A shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.75% and account maintenance fees of 0.25% each year under distribution
plans that the Fund has adopted under Rule 12b-1. Because these fees are paid
out of the Fund's assets on an ongoing basis, over time these fees increase the
cost of your investment and may cost you more than paying an initial sales
charge. The Distributor uses the money that it receives from the deferred sales
charges and the distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial Consultant or other securities
dealer who assists you in purchasing Fund shares.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 23
<PAGE>
[ICON] Your Account
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases as
you hold your shares over time, according to the following schedule:
Years Since Purchase Sales Charge*
- --------------------------------------------------------------------------------
0 - 1 4.00%
- --------------------------------------------------------------------------------
1 - 2 3.00%
- --------------------------------------------------------------------------------
2 - 3 2.00%
- --------------------------------------------------------------------------------
3 - 4 1.00%
- --------------------------------------------------------------------------------
4 and thereafter 0.00%
- --------------------------------------------------------------------------------
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales
charge. Not all Merrill Lynch funds have identical deferred sales charge
schedules. If you exchange your shares for shares of another fund, the
higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
o Certain post-retirement withdrawals from an IRA or other retirement
plan if you are over 59 1/2 years old
o Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts and certain retirement plan rollovers
o Redemption in connection with participation in certain Merrill Lynch
fee-based programs
o Withdrawals resulting from shareholder death or disability as long
as the waiver request is made within one year of death or disability
or, if later, reasonably promptly following completion of probate,
or in connection with involuntary termination of an account in which
Fund shares are held
o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of
up to 10% per year of your Class B account value at the time the
plan is established
24 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class D
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B to Class D shares is not a taxable event for Federal income tax
purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, the Fund's eight year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class B
shares of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. The length of time that you hold both the original and
exchanged Class B shares in both funds will count toward the conversion
schedule. The conversion schedule may be modified in certain other cases as
well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relative to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart on the following page summarizes how to buy, sell, transfer and
exchange shares through Merrill Lynch or other securities dealers. You may also
buy shares through the Transfer Agent. To learn more about buying shares through
the Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 25
<PAGE>
[ICON] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 21. Be sure to read
appropriate for you this Prospectus carefully.
---------------------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for all accounts
your investment except:
o $250 for certain Merrill Lynch fee-based programs
o $100 for retirement plans.
(The minimums for initial investments may be waived under certain
circumstances.)
---------------------------------------------------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on the next calculation of net asset value
Financial Consultant or after your order is placed.
securities dealer submit Any purchase orders placed prior to the close of business on the New York
your purchase order Stock Exchange (generally 4:00 p.m Eastern time) will be priced at the net
asset value determined that day.
Purchase orders placed after that time will be priced at the net asset value
determined on the next business day. The Fund may reject any order to buy
shares and may suspend the sale of shares at any time. Merrill Lynch may
charge a processing fee to confirm a purchase. This fee is currently $5.35.
---------------------------------------------------------------------------------------------------------------
Or contact the Transfer To purchase shares directly, call the Transfer Agent at 1-800-MER-FUND and
Agent request a purchase application. Mail the completed purchase application to
the Transfer Agent at the address on the inside back cover of this
Prospectus.
- ------------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for all accounts
Investment except that retirement plans have a minimum additional purchase of $1 and
certain programs, such as automatic investment plans, may have higher
minimums.
(The minimum for additional purchases may be waived under certain
circumstances.)
---------------------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales charge.
through the automatic
dividend reinvestment plan
---------------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through certain
investment plan Merrill Lynch investment or central asset accounts.
- ------------------------------------------------------------------------------------------------------------------------------------
Transfer Shares Transfer to a participating You may transfer your Fund shares only to another securities dealer that
to Another securities dealer has entered into an agreement with Merrill Lynch. Certain shareholder
Securities Dealer services may not be available for the transferred shares. You may only
purchase additional shares of funds previously owned before the transfer.
All future trading of these assets must be coordinated by the receiving
firm.
---------------------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer o Transfer your shares to an account with the Transfer Agent; or
o Sell your shares, paying any applicable CDSC.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net asset value
Financial Consultant or after your order is placed. For your redemption request to be priced at the
securities dealer submit net asset value on the day of your request, you must submit your request to
your sales order your dealer prior to that day's close of business on the New York Stock
Exchange (generally 4:00 p.m. Eastern time). Any redemption request placed
after that time will be priced at the net asset value at the close of
business on the next business day. Dealers must submit redemption requests
to the Fund not more than thirty minutes after the close of business on the
New York Stock Exchange on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a fee to process a
redemption of shares. Merrill Lynch currently charges a fee of $5.35. No
processing fee is charged if you redeem shares directly through the Transfer
Agent.
The Fund may reject an order to sell shares under certain circumstances.
---------------------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to the Transfer
Agent at the address on the inside back cover of this prospectus. All
shareholders on the account must sign the letter. A signature guarantee will
generally be required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities dealer,
securities broker, credit union, savings and loan association, national
securities exchange and registered securities association. A notary public
seal will not be acceptable. If you hold stock certificates, return the
certificates with the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before the Fund has
collected payment for the purchase of shares, the Fund or the Transfer Agent
may delay mailing your proceeds. This delay will usually not exceed ten
days.
If you hold share certificates, they must be delivered to the Transfer Agent
before they can be converted. Check with the Transfer Agent or your Merrill
Lynch Financial Consultant for details.
- ------------------------------------------------------------------------------------------------------------------------------------
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund account either
Systematically Systematic Withdrawal Plan by check or through direct deposit to your bank account on a monthly or
quarterly basis. If you hold your Fund shares in a Merrill Lynch CMA(R),
CBA(R) or Retirement Account you can arrange for systematic redemptions of a
fixed dollar amount on a monthly, bi-monthly, quarterly, semi-annual or
annual basis, subject to certain conditions. Under either method you must
have dividends automatically reinvested. For Class B and C shares your total
annual withdrawals cannot be more than 10% per year of the value of your
shares at the time your plan is established. The deferred sales charge is
waived for systematic redemptions. Ask your Merrill Lynch Financial
Consultant for details.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 27
<PAGE>
[ICON] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exchange Your Shares Select the fund into which You can exchange your shares of the Fund for shares of many other Merrill
you want to exchange. Be Lynch mutual funds. You must have held the shares used in the exchange for
sure to read that fund's at least 15 calendar days before you can exchange to another fund.
prospectus
Each class of Fund shares is generally exchangeable for shares of the same
class of another fund. If you own Class A shares and wish to exchange into a
fund in which you have no Class A shares, you will exchange into Class D
shares.
Some of the Merrill Lynch mutual funds impose a different initial or
deferred sales charge schedule. If you exchange Class A or D shares for
shares of a fund with a higher initial sales charge than you originally
paid, you will be charged the difference at the time of exchange. If you
exchange Class B shares for shares of a fund with a different deferred sales
charge schedule, the higher schedule will apply. The time you hold Class B
or C shares in both funds will count when determining your holding period
for calculating a deferred sales charge at redemption. If you exchange Class
A or D shares for money market fund shares, you will receive Class A shares
of Summit Cash Reserves Fund. Class B or C shares of the Fund will be
exchanged for Class B shares of Summit.
Although there is currently no limit on the number of exchanges that you can
make, the exchange privilege may be modified or terminated at any time in
the future.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
Net Asset Value -- the market value of
the Fund's total assets after deducting
liabilities, divided by the number of
shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, after the close of business on the Exchange (the Exchange
generally closes at 4:00 p.m. Eastern time). The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 29
<PAGE>
[ICON] Your Account
Dividends -- Ordinary income and capital
gains paid to shareholders. Dividends
may be reinvested in additional Fund
shares as they are paid.
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value. However,
if you participate in the program for less than a specified period, you may be
charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute at least annually any net investment income and any net
realized long-term capital gains. The Fund may also pay a special distribution
at the end of the calendar year to comply with Federal tax requirements. If your
account is with Merrill Lynch and you would like to receive dividends in cash,
contact your Merrill Lynch Financial Consultant. If your account is with the
Transfer Agent and you would like to receive dividends in cash, contact the
Transfer Agent. Although this cannot be predicted with any certainty, the Fund
anticipates that the majority of its dividends, if any, will consist of capital
gains.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. Capital gain
dividends are generally taxed at different rates than ordinary income dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
30 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
"BUYING A DIVIDEND"
Unless your investment is in a tax
deferred account, you may want to avoid
buying shares shortly before the Fund
pays a dividend. The reason? If you buy
shares when a fund has realized but not
yet distributed ordinary income or
capital gains, you will pay the full
price for the shares and then receive a
portion of the price back in the form of
a taxable dividend. Before investing you
may want to consult your tax adviser.
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 United States may reduce or eliminate such taxes. You may be
able to claim a credit or take a deduction for foreign taxes paid by the Fund if
certain requirements are met.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number or if
the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 31
<PAGE>
Management of the Fund [ICON]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Manager, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Manager has the responsibility for making all
investment decisions for the Fund. The Manager has a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the
Manager may pay a fee for services it receives. The Fund pays the Manager a fee
at the annual rate of 1.0% of the average daily net assets of the Fund.
Merrill Lynch Asset Management was organized as an investment adviser in 1977
and offers investment advisory services to more than 40 registered investment
companies. Merrill Lynch Asset Management is part of the Asset Management Group
of ML & Co. which had approximately $514 billion in investment company and other
portfolio assets under management as of September 1999. This amount includes
assets managed for Merrill Lynch affiliates.
A Note About Year 2000
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"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told Fund management that they also
expect to resolve the Year 2000 Problem, and Fund management will continue to
monitor the situation as the Year 2000 approaches. However, if the problem has
not been fully addressed, the Fund could be negatively affected. The Year 2000
Problem could also have a negative impact on the issuers of securities in which
the Fund invests. This negative impact may be greater for companies in foreign
markets, particularly emerging markets, since they may be less prepared for the
Year 2000 Problem than domestic companies and markets. If the companies in which
the Fund invests have Year 2000 Problems, the Fund's returns could be adversely
affected.
32 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends). This information has been audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial statements,
is included in the Fund's annual report to shareholders, which is available upon
request
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------
Increase (Decrease) in
Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995
- --------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.44 $ 17.23 $ 15.05 $ 13.35 $ 14.61
- --------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net .18 .08 .36 .23 .24
- --------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.32 (6.18) 2.21 1.71 (.40)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.50 (6.10) 2.57 1.94 (.16)
- --------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net -- (.12) (.28) (.24) (.04)
In excess of investment income -- net -- (.09) -- -- --
Realized gain on investments -- net -- -- (.11) -- (.60)
In excess of realized gain on
investments -- net (.06) (.48) -- -- (.46)
- --------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.06) (.69) (.39) (.24) (1.10)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.88 $ 10.44 $ 17.23 $ 15.05 $ 13.35
- --------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 14.60% (36.00)% 17.66% 14.82% (1.67)%
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------------------
Expenses 1.97% 1.63% 1.53% 1.54% 1.62%
- --------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net 1.94% .53% 2.32% 1.66% 1.56%
- --------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $83,115 $219,422 $471,790 $342,884 $350,081
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover 84.92% 98.16% 86.68% 71.01% 63.37%
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class B
-------------------------------------------------------------
For the Year Ended June 30,
-------------------------------------------------------------
For the
Period
July 1 1994++
Increase (Decrease) in to June 30,
Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995
- --------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.28 $ 17.04 $ 14.90 $ 13.24 $ 14.54
- --------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net .08 (.07) .19 .09 .08
- --------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.27 (6.08) 2.20 1.69 (.32)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.35 (6.15) 2.39 1.78 (.24)
- --------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net -- (.07) (.14) (.12) --
In excess of investment income -- net -- (.06) -- -- --
Realized gain on investments -- net -- -- (.11) -- (.60)
In excess of realized gain on
investments -- net (.06) (.48) -- -- (.46)
- --------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.06) (.61) (.25) (.12) (1.06)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.57 $ 10.28 $ 17.04 $ 14.90 $ 13.24
- --------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 13.37% (36.68)% 16.39% 13.63% (2.22)%#
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------------------
Expenses 3.04% 2.67% 2.57% 2.56% 2.79%*
- --------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net .91% (.53)% 1.22% .65% 1.01%*
- --------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $92,104 $164,929 $398,468 $302,183 $162,774
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover 84.92% 98.16% 86.68% 71.01% 63.37%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
++ Commencement of operations.
# Aggregate total investment return.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. 33
<PAGE>
[ICON] Management of the Fund
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------
For the
Period
For the Year Ended October
June 30, 21, 1994++
-------------------------------------------- to
Increase (Decrease) in June 30,
Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995
- -----------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.24 $ 16.99 $ 14.87 $ 13.22 $ 16.71
- -----------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net .08 (.07) .18 .09 .08
- -----------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.27 (6.08) 2.20 1.70 (2.50)
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations 1.35 (6.15) 2.38 1.79 (2.42)
- -----------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net -- (.07) (.15) (.14) (.01)
In excess of investment income -- net -- (.05) -- -- --
Realized gain on investments -- net -- -- (.11) -- (.60)
In excess of realized gain on
investments -- net (.06) (.48) -- -- (.46)
- -----------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.06) (.60) (.26) (.14) (1.07)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.53 $ 10.24 $ 16.99 $ 14.87 $ 13.22
- -----------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- -----------------------------------------------------------------------------------------------------------------
Based on net asset value per share 13.42% (36.69)% 16.37% 13.68% (14.97)%#
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------
Expenses 3.04% 2.68% 2.58% 2.56% 2.96%*
- -----------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net .90% (.51)% 1.19% .67% 1.32%*
- -----------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $17,768 $32,339 $71,769 $46,983 $18,573
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover 84.92% 98.16% 86.68% 71.01% 63.37%
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Class D
----------------------------------------------------------
For the
Period
For the Year Ended October
June 30, 21, 1994++
-------------------------------------------- to
Increase (Decrease) in June 30,
Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995
- ----------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.41 $ 17.19 $ 15.02 $ 13.33 $ 16.77
- ----------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net .16 .04 .32 .21 .13
- ----------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.30 (6.15) 2.20 1.69 (2.48)
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations 1.46 (6.11) 2.52 1.90 (2.35)
- ----------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net -- (.11) (.24) (.21) (.03)
In excess of investment income -- net -- (.08) -- -- --
Realized gain on investments -- net -- -- (.11) -- (.60)
In excess of realized gain on
investments -- net (.06) (.48) -- -- (.46)
- ----------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.06) (.67) (.35) (.21) (1.09)
- ----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.81 $ 10.41 $ 17.19 $ 15.02 $ 13.33
- ----------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- ----------------------------------------------------------------------------------------------------------------
Based on net asset value per share 14.26% (36.13)% 17.30% 14.55% (14.49)%#
- ----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Expenses 2.20% 1.88% 1.78% 1.76% 2.19%*
- ----------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net 1.74% .28% 2.06% 1.48% 2.10%*
- ----------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $19,648 $31,686 $73,686 $57,821 $21,899
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover 84.92% 98.16% 86.68% 71.01% 63.37%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
++ Commencement of operations.
# Aggregate total investment return.
34 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
-----------------------------
POTENTIAL
INVESTORS
Open an account (two options)
-----------------------------
1 2
- ----------------------------- ---------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
OR SECURITIES DEALER Financial Data Services, Inc.
P.O. Box 45289
Advises shareholders on Jacksonville, Florida 32232-5289
their Fund investments.
- ----------------------------- Performs recordkeeping
and reporting services.
---------------------------------
-----------------------------------------------
Distributor
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
-----------------------------------------------
- ------------------------------ ------------------------------
COUNSEL CUSTODIAN
Brown & Wood LLP Brown Brothers Harriman & Co.
One World Trade Center 40 Water Street
New York, New York 10048-0557 Boston, Massachusetts 02109
Provides legal advice Holds the Fund's assets
to the Fund. for safekeeping.
- ------------------------------ ------------------------------
----------------------
THE FUND
The Board of Directors
oversees the Fund.
----------------------
- --------------------------------- ------------------------------------
INDEPENDENT AUDITORS MANAGER
Deloitte & Touche LLP Merrill Lynch Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on
behalf of the shareholders. MAILING ADDRESS
- --------------------------------- P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's
day-to-day activities.
------------------------------------
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<PAGE>
For More Information [ICON]
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 32232-5289 or
by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-5723
Code #10893-10-99
(c) Merrill Lynch Asset Management, L.P.
[LOGO] Merrill Lynch
Prospectus
Merrill Lynch Developing
Capital Markets Fund, Inc.
October 29, 1999
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Developing Capital Markets Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
Merrill Lynch Developing Capital Markets Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company that seeks long term
capital appreciation by investing in securities, principally equities, of
issuers in countries having smaller capital markets. Merrill Lynch Asset
Management, L.P., the investment adviser of the Fund ("MLAM" or the "Manager"),
considers all countries other than Japan, the United Kingdom, the United States
and Germany to be countries having smaller capital markets. The Fund considers
an issuer to be located in a country having a smaller capital market if at least
50% of the issuer's assets, gross revenues or profits in any one of the last two
years represents assets or activities located in such countries. There can be no
assurance that the Fund's investment objective will be achieved. For more
information on the Fund's investment objective and policies, see "Investment
Objective and Policies."
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. See
"Purchase of Shares."
-------------------
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
29, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1999 annual report to shareholders. You may request a copy of the annual report
or the Prospectus at no charge by calling (800) 456-4587 ext. 789 between 8:00
a.m. and 8:00 p.m. on any business day.
-------------------
Merrill Lynch Asset Management -- Manager
Merrill Lynch Funds Distributor -- Distributor
The date of this Statement of Additional Information is October 29, 1999.
-------------------
<PAGE>
TABLE OF CONTENTS
Page
----
Investment Objective and Policies ........................................ 2
Description of Certain Investments ....................................... 2
European Economic and Monetary Union ................................... 5
Derivatives ............................................................ 6
Other Investment Policies and Practices ................................ 11
Investment Restrictions ................................................ 11
Portfolio Turnover ..................................................... 14
Management of the Fund ................................................... 14
Directors and Officers ................................................. 14
Compensation of Directors .............................................. 15
Management and Advisory Arrangements ................................... 16
Code of Ethics ......................................................... 17
Purchase of Shares ....................................................... 17
Initial Sales Charge Alternatives-- Class A and Class D Shares ......... 18
Deferred Sales Charge Alternatives -- Class B and Class C Shares ....... 22
Distribution Plans ..................................................... 25
Limitations on the Payment of Deferred Sales Charges ................... 26
Redemption of Shares ..................................................... 27
Redemption ............................................................. 27
Repurchase ............................................................. 28
Reinstatement Privilege-- Class A and Class D Shares ................... 28
Pricing of Shares ........................................................ 29
Determination of Net Asset Value ....................................... 29
Computation of Offering Price Per Share ................................ 30
Portfolio Transactions and Brokerage ..................................... 30
Shareholder Services ..................................................... 32
Investment Account ..................................................... 32
Exchange Privilege ..................................................... 32
Fee-Based Programs ..................................................... 34
Retirement and Education Savings Plans ................................. 35
Automatic Investment Plans ............................................. 35
Automatic Dividend Reinvestment Plan ................................... 35
Systematic Withdrawal Plan ............................................. 35
Dividends and Taxes ...................................................... 36
Dividends .............................................................. 36
Taxes .................................................................. 37
Tax Treatment of Options, Futures and Forward Foreign
Exchange Transactions .................................................. 39
Special Rules for Certain Foreign Currency Transactions ................ 39
Performance Data ......................................................... 40
General Information ...................................................... 42
Description of Shares .................................................. 42
Independent Auditors ................................................... 43
Custodian .............................................................. 43
Transfer Agent ......................................................... 43
Legal Counsel .......................................................... 43
Reports to Shareholders ................................................ 43
Shareholder Inquiries .................................................. 43
Additional Information ................................................. 43
Financial Statements ..................................................... 44
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing in securities, principally equities, of issuers in
countries having smaller capital markets. Under normal circumstances Fund
management tries to do this by investing at least 65% of the Fund's assets in
the equity securities of countries having smaller capital markets. The Fund may,
however, for defensive purposes, or to provide for redemptions or in
anticipation of investment in countries having smaller capital markets, hold
cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term
securities, including money market securities. Current income from dividends and
interest will not be an important consideration in selecting portfolio
securities. There can be no assurance that the investment objective of the Fund
will be realized. The investment objective of the Fund described in the first
sentence of this paragraph is a fundamental policy of the Fund and may not be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities.
The Fund considers "smaller capital markets" to be all markets other than the
four largest (by equity market capitalization). This currently precludes the
Fund from investing in companies in Japan, the United Kingdom, the United States
and Germany (except for short-term cash positions). As of December 31, 1998,
these countries' equity market capitalizations totalled approximately 72.66% of
the world's equity market capitalization. The Fund considers an issuer to be
located in a country having a smaller capital market if at least 50% of the
issuer's assets, gross revenues or profits in any one of the last two years
represents assets or activities located in such countries. The Fund can also buy
fixed income securities of companies and governments in these countries. The
Fund normally invests in at least three countries at any given time. Fund
management anticipates that under most circumstances the Fund will have
substantial investments in emerging markets. The Fund can invest in securities
denominated in either U.S. dollars or foreign currencies. Fund management
anticipates that under most circumstances the Fund's investments will primarily
be denominated in foreign currencies.
Fund management believes that investment opportunities may result from an
evolving long term international trend favoring more market-oriented economies,
a trend that may especially benefit certain countries having smaller capital
markets. Local or international political, economic or financial developments
that could benefit the capital markets of such countries can increase the effect
of this trend. Certain such countries, particularly so-called "emerging"
countries which may be in the process of developing more market-oriented
economies, may experience relatively high rates of economic growth. Other
countries, although having relatively mature smaller capital markets, may also
be in a position to benefit from local or international developments encouraging
greater market orientation and diminishing governmental intervention in economic
affairs.
Fund management chooses securities using a combination of "top down" and
"bottom up" investment styles. "Top down" means that the Fund seeks to allocate
its investments to markets that Fund management believes have the potential to
outperform other markets due to economic factors, such as government fiscal
policies and the direction of interest rate and currency movements. "Bottom up"
means that the Fund also selects investments based on Fund management's
assessment of the earning prospects of individual companies. When choosing debt
securities, Fund management considers various factors including the operating
history, financial resources and credit quality of issuers, and yield analysis.
When assessing individual companies, Fund management seeks to identify
companies engaged in businesses with attractive earning prospects, sound
management and a record of maximizing returns on shareholder equity. Fund
management then further considers which of the companies meeting its criteria
would be most likely to benefit from the economic circumstances anticipated by
Fund management. However, because of the general illiquidity of smaller capital
markets, the Fund may limit its investments to a relatively small number of
large, actively-traded companies.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets, including high yield or junk bonds. Junk bonds are
bonds that are rated below investment grade by independent rating agencies or
are bonds that are not rated but which Fund management considers to be of
comparable quality.
The Fund also may invest in securities subject to repurchase agreements
with banks or securities firms if the underlying securities are those which
otherwise qualify for investment by the Fund and if, as a result thereof, not
more than 15% of its total assets would be invested in illiquid securities,
including repurchase agreements maturing in more than seven days.
Description of Certain Investments
When Issued Securities, Delayed Delivery Securities and Forward
Commitments. The Fund may purchase or sell securities that it is entitled to
receive on a when issued basis. The Fund may also purchase or sell securities on
a delayed delivery basis. The Fund may also purchase or sell securities through
a forward commitment. These
2
<PAGE>
transactions involve the purchase or sale of securities by the Fund at an
established price with payment and delivery taking place in the future. The Fund
enters into these transactions to obtain what is considered an advantageous
price to the Fund at the time of entering into the transaction. The Fund has not
established any limit on the percentage of its assets that may be committed in
connection with these transactions. When the Fund purchases securities in these
transactions, the Fund segregates liquid securities in an amount equal to the
amount of its purchase commitments.
There can be no assurance that a security purchased on a when issued basis
will be issued or that a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may not
benefit from an appreciation in the value of the security during the commitment
period.
Standby Commitment Agreements. The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities which may be issued and sold to the Fund
at the option of the issuer. The price 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 for the purpose of investing in the
security underlying the commitment at a 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 will limit its investment in such commitments so
that the aggregate purchase price of 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 the commitment. The Fund segregates liquid assets 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. 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
thereafter will 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.
Depositary Receipts. 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. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. American Depositary Receipts ("ADRs") are receipts typically
issued by an American bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation. European Depositary
Receipts ("EDRs") are receipts issued in Europe that evidence a similar
ownership arrangement. Global Depositary Receipts ("GDRs") are receipts issued
throughout the world that evidence a similar 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 in 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 be less information
available regarding such issuers and there may not be a correlation between such
information and the market value of the Depositary Receipts.
Sovereign Debt. Investment in sovereign debt involves a high degree of
risk. The governmental entity that controls the repayment of sovereign debt 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
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Monetary Fund and the political constraints to which a governmental entity may
be subject. Governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearages on their debt. The commitment on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due may result in the cancellation of such
third parties' commitments to lend funds to the governmental entity, which may
further impair such debtor's ability or willingness to timely service its debts.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt 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 a governmental entity, there may be few or no
effective legal remedies available to a Fund and there can be no assurance a
Fund will be able to collect on defaulted sovereign debt in whole or in part.
Junk Bonds. Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally pay
higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. The major
risks in junk bond investments include the following:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their interest
or principal payment obligations because of an economic downturn, specific
issuer developments or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations. The
issuer's ability to pay its debt obligations also may be lessened by specific
issuer developments, or the unavailability of additional financing.
Junk bonds are frequently ranked junior to claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If an issuer redeems
the junk bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds than
on other higher rated fixed income securities.
Junk bonds may be less liquid than higher rated fixed income securities
even under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid, judgment may play a greater
role in valuing certain of the Fund's portfolio securities than in the case of
securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
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The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to illiquidity,
could be less than those originally paid by the Fund or less than their fair
market value. In addition, issuers whose securities are not publicly traded may
not be subject to the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded. If any privately
placed securities held by the Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration. Certain of the Fund's
investments in private placements may consist of direct investments and may
include investments in smaller, less-seasoned issuers, which may involve greater
risks. These issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group. In making
investments in such securities, the Fund may obtain access to material nonpublic
information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies
and procedures adopted by the Fund's Board. The Board of Directors has adopted
guidelines and delegated to the Investment Adviser 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 continue to develop, the Board of Directors will carefully
monitor the Fund's investments in these securities. 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.
Investment in Other Investment Companies. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the Investment Company Act, the Fund
may invest up to 10% of its total assets in securities of other investment
companies. In addition, under the Investment Company Act the Fund may not own
more than 3% of the total outstanding voting stock of any investment company and
not more than 5% of the value of the Fund's total assets may be invested in the
securities of any investment company. If the Fund acquires shares in investment
companies, shareholders would bear both their proportionate share of expenses in
the Fund (including management and advisory fees) and, indirectly, the expenses
of such investment companies (including management and advisory fees).
Investments by the Fund in wholly owned investment entities created under the
laws of certain countries will not be deemed an investment in other investment
companies.
European Economic and Monetary Union
For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty on European Union (the "Maastricht Treaty") set
out a framework for the European Economic and Monetary Union ("EMU") among the
countries that comprise the European Union ("EU"). EMU established a single
common European currency (the "euro") that was introduced on January 1, 1999 and
is expected to replace the existing national currencies of all EMU participants
by July 1, 2002. EMU took effect for the initial EMU participants as of January
1, 1999. Certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are listed,
traded and make dividend and other payments only in euros.
No assurance can be given that EMU will take full effect, that all the
changes planned for the EU can be successfully implemented, or that these
changes will result in the economic and monetary unity and stability
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intended. There is a possibility that EMU will not be completed, or will be
completed but then partially or completely unwound. Because any participating
country may opt out of EMU within the first three years, it is also possible
that a significant participant could choose to abandon EMU, which could diminish
its credibility and influence. Any of these occurrences could have adverse
effects on the markets of both participating and non-participating countries,
including sharp appreciation or depreciation of participants' national
currencies and a significant increase in exchange rate volatility, a resurgence
in economic protectionism, an undermining of confidence in the European markets,
an undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU by an initial participant could cause disruption of
the financial markets as securities redenominated in euros are transferred back
into that country's national currency, particularly if the withdrawing country
is a major economic power. Such developments could have an adverse impact on the
Fund's investments in Europe generally or in specific countries participating in
EMU. Gains or losses from euro conversions may be taxable to Fund shareholders
under foreign or, in certain limited circumstances, U.S. tax laws.
Derivatives
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) a currency or an index (a measure of value or
rates, such as the Standard & Poor's 500 Index or the prime lending rate).
Derivatives allow the Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments.
Hedging. The Fund may use Derivatives for hedging purposes. Hedging is a
strategy in which a Derivative is used to offset the risk that other Fund
holdings may decrease in value. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite manner
to market movements. While hedging can reduce losses, it can also reduce or
eliminate gains if the market moves in a different manner than anticipated by
the Fund or if the cost of the Derivative outweighs the benefit of the hedge.
Hedging also involves the risk that changes in the value of the Derivative will
not match those of the holdings being hedged as expected by the Fund, in which
case any losses on the holdings being hedged may not be reduced.
The Fund may use Derivative instruments and trading strategies including
the following:
Indexed Securities. The Fund may invest in securities the potential return
of which is based on an "index." As an illustration, the Fund may invest in a
debt security that pays interest based on the current value of an interest rate
index, such as the prime rate. The Fund may also invest in a debt security which
returns principal at maturity based on the level of a securities index or a
basket of securities, or based on the relative changes of two indices. Indexed
securities involve credit risk, and certain indexed securities may involve
leverage risk and liquidity risk. The Fund may invest in indexed securities for
hedging purposes only. When used for hedging purposes, indexed securities
involve correlation risk
Options on Securities and Securities Indices
Purchasing Put Options. The Fund may purchase put options on securities
held in its portfolio or securities or interest rate indices which are
correlated with securities held in its portfolio. When the Fund purchases a put
option, in consideration for 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. Purchasing a put
option may involve correlation risk, and may also involve liquidity and credit
risk.
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Purchasing Call Options. The Fund may also purchase call options on
securities it intends to purchase or securities or interest rate indices, which
are correlated with the types of securities it intends to purchase. When the
Fund purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option 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. Purchasing a call option involves correlation risk, and may also
involve liquidity and credit risk.
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 Call Options. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates with securities held in its portfolio. When the Fund writes a call
option, in return for 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. Writing a call option may
involve correlation risk.
Writing Put Options. 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"). Writing a
put option may involve substantial leverage risk.
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
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Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Derivatives" below. A call option will also
be considered covered if the Fund owns the securities it would be required to
deliver upon exercise of the option (or, in the case of an option on a
securities index, securities which substantially correlate with the performance
of such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.
The Fund may write put options on underlying securities exceeding 50% of
its net assets, taken at market value. The Fund will not purchase options on
securities (including stock index options) if as a result of such purchase, the
aggregate cost of all outstanding options on securities held by the Fund would
exceed 5% of the market value of the Fund's total assets.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the 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 credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions; Limitation on the Use of OTC
Derivatives" 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 an
asset 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. Futures involve substantial leverage
risk.
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 asset 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.
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.
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Forward Foreign Exchange Transactions. 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.
Forward foreign exchange transactions involve substantial currency risk, and
also involve credit and liquidity risk.
Currency Futures. 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".
Currency futures involve substantial currency risk, and also involve leverage
risk.
Currency Options. 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 "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below. Currency options involve substantial currency risk, and may
also involve credit, leverage or liquidity risk.
Limitations on Currency Hedging. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. The Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). The Fund will
only enter into a cross-hedge if the Investment Adviser believes that (i) there
is a demonstrable high correlation between the currency in which the cross-hedge
is denominated and the currency being hedged, and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be
significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.
Risk Factors in Hedging Foreign Currency Risks. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. 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 decreases 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 and it is not possible to engage in
effective foreign currency hedging.
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Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit Risk -- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency Risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage Risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative 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 Derivatives 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 Derivatives." However, there can be
no assurance that, at any specific time, either a liquid secondary market will
exist for a Derivative 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 Derivative without incurring substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. 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 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
Derivatives
Certain Derivatives traded in OTC markets, including indexed securities,
swaps and OTC options, involve substantial liquidity risk. The absence of
liquidity may make it difficult or impossible for the Fund to sell such
instruments promptly at an acceptable price. The absence of liquidity may also
make it more difficult for the Fund to ascertain a market value for such
instruments. The Fund will therefore acquire illiquid OTC instruments (i) if the
agreement pursuant to which the instrument is purchased contains a formula price
at which the instrument may be terminated or sold, or (ii) for which the
Investment Adviser anticipates the Fund can receive on each business day at
least two independent bids or offers, unless a quotation from only one dealer is
available, in which case that dealer's quotation may be used.
Because Derivatives 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 have substantial capital or which have provided the Fund with a
third-party guaranty or other credit enhancement.
10
<PAGE>
Other Investment Policies and Practices
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements may be entered into only with financial institutions which
(i) have, in the opinion of the Manager, substantial capital relative to the
Fund's exposure, or (ii) have provided the Fund with a third-party guaranty or
other credit enhancement. Under a repurchase agreement or a puchase and sale
contract, 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
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. The price at which
the trades are conducted do not reflect accrued interest on the underlying
obligation. Repurchase agreements may be construed to be collateralized loans by
the purchaser to the seller secured by the securities transferred to the
purchaser. In the case of a repurchase agreement, as a purchaser, the Fund will
require the seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term of the
repurchase agreement; the Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. In the event of default
by the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the collateral. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate, the rate of return to the Fund 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. The Fund may not
invest more than 15% of its net assets in repurchase agreements maturing in more
than seven days together with all other illiquid investments.
Lending of Portfolio Securities. The Fund may lend securities with a value
not exceeding 10% of its total assets. In return, the Fund receives collateral
in an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
The Fund receives securities as collateral for the loaned securities and the
Fund and the borrower negotiate a rate for the loan premium to be received by
the Fund for the loaned securities, which increases the Fund's yield. The Fund
may receive a flat fee for its loans. The loans are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, administrative and
custodial fees in connection with its loans. In the event that the borrower
defaults on its obligation to return borrowed securities because of insolvency
or for any other reason, 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.
Suitability. The economic benefit of an investment in the Fund depends
upon many factors beyond the control of the Fund, the Manager and its
affiliates. Because of its emphasis on technology related securities, the Fund
should be considered a vehicle for diversification and not as a balanced
investment program. The suitability for any particular investor of a purchase of
shares in the Fund will depend upon, among other things, such investor's
investment objectives and such investor's ability to accept the risks associated
with investing in securities of issuers in countries having smaller capital
markets, including the risk of loss of principal.
Investment Restrictions
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 Fund's shares present at a meeting at which more
than 50% of the outstanding shares of the Fund are represented or (ii) more than
50% of the outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the
time of purchase, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
11
<PAGE>
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent
permitted by applicable law, 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, commercial paper, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or any
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 the lending of portfolio securities may be made only in accordance
with applicable law and the guidelines set forth in the Fund's Prospectus
and 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, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, (iii) the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (iv) the Fund may purchase securities on
margin to the extent permitted by applicable law.The Fund may not pledge
its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus
and Statement of Additional Information, as they may be amended from time
to time, in connection with hedging transactions, short sales, when-issued
and forward commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except
to the extent that the Fund may do so in accordance with applicable law
and the Fund's Prospectus and Statement of Additional Information, as they
may be amended from time to time, and without registering as a commodity
pool operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental investment restrictions
that may be changed by the Board of Directors without a vote of the Fund's
shareholders. Under the non-fundamental investment restrictions, theFund may
not:
a. Purchase securities of other investment companies, except to the
extent 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)(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 currently does
not intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which can not otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
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.
12
<PAGE>
d. Notwithstanding fundamental investment restriction (6) above,
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 financial futures contracts
or options transactions is not considered to be the purchase of a security
on margin. The purchase of securities while borrowings are outstanding
will have the effect of leveraging the Fund. Such leveraging or borrowing
increases the Fund's exposure to capital risk, and borrowed funds are
subject to interest costs which will reduce net income. The Fund will not
purchase securities while borrowings exceed 5% of its total assets.
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, theFund has adopted an investment policy pursuant to which
it will not purchase or sell OTC options 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 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 exceed 10% 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 an
OTC option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
securities minus the option's strike price). The repurchase price with the
primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money." This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by
theCommission staff of its position.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with theManager, 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.
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments are limited, however, in
order to allow the Fund to qualify as a "regulated investment company" under the
Code. See "Dividends and Taxes -- Taxes." To qualify, the Fund complies with
certain requirements, including limiting its investments so that at the close of
each quarter of the taxable year (i) not more than 25% of the market value of
the Fund's total assets will be invested in the securities of a single issuer
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the Fund will not own more than 10% of the
outstanding voting securities of a single issuer. A fund that elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's net asset value may fluctuate to a greater extent
than that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers, and the Fund may be more
susceptible to any single economic, political or regulatory occurrence than a
diversified company.
13
<PAGE>
Portfolio Turnover
The Manager will effect portfolio transactions without regard to the time
the securities have been held, 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, financial or economic
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions and the Fund's portfolio turnover
rate may vary greatly from year to year or during periods within a year. 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. Technology related securities historically have been very volatile and
therefore usually have a higher rate of portfolio turnover. A high portfolio
turnover may result in negative tax consequences, such as an increase in capital
gain dividends. High portfolio turnover may also involve correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions, which
are borne directly by the Fund.
MANAGEMENT OF THE FUND
Directors and Officers
The Directors of the Fund consist of seven individuals, five of whom are
not "interested persons" of the Fund as defined in the Investment Company Act
(the "non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties imposed
on the directors of investment companies by the Investment Company Act.
Information about the Directors, executive officers and the 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
Director, executive officer and the portfolio manager is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
TERRY K. GLENN (59) -- President and Director(1)(2) -- Executive Vice
President of the Manager and Fund Asset Management, L.P. ("FAM") (which terms as
used herein include their corporate predecessors) since 1983; President of
Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director thereof since
1991; Executive Vice President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of Princeton Administrators, L.P.
since 1988.
DONALD CECIL (72) -- Director(2)(3) -- 1114 Avenue of the Americas, New
York, New York 10036. Special Limited Partner of Cumberland Associates (an
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 (72) -- Director(2)(3) -- 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),
Harman International Industries, Inc. and Ethan Allen Interiors, Inc.
CHARLES C. REILLY (68) -- Director(2)(3) -- 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; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to 1990;
Partner, Small Cities Cable Television since 1986.
RICHARD R. WEST (61) -- Director(2)(3) -- 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), Vornado Operating Company,
Inc. and Alexander's, Inc. (real estate company).
ARTHUR ZEIKEL (67) -- Director(1)(2) -- 300 Woodland Avenue, Westfield,
New Jersey 07090. Chairman of the Manager and FAM from 1997 to 1999 and
President thereof from 1977 to 1997; Chairman of Princeton Services from 1997 to
1999, Director thereof from 1993 to 1999 and President thereof from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from
1990 to 1999.
EDWARD D. ZINBARG (64) -- Director(2)(3) -- 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.
14
<PAGE>
ROBERT C. DOLL (45) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1999; Senior Vice President of Princeton
Services since 1999; Chief Investment Officer of Oppenheimer Funds, Inc. in 1999
and Executive Vice President thereof from 1991 to 1999.
A. GRACE PINEDA (42) -- Senior Vice President and Portfolio Manager(1)(2)
- -- First Vice President of the Manager since 1997; Vice President of the Manager
from 1989 to 1997 and Senior Portfolio Manager thereof since 1989.
DONALD C. BURKE (38)--Vice President and Treasurer(1)(2)--800 Scudders
Mill Road, Plainsboro, New Jersey 08536. Senior Vice President and Treasurer of
the Adviser and MLAM since 1999; Senior Vice President and Treasurer of
Princeton Services since 1999; Vice President of the Distributor since 1999;
First Vice President of the Adviser and MLAM from 1997 to 1999; Vice President
of MLAM from 1990 to 1997.
SUSAN B. BAKER (42) -- Secretary(1)(2) -- Director of the Manager since
1999; Vice President of the Manager from 1993 to 1999; attorney associated with
the Manager since 1987.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the
Program.
(2) The Directors and officers of the Program are Directors and officers of
certain other investment companies for which the Adviser or MLAM acts as
investment adviser.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Directors.
As of October 1, 1999, the Directors and officers of the Fund as a group
(11 persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, a Director
and officer of the Fund, and the other officers of the Fund owned an aggregate
of less than 1% of the outstanding shares of common stock of ML & Co.
Compensation of Directors
The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates each member of the
Audit and Nominating Committee (the "Committee"), which consists of the
non-interested Directors at a rate of $500 per Committee meeting attended. The
Fund pays the Chairman of the Committee an additional fee of $250 per Committee
meeting attended. The Fund reimburses each non-interested Director for his
out-of-pocket expenses relating to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended June 30, 1999 and the aggregate compensation
paid to them from all registered investment companies advised by the Manager and
its affiliate, FAM ("MLAM/FAM-advised funds"), for the calendar year ended
December 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Pension or Estimated Compensation from
Retirement Benefits Annual Fund and Other
Position with Compensation Accrued as Part of Benefits upon MLAM/FAM-
Name Fund From Fund Fund Expense Retirement Advised Funds(1)
- ---- ------------- ------------ ---------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Donald Cecil .......... Director $8,500 None None $277,808
Roland M. Machold ..... Director $4,833 None None $ 39,208(2)
Edward H. Meyer ....... Director $7,000 None None $214,558
Charles C. Reilly ..... Director $7,500 None None $362,858
Richard R. West ....... Director $7,500 None None $346,125
Edward D. Zinbarg ..... Director $7,500 None None $133,959
</TABLE>
- ----------
(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. Machold (19 registered investment companies consisting of
19 portfolios); Mr. Meyer (34 registered investment companies consisting
of 34 portfolios); Mr. Reilly (59 registered investment companies
consisting of 72 portfolios); Mr. West (61 registered investment companies
consisting of 85 portfolios); and Mr. Zinbarg (18 registered investment
companies consisting of 18 portfolios).
(2) Mr. Machold was elected a Director of the Fund and director or trustee of
certain other MLAM/FAM-advised funds on October 20, 1998. Mr. Machold
resigned all such positions on August 20, 1999.
15
<PAGE>
Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares--Initial Sales Charge Alternatives -- Class A and
Class D Shares -- Reduced Initial Sales Charges -- Purchase Privilege of Certain
Persons."
Management and Advisory Arrangements
Management Services. The Manager provides the Fund with investment
advisory and management services. Subject to the supervision of the Directors,
the Manager is responsible for the actual management of the Fund's portfolio and
constantly reviews the Fund's holdings in light of its own research analysis and
that from other relevant sources. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Manager. The Manager
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management of
the Fund.
Management Fee. The Fund has entered into an investment advisory agreement
with the Manager (the "Management Agreement"), pursuant to which the Manager
receives for its services to the Fund monthly compensation at the annual rate of
1.0% of the average daily net assets of the Fund. The table below sets forth
information about the total management fees paid by the Fund to the Manager for
the periods indicated.
Management
Fiscal Year Ended June 30, Fee
-------------------------- ----------
1999 .................................. $2,512,044
1998 .................................. $7,818,489
1997 .................................. $8,154,217
The Manager has entered into a sub-advisory agreement with Merrill Lynch Asset
Management U.K. Limited ("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, 1999, 1998 and 1997, the Manager paid no fees to
MLAM U.K. pursuant to this agreement.
Payment of Fund Expenses. 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 Merrill Lynch Funds Distributor, a division of PFD (the "Distributor");
charges of the custodian and sub-custodian, and the transfer agent; expenses of
redemption of shares; SEC fees; expenses of registering the shares under
Federal, state or foreign laws; fees and expenses of non-interested Directors;
accounting and pricing costs (including the daily calculations 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 for the Fund by the Manager and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. The Distributor will pay certain promotional expenses of the
Fund incurred in connection with the offering of shares of the Fund. Certain
expenses 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."
Organization of the Manager. The Manager is a limited partnership, the
partners of which are ML & Co., a financial services holding company and the
parent of Merrill Lynch, 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 or policies.
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
16
<PAGE>
if approved annually (a) by the 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 contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), 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 a fee of
$11.00 per Class A or Class D account and $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 the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
Distribution Expenses. The Fund has entered into four 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.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of 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 pre-clear any personal
securities investment (with limited exceptions, such as government securities).
The pre-clearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that 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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund offers 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 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
17
<PAGE>
fees (also known as service 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
contingent deferred sales charges ("CDSCs"), distribution fees 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 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 Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager or FAM. Funds advised by
the Manager or FAM that utilize the Merrill Lynch Select Pricing(SM) System are
referred to herein as "Select Pricing Funds."
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 Fund or the Distributor. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a sale of shares to such customers.
Purchases made directly through the Transfer Agent are not subject to the
processing fee.
Initial Sales Charge Alternatives -- Class A and Class D Shares
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase Class
A shares should purchase Class A shares rather than Class D shares because there
is an account maintenance fee imposed on Class D shares. Investors qualifying
for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A or
Class D shares, because over time the accumulated ongoing account maintenance
and distribution fees on Class B or Class C shares may exceed the initial sales
charges and, in the case of Class D shares, the account maintenance fee.
Although some investors who previously purchased Class A shares may no longer be
eligible to purchase Class A shares of other Select Pricing Funds, those
previously purchased Class A shares, together with Class B, Class C and Class D
share holdings, will count toward a right of accumulation which may qualify the
investor for a reduced initial sales charge 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.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, 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 to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or which
has no purpose other than the purchase
18
<PAGE>
of shares of the Fund or shares of other registered investment companies at a
discount; provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
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 who currently own Class A shares in a shareholder account are entitled
to purchase additional Class A shares of the Fund in that account. Certain
employee-sponsored retirement or savings plans, including eligible 401(k) plans,
may purchase Class A shares 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 banking institutions provided that the program has $3
million or more initially invested in Select Pricing Funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee and certain
purchases made in connection with certain fee-based programs. In addition, Class
A shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies. 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 are met. In addition, Class A shares of the Fund and certain other
Select Pricing Funds are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. and, if certain conditions 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 Select Pricing
Funds.
Class A and Class D Sales Charge Information
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained By Paid To Redemption of
June 30, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1999 $ 17,801 $1,117 $ 16,684 $30,000
1998 $ 72,619 $5,269 $ 67,350 $ 0
1997 $139,059 $8,940 $130,119 $ 0
<CAPTION>
Class D Shares
--------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained By Paid To Redemption of
June 30, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1999 $ 33,205 $ 2,167 $ 31,038 $ 0
1998 $122,480 $ 8,796 $113,684 $ 0
1997 $302,358 $22,866 $279,492 $ 0
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A 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.
Reduced Initial Sales Charges
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.
Reinvested Dividends. No initial sales charges are imposed upon Class A
and Class D shares issued as a result of the automatic reinvestment of
dividends.
19
<PAGE>
Right of Accumulation. 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 public offering price of the shares 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 any other Select Pricing 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. 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 Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent is not a binding obligation to purchase any amount of Class A
or Class D shares; however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intent may be included under a
subsequent Letter of Intent 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 Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, may be included as
a credit toward the 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 Intent (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 5.0% of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intent must be at least 5.0% 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 charge 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 Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
TMA(SM) Managed Trusts. Class A shares are offered at net asset value to
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
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 investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
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. 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.
20
<PAGE>
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM/FAM-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. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund's suitability
standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that 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
shares 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 must establish that such
redemption had been made within 60 days prior to the investment in the Fund and
the proceeds from the redemption had 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 a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that 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 the shares of
such other fund were 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 such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that 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 shares of such
other mutual fund 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.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select Pricing(SM) System commenced operations) 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 Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been 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
21
<PAGE>
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 CDSC (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.
Acquisition of Certain Investment Companies. Class D shares may be offered
at net asset value in connection with the acquisition of the assets of or merger
or consolidation with a personal holding company or a public or private
investment company.
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 Select Pricing Funds.
Because no initial sales charges are deducted at the time of the 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 that do not qualify for
the 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.
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. See "Pricing of Shares -- Determination of Net Asset Value" below.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. 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. It will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the
four-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.
The following table sets forth the Class B CDSC:
CDSC as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
------------------------------- ----------------
0-1 .................................. 4.0%
1-2 .................................. 3.0%
2-3 .................................. 2.0%
3-4 .................................. 1.0%
4 and thereafter ..................... None
22
<PAGE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon 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 a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder
(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 or, if later, reasonably promptly following
completion of probate. The Class B CDSC also may be waived on redemptions of
shares by certain eligible 401(a) and 401(k) plans. The CDSC may also be 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 may be waived for any Class B shares that were acquired and held at the
time of the redemption in an Employee Access(SM) Account available through
employers providing eligible 401(k) plans. The Class B CDSC may also be waived
for any Class B shares that are purchased by a Merrill Lynch rollover IRA that
was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group and held in such account at the time of redemption. The
Class B CDSC may also be waived or its terms may be modified in connection with
certain fee-based programs. The Class B CDSC may also be waived in connection
with involuntary termination of an account in which Fund shares are held or for
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee Based Programs" and "-- Systematic Withdrawal
Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class B shares with a waiver of the CDSC upon
redemption, 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. Such
Class B shares will convert into Class D shares approximately ten years after
the plan purchases the first share of any Select Pricing 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.
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 the average daily 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 value 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 the 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 Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing 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
23
<PAGE>
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 on to the holding period for the shares acquired. The Conversion Period
also may be modified for investors that participate in certain fee-based
programs. See "Shareholder Services -- Fee-Based Programs."
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.
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.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be
subject to a 1.0% CDSC charged as a percentage of the dollar amount subject
thereto. 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. 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. It will be assumed
that the redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends 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. The Class
C CDSC may be waived in connection with involuntary termination of an account in
which Fund shares are held and withdrawals through the Merrill Lynch Systematic
Withdrawal Plans. See "Shareholder Services -- Systematic Withdrawal Plan." The
Class C CDSC of the Fund and certain other MLAM-advised mutual funds may be
waived with respect to Class C shares purchased by an investor with the net
proceeds of a tender offer made by certain MLAM-advised closed end funds,
including Merrill Lynch Senior Floating Rate Fund II, Inc. Such waiver is
subject to the requirement that the tendered shares shall have been held by the
investor for a minimum of one year and to such other conditions as are set forth
in the prospectus for the related closed end fund.
Class B and Class C Sales Charge Information
Class B Shares*
----------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended June 30, by Distributor Merrill Lynch
------------------- -------------- -------------
1999 $447,441 $447,441
1998 $946,237 $946,237
1997 $714,967 $714,967
- ----------
* Additional Class B 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.
Class C Shares
----------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended June 30, by Distributor Merrill Lynch
------------------- -------------- -------------
1999 $ 7,544 $ 7,544
1998 $37,127 $37,127
1997 $20,007 $20,007
Merrill Lynch compensates its Financial Consultants for selling Class B
and Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and
24
<PAGE>
are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from the dealer's own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at the
time of purchase. See "Distribution Plans" below. 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.
Distribution Plans
Reference is made to "Fees and Expenses" 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.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pay 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 with respect to Class B, Class C and Class D shares. Each of those
classes has exclusive voting rights with respect to the 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).
The Distribution Plans for Class B and Class C shares each provides that
the Fund also pay 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. 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 each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
non-interested Directors shall be committed to the discretion of the
non-interested Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Directors concluded that there is
reasonable likelihood that each 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 non-interested 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 Directors, including a majority of the non-interested
Directors who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in an easily
accessible place.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage of
average daily net assets
25
<PAGE>
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 annually, as of December 31 of
each year, on a "fully allocated accrual" basis and quarterly on a "direct
expense and revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, the CDSCs and
certain other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial consultant
compensation.
As of December 31, 1998, 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 the fully allocated accrual revenues by
approximately $1,759,000 (1.88% of Class B net assets at that date). As of June
30, 1999, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $8,498,209 (9.22%
of Class B net assets at that date). As of December 31, 1998, 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 the fully
allocated accrual revenues by approximately $427,000 (2.33% of Class C net
assets at that date). As of June 30, 1999, direct cash revenues for the period
since the commencement of operations of Class C shares exceeded direct cash
expenses by $1,174,339 (6.61% of Class C net assets at that date).
For the fiscal year ended June 30, 1999, the Fund paid the Distributor
$1,023,333 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $102.3
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, 1999, the Fund paid the
Distributor $200,590 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$20.1 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, 1999, the Fund paid the
Distributor $49,691 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$20.0 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
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 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, 1999
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 the Class B shares, the Distributor's voluntary
maximum.
26
<PAGE>
<TABLE>
<CAPTION>
Data Calculated as of June 30, 1999
---------------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Amounts Fee at
Eligible Allowable Interest on Maximum Previously Aggregate Current Net
Gross Aggregate Unpaid Amount Paid to Unpaid Asset
Sales(1) Sales Charges(2) Balance(3) Payable Distributor(4) Balance Level(5)
-------- ---------------- ----------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares for the period
July 1, 1994 (commencement of
operations) to June 30, 1999
Under NASD Rule as Adopted ......... $332,855 $20,636 $5,188 $25,824 $11,337 $14,487 $691
Under Distributor's Voluntary Waiver $332,855 $20,636 $1,832 $22,468 $11,137 $11,331 $691
Class C Shares, for the period
October 21, 1994 (commencement of
operations) to June 30, 1999
Under NASD Rule as Adopted ......... $83,942 $ 5,129 $1,468 $6,597 $ 1,368 $ 5,229 $133
</TABLE>
- ----------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of
Summit can only be purchased by exchange from another fund (the "redeemed
fund"). Upon such an exchange, the maximum allowable sales charge payment
to the redeemed fund is reduced in accordance with the amount of the
redemption. This amount is then added to the maximum allowable sales
charge payment with respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum allowable
sales charge payment to Summit and added to the maximum allowable sales
charge payment to the fund into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(4) Consists of CDSC payments, distribution fee payments and accruals. See
"What are the Fund's fees and expenses?" 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.
(5) 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 voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon
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 right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the New York Stock Exchange (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 in part on the market value of the securities held
by the Fund at such time.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
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
signature(s) of all persons in
27
<PAGE>
whose name(s) the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent's register. The signatures on the redemption
request may require a guarantee by an "eligible guarantor institution" as
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the "Exchange
Act"), the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. In the event a signature guarantee is
required, notarized signatures are not sufficient. In general, signature
guarantees are waived on redemptions of less than $50,000 as long as the
following requirements are met: (i) all requests require the signature(s) of all
persons in whose name(s) shares are recorded on the Transfer Agent's register;
(ii) all checks must be mailed to the stencil address of record on the Transfer
Agent's register and (iii) the stencil address must not have changed within 30
days. Certain rules may apply regarding certain account types such as but not
limited to UGMA/UTMA accounts, Joint Tenancies With Rights of Survivorship,
contra broker transactions, and institutional accounts. 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, payments
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 (e.g., cash, Federal funds or certified check
drawn on a U.S. bank). 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, Federal funds or certified check drawn on a U.S. bank) has been
collected for the purchase of such Fund shares, which will not usually exceed 10
days.
Repurchase
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to the regular close of
business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) 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 on
accounts held at 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 Fund shares as set forth above.
Reinstatement Privilege -- Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
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.
28
<PAGE>
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday after the close of business on the NYSE on each
day the NYSE is open for trading. The NYSE generally closes at 4:00 p.m.,
Eastern time. 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
NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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, rounded to the nearest
cent. Expenses, including the fees payable to the Manager and Distributor are
accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the 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, 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 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 financial futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are stated at fair value as
determined in good faith by or under the direction of the Directors of the Fund.
Such valuations and procedures will be reviewed periodically by the Directors.
Generally, trading in non-U.S. 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 that may not be reflected in the computation of the Fund's net asset value.
29
<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 number of shares outstanding on June 30, 1999 is set forth below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets ............................. $83,114,734 $92,104,098 $17,768,346 $19,647,758
----------- ----------- ----------- -----------
Number of Shares Outstanding ........... 6,997,528 7,957,431 1,540,963 1,663,022
----------- ----------- ----------- -----------
Net Asset Value Per Share (net assets
divided by number of shares
outstanding) ......................... $ 11.88 $ 11.57 $ 11.53 $ 11.81
Sales Charge (for Class A and Class D
shares: 5.25% of offering price; 5.54%
of net asset value per share)* ....... 0.66 ** ** 0.65
----------- ----------- ----------- -----------
Offering Price ......................... $ 12.54 $ 11.57 $ 11.53 $ 12.46
----------- ----------- ----------- -----------
</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 Charges Alternatives -- Class B and Class C Shares"
herein.
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. The Fund has no obligation to deal
with any broker or group of brokers in the execution of transactions in
portfolio securities and does not use any particular broker or dealer. In
executing transactions with brokers and dealers, 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 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 spread or commission available. 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;
however, whether or not a particular broker or dealer sells shares of the Fund
neither qualifies nor disqualifies such broker or dealer to execute transactions
for the Fund.
Subject to obtaining the best net results, brokers who provide
supplemental investment research services to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Manager under the
Management Agreement, and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information. If in the
judgment of the Manager the Fund will benefit from supplemental research
services, the Manager is authorized to pay brokerage commissions to a broker
furnishing such services that are in excess of commissions that another broker
may have charged for effecting the same transaction. Certain supplemental
research services may primarily benefit one or more other investment companies
or other accounts for which the Manager exercises investment discretion.
Conversely, the Fund may be the primary beneficiary of the supplemental research
services received as a result of portfolio transactions effected for such other
accounts or investment companies.
The Fund anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
30
<PAGE>
Foreign equity securities may be held by the Fund in the form of ADRs,
EDRs, GDRs or other securities convertible into foreign equity securities. ADRs,
EDRs and GDRs may be listed on stock exchanges, or traded in over-the-counter
markets in the United States or Europe, as the case may be. ADRs, like other
securities traded in the United States, will be subject to negotiated commission
rates. The Fund's ability and decisions to purchase or sell portfolio securities
of foreign issuers may be affected by laws or regulations relating to the
convertibility and repatriation of assets. Because the shares of the Fund are
redeemable on a daily basis in United States dollars, the Fund intends to manage
its portfolio so as to give reasonable assurance that it will be able to obtain
United States 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.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
Aggregate Brokerage Commissions Paid
Fiscal Year Ended June 30, Commissions Paid to Merrill Lynch
------------------------- ------------------- ----------------
1999 ........................... $1,800,225 $290,563
1998 ........................... $5,604,055 $341,717
1997 ........................... $5,196,036 $413,827
For the fiscal year ended June 30, 1999, the brokerage commissions paid to
Merrill Lynch represented 16.14% of the aggregate brokerage commissions paid and
involved 19.60% of the Fund's dollar amount of transactions involving payment of
brokerage commissions.
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which 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 the dealers acting as principal for their own accounts, the
Fund will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
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 placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved 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."
Section 11(a) of the Exchange Act generally prohibits members of the
United States 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.
The Board of Directors of the Fund 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 to
the Manager. 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.
31
<PAGE>
Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Manager or an affiliate when one or
more clients of the Manager or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for which the Manager
or an affiliate acts as manager 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 an affiliate 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.
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 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, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to U.S.
investors.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of dividends. The statements
will also show any other activity in the account since the preceding statement.
Shareholders will also receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
dividends. A shareholder with an account held at the Transfer Agent may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. A shareholder may also maintain an account
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with Merrill
Lynch. Certain shareholder services may not be available for the transferred
shares. After the transfer, the shareholder may purchase additional shares of
funds owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or her
shares, paying any applicable CDSC or (ii) continue to maintain an Investment
Account at the Transfer Agent for those shares. The shareholder may also request
the new securities dealer to maintain the shares in an account at the Transfer
Agent registered in the name of the securities dealer for the benefit of the
shareholder whether the securities dealer has entered into a selected dealer
agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer 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.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
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. Before effecting an exchange, shareholders
should obtain a currently effective
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prospectus of the fund into which the exchange is to be 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.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in the 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 Select Pricing 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 Select Pricing 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 D shares are exchangeable with shares of the
same class of other Select Pricing Funds.
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 Select Pricing Funds
or for 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 or 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 generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offer to exchange their Class B or Class C shares for Class B or Class C shares,
respectively, of certain other Select Pricing Funds or for Class B shares of
Summit ("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 CDSC 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's 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.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares are
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 Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, 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 toward
satisfaction of any
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Conversion Period with respect to Class B shares. 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 October 12, 1998, exchanges from the Fund and other Select
Pricing Funds into a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who exchanged
Select Pricing Fund shares for shares of such other money market funds and
subsequently wish to exchange those money market fund shares for shares of the
Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for the money market fund shares will not count toward
satisfaction of the holding period requirement for reduction of the CDSC imposed
on such shares, if any, and, with respect to Class B shares, toward satisfaction
of the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA Program, i.e., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA Program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA Program. First, the initial
allocation of assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA Program.
Exercise of the Exchange Privilege. 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 Select Pricing 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 to the general
public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be made. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
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
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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 1-800-MER-FUND
(1-(800)-637-3863).
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings
plans are available from Merrill Lynch. Under these plans, investments may be
made in the Fund and certain of the other mutual funds sponsored by Merrill
Lynch as well as in other securities. Merrill Lynch may charge an initial
establishment fee and an annual fee for each account. Information with respect
to these plans is available on request from Merrill Lynch.
Capital gains and ordinary income received in each of the plans referred
to above are exempt from Federal taxation until distributed from the plans.
Different tax rules apply to RothIRA plans and education savings plans.
Investors considering participation in any retirement or education savings plan
should review specific tax laws relating thereto and should consult their
attorneys or tax advisers with respect to the establishment and maintenance of
any such plan.
Automatic Investment Plans
A 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) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made 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
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
Alternatively, an investor that maintains a CMA(R) or CBA(R) account may arrange
to have periodic investments made in the Fund in amounts of $100 ($1 for
retirement accounts) or more through the CMA(R) or CBA(R) Automated Investment
Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in additional
full and fractional shares of the Fund. Such reinvestment will be at the net
asset value of shares of the Fund as of the close of business on the NYSE on the
monthly payment date for such dividends. No CDSC will be imposed upon redemption
of shares issued as a result of the automatic reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends paid in cash, rather
than reinvested in shares of the Fund or vice versa (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). Commencing ten
days after the receipt by the Transfer Agent of such notice, those instructions
will be effected. 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 dividend checks. Cash payments can also be directly
deposited to the shareholder's bank account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
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At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. Redemptions will be made at net
asset value as determined after the close of business on the NYSE (generally,
the NYSE closes at 4:00 p.m., Eastern 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 made, on the next business day following redemption. When a shareholder
is making systematic withdrawals, dividends on all shares in the Investment
Account are reinvested automatically in Fund shares. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or 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." 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 be applied thereafter to Class D shares if the shareholder so elects.
If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Merrill Lynch Financial
Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
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 that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Automatic 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) or
CBA(R) 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 Automated Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute substantially all of 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. 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. If in any fiscal year, the
Fund has net income from certain foreign currency transactions, such income will
be distributed at least annually.
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See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for
information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. 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 in cash. Dividends are taxable to
shareholders, as discussed below, whether they are reinvested in shares of the
Fund or received in cash. The per share dividends on Class B and Class C shares
will be lower than the per share dividends on Class A and Class D shares as a
result of the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares; similarly, the per
share dividends on Class D shares will be lower than the per share dividends on
Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Pricing of Shares -- Determination of Net
Asset Value."
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). 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 that 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). Certain categories of
capital gains are taxable at different rates. 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 amount of any capital gain dividends as well as
any 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. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid 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 United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets certain
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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 if more than 50% in the 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 United States
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 United
States 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
United States 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 United States tax for the foreign taxes treated as having been paid
by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes and other information needed to claim
the foreign tax credit. For this purpose, the Fund will allocate foreign taxes
and foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Securities and Exchange Commission 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.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the 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 bonds"), as previously described. Some of these high
yield bonds 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 securities
may be treated as dividends for Federal income tax purposes, in such case. If
the issuer of such high yield 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 it total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (the
"interest charge"), on a portion of the distributions from such a company and on
gain from the disposition of the shares of such a company (collectively referred
to as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election
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with respect to certain PFICs in which it owns shares that will allow it to
avoid the taxes on excess distributions. However, such election may cause the
Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, under recent legislation the Fund could
elect to "mark to market" at the end of each taxable year all shares that it
holds in PFICs. If it made this election, the Fund would recognize as ordinary
income any increase in the value of such shares over their adjusted basis and as
ordinary loss any decrease in such value to the extent it did not exceed prior
increases. By making the mark-to-market election, the Fund could avoid
imposition of the interest charge with respect to its distributions from PFICs,
but in any particular year might be required to recognize income in excess of
the distributions it received from PFICs and its proceeds from dispositions of
PFIC stock.
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non- equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest or currency exchange rates with respect
to its investments.
A forward foreign exchange contract that is a Section 1256 contract will
be marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in 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 stocks, 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, futures, or 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 foreign currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will be treated as
ordinary income or loss under Code Section 988. In certain circumstances, the
Fund may elect capital gain or loss treatment for such transactions. Regulated
futures contracts, as described above, will be taxed under Code Section 1256
unless application of Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Fund would
not be able to make any ordinary income dividend distributions, and all or a
portion of distributions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital to shareholders,
thereby reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's 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.
39
<PAGE>
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain countries in which the Fund intends to invest. No such
regulations have been issued to date.
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
that 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 formulas 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 as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and D shares.
Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance and
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 also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. In advertisements distributed
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 loads in the case of Class A and Class D shares, the 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 is 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
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
40
<PAGE>
Set forth below is total return information for the Class A, Class B,
Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------- -------------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ----------------- ----------------- -----------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended June 30, 1999 ......... 8.59% $1,085.90 9.37% $1,093.70
Five Years Ended June 30, 1999 ....... (1.59)% $ 923.10 -- --
Inception (September 1, 1989) to
June 30, 1999 ...................... 5.60% $1,708.80 -- --
Inception (July 1, 1994) to
June 30, 1999 ...................... -- -- (1.48)% $ 928.30
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended June 30,
1999 .............................. 14.60% $1,146.00 13.37% $1,133.70
1998 .............................. (36.00)% $ 640.00 (36.68)% $ 633.20
1997 .............................. 17.66% $1,176.60 16.39% $1,163.90
1996 .............................. 14.82% $1,148.20 13.63% $1,136.30
1995 .............................. (1.67)% $ 983.30 -- --
1994 .............................. 28.73% $1,287.30 -- --
1993 .............................. 5.17% $1,051.70 -- --
1992 .............................. 17.02% $1,170.20 -- --
1991 .............................. (4.45)% $ 955.50 -- --
Inception (July 1, 1994) to
June 30, 1995 ...................... -- -- (2.22)% $ 977.80
Inception (September 1, 1989) to
June 30, 1990 ...................... 22.29% $1,222.90 -- --
Aggregate Total Return
(including maximum applicable sales charges)
Inception (September 1, 1989) to
June 30, 1999 ...................... 70.88% $1,708.80 -- --
Inception (July 1, 1994) to
June 30, 1999 ...................... -- -- (7.17)% $928.30
<CAPTION>
Class C Shares Class D Shares
------------------------------------- -------------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ----------------- ----------------- -----------------
Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended June 30, 1999 ......... 12.42% $1,124.20 8.26% $1,082.60
Inception (October 21, 1994) to
June 30, 1999 ...................... (4.45)% $ 807.80 (4.79)% $ 794.40
Average Annual Total Return
(excluding maximum applicable sales charges)
Year Ended June 30,
1999 .............................. 13.42% $1,134.20 14.26% $1,142.60
1998 .............................. (36.69)% $ 633.10 (36.13)% $ 638.70
1997 .............................. 16.37% $1,163.70 17.30% $1,173.00
1996 .............................. 13.68% $1,136.80 14.55% $1,145.50
Inception (October 21, 1994) to
June 30, 1995 ...................... (14.97)% $ 850.30 (14.49)% $ 855.10
Aggregate Total Return
(including maximum applicable sales charges)
Inception (October 21, 1994) to
June 30, 1999 ...................... (19.22)% $ 807.80 (20.56)% $ 794.40
</TABLE>
41
<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,"
the total return data quoted by the Fund in advertisements directed to such
investors 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 the waiver of CDSCs, a lower
amount of expenses may be deducted.
On occasion, the Fund may compare its performance to various indices
including the Standard & Poor's 500 Index, the Dow Jones Industrial Average, or
to performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc. ("Morningstar"), Money Magazine, U.S. News & World Report,
Business Week, 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 Morningstar risk-adjusted performance ratings in
advertisements 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.
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.
GENERAL INFORMATION
Description of Shares
The Fund was incorporated under Maryland law on April 14, 1989. At the
date of this Statement of Additional Information, it has an authorized capital
of 400,000,000 shares of Common Stock, par value of $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. Shares of Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Board of 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 matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Generally, under Maryland law, a meeting of shareholders
may be called for any purpose on the written request of the holders of at least
10% of the outstanding shares of the Fund. Voting rights for Directors are not
cumulative. Shares issued are fully paid and nonassessable and have no
preemptive rights. Redemption and conversion rights are discussed elsewhere
herein and in the Prospectus. Each share 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. Stock certificates are issued by the transfer agent only on
specific request. Certificates for fractional shares are not issued in any case.
Shareholders may, in accordance with Maryland law, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Directors at
the request of 25% of the outstanding shares of the Fund. A Director may be
removed at a special meeting of shareholders by a vote of a majority of the
votes entitled to be cast for the election of Directors.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares for $100,000. Such shares were acquired for investment and can only be
disposed of by redemption. The proceeds realized by the Manager
42
<PAGE>
upon the redemption of any of the shares initially purchased by it will be
reduced by the proportionate amount of the unamortized organizational expenses
which the number of shares redeemed bears to the number of shares initially
purchased.
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 approval by the non-interested Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
Custodian
Brown Brothers Harriman & Co. (the "Custodian"), 40 Water Street, Boston,
Massachusetts, 02119, 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 of the United
States 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 is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "How to Buy, Sell,
Transfer and Exchange Shares -- Through the Transfer Agent" in the Prospectus.
Legal Counsel
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557,
is counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on June 30 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
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 ML & Co. under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of a class of the Fund's shares as of October 1, 1999
43
<PAGE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
44
<PAGE>
PART C
ITEM 23. Exhibits
Exhibit
Number Description
------- -----------
1(a) -- Articles of Incorporation of the Registrant, dated April 13,
1989.(a)
(b) -- Articles of Amendment to the Articles of Incorporation of the
Registrant, dated May 17, 1989.(a)
(c) -- Articles of Amendment to the Articles of Incorporation of the
Registrant, dated June 16, 1989.(a)
(d) -- Form of Articles Supplementary to the Articles of Incoporation
of the Registrant.(a)
(e) -- Articles of Amendment to the Articles of Incorporation of the
Registrant, dated October 17, 1994.(c)
(f) -- Articles Supplementary to the Articles of Incorporation of the
Registrant, dated October 17, 1994.(c)
2 -- By-Laws of the Registrant. (c)
3 -- Copies of instruments defining the rights of shareholders,
including the relevant portions of the Articles of
Incorporation, as amended and supplemented, and By-Laws of the
Registrant.(d)
4(a) -- Management Agreement between the Registrant and Merrill Lynch
Asset Management, Inc. dated June 19, 1989.(c)
(b) -- Supplement to Management Agreement between the Registrant and
Merrill Lynch Asset Management, L.P. dated January 3, 1994.(a)
(c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K.
Limited.(e)
5(a) -- Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, a division of Princeton
Funds Distributor, Inc. (the "Distributor").(b)
(b) -- Class B Shares Distribution Agreement between the Registrant
and the Distributor.(a)
(c) -- Letter Agreement between the Registrant and the Distributor
with respect to the Merrill Lynch Mutual Fund Advisor
Program.(f)
(d) -- Class C Shares Distribution Agreement between the Registrant
and the Distributor.(b)
(e) -- Class D Shares Distribution Agreement between the Registrant
and the Distributor.(b)
6 -- None.
7 -- Custody Agreement between the Registrant and Brown Brothers
Harriman & Co.(g)
8(a) -- 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.).(c)
(b) -- Form of License Agreement relating to the use of name between
the Registrant and Merrill Lynch & Co., Inc.(c)
9(a) -- Opinion of Brown & Wood LLP, counsel to the Registrant.(i)
(b) -- Consent of Brown & Wood LLP, counsel to the Registrant.
10 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch Asset Management, Inc.(c)
13(a) -- Class B Distribution Plan and Class B Distribution Plan
Sub-Agreement of the Registrant.(a)
(b) -- Form of Class C Distribution Plan and Class C Distribution
Plan Sub-Agreement of the Registrant.(b)
(c) -- Form of Class D Distribution Plan and Class D Distribution
Plan Sub-Agreement of the Registrant.(b)
14 -- None
15 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule
18f-3.(h)
C-1
<PAGE>
- ----------
(a) Filed on May 13, 1994, as an Exhibit to Post-Effective Amendment No. 7 to
the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended (File No. 33-28248) (the "Registration
Statement").
(b) Filed on October 17, 1994, as an Exhibit to Post-Effective Amendment No. 8
to the Registration Statement.
(c) Filed on October 25, 1995, as an Exhibit to Post-Effective Amendment No. 9
to the Registration Statement.
(d) Reference is made to Article V, Article VI, Article VII, Article VIII and
Article X of the Registrant's Articles of Incorporation, as amended and
supplemented, filed as Exhibits 1(a), 1(b), 1(c), 1(d), 1(e) and 1(f) to
the Registration Statement; and to Article II, Article III (sections 1, 3,
5, 6 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit 2 to the
Registration Statement.
(e) Filed on September 29, 1997, as an Exhibit to Post-Effective Amendment No.
11 to the Registration Statement.
(f) Filed on October 28, 1993, as an Exhibit to Post-Effective Amendment No. 6
to the Registration Statement.
(g) Filed on October 28, 1996, as an Exhibit to Post-Effective Amendment No.
10 to the Registration Statement.
(h) 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 15, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Securities Trust (File No. 2-99473).
(i) Filed on July 21, 1989, as an Exhibit to Pre-Effective Amendment No. 2 to
the Registration Statement and refiled as an Exhibit to Post-Effective
Amendment No. 14 to the Registration Statement pursuant to the Electronic
Data Gathering, Analysis and Retrieval ("EDGAR") requirements.
Item 24. Persons Controlled by or Under Common Control with the Registrant
Not applicable.
Item 25. Indemnification
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeaseance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office, the decision by
the Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-Laws shall be entitled to advances from
the Registrant for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the full
extent permitted under the General Laws of the State of Maryland; provided,
however, that the person seeking indemnification shall provide to the Registrant
a written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
C-2
<PAGE>
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
In Section 9 of the Class A, Class B, Class C and Class D 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 (the "1933 Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement or 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 26. Business and Other Connections of Investment Adviser
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
Developing Capital Markets Fund, Inc., Merrill Lynch Disciplined Equity Fund,
Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, 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 U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., 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., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund II, 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 Advisors 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
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,
C-3
<PAGE>
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate
Bond Fund, Inc., Merrill Lynch Corporate High Yield 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 California Insured Fund IV, Inc., MuniHoldings
California Insured Fund V, Inc., MuniHoldings Florida Insured Fund, MuniHoldings
Florida Insured Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings
Florida Insured Fund IV, MuniHoldings Florida Insured Fund V, MuniHoldings
Insured Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Insured
Fund III, Inc., MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc.,
MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings New Jersey Insured
FundIV, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York Insured
Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York
Insured Fund III, Inc., MuniHoldings New York Insured Fund IV, Inc.,
MuniHoldings Pennsylvania Insured Fund, 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 the Investment Adviser, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") 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, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and ML & Co. is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1201. 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, 1997 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Glenn is President and Mr. Burke
is Vice President and Treasurer of all or substantially all of the investment
companies described in the first two paragraphs of this Item 26, and Messrs.
Doll, Giordano and Monagle are officers of one or more of such companies.
Other Substantial Business,
Position(s) with the Profession, Vocation
Name Manager or Employment
- ----- -------------------- ---------------------------
ML & Co.................. Limited Partner Financial Services Holding
Company; Limited Partner of
FAM
Princeton Services....... General Partner General Partner of FAM
Jeffrey M. 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
C-4
<PAGE>
Other Substantial Business,
Position(s) with the Profession, Vocation
Name Manager or Employment
- ----- -------------------- ---------------------------
Terry K. Glenn........... Executive Vice Executive Vice President of
President FAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
PFD; Director of FDS;
President of Princeton
Administrators
Gregory A. Bundy......... Chief Operating Officer Chief Operating Officer and
and Managing Director Managing Director of FAM;
Chief Operating Officer and
Managing Director of
Princeton Services; Co-CEO
of Merrill Lynch Australia
from 1997 to 1999
Donald C. Burke.......... Senior Vice President, Senior Vice President and
Treasurer and Treasurer of FAM; Senior
Director of Taxation Vice President and Treasurer
of Princeton Services; Vice
President of PFD; First Vice
President of the Manager
from 1997 to 1999; Vice
President of the Manager
from 1990 to 1997
Michael G. Clark......... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services;
Treasurer and Director of
PFD; First Vice President of
the Manager from 1997 to
1999; Vice President of the
Manager from 1996 to 1997
Robert C. Doll........... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services; Chief
Investment Officer of
Oppenheimer Funds, Inc. in
1999 and Executive Vice
President thereof from 1991
to 1999
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
Michael J. Hennewinkel... Senior Vice President, Senior Vice President,
Secretary and General Secretary and General
Counsel Counsel of FAM; Senior Vice
President of Princeton
Services
Philip L. Kirstein....... Senior Vice President Senior Vice President of
FAM; Senior Vice President,
Secretary, General Counsel
and Director of Princeton
Services
Debra W. 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;
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
Gregory D. Upah.......... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
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., 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 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 Convertible Fund, Inc.,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
C-5
<PAGE>
Fundamental Growth Fund, 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 Senior
Floating Rate Fund, Inc., Merrill Lynch Senior Floating Rate Fund II, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Utility Income
Fund, Inc., Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World
Income Fund, Inc., The Municipal Fund Accumulation Program, 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 33 King William Street, London EC4R 9AS, 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,
1997, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Glenn, Burke and Albert are officers of
one or more of the registered investment companies listed in the first two
paragraphs of this Item 26.
Position With Other Substantial Business,
Name MLAM U.K. Profession, Vocation or Employment
- ----- --------------------- ----------------------------------
Terry K. Glenn....... Director and Chairman Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of Princeton
Services; President and Director of
PFD; President of Princeton
Administrators
Alan J. Albert....... Senior Managing Vice President of the Manager
Director
Nicholas C.D. Hall... Director Director of Merrill Lynch Europe
PLC.; General Counsel of Merrill
Lynch International Private Banking
Group
Donald C. Burke...... Treasurer Senior Vice President and Treasurer
of the Manager and FAM; Director of
Taxation of MLAM; Senior Vice
President and Treasurer of
Princeton Services; Vice President
of PFD; First Vice President of the
Manager from 1997 to 1999; Vice
President of the Manager from 1990
to 1997
Carol Ann Langham.... Company Secretary None
Debra Anne Searle.... Assistant Company None
Secretary
Item 27. 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 26 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. 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., Merrill Lynch Senior Floating Rate Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund II, Inc. A separate division of PFD acts
as the principal underwriter of a number of other investment companies.
C-6
<PAGE>
(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 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
Position(s) and Office(s) Position(s) and Office(s) with
Name with PFD Registrant
- ----- ------------------------- ------------------------------
<S> <C> <C>
Terry K. Glenn.............. President and Director President and Director
Michael G. Clark............ Treasurer and Director None
Thomas J. Verage............ Director None
Robert W. Crook............. Senior Vice President None
Michael J. Brady............ Vice President None
William M. Breen............ Vice President None
Donald C. Burke............. Vice President Vice President and Treasurer
James T. Fatseas............ Vice President None
Debra W. Landsman-Yaros..... Vice President None
Michelle T. Lau............. Vice President None
Salvatore Venezia........... Vice President None
William Wasel............... Vice President None
Robert Harris............... Secretary None
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (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 29. Management Services
Other than as set forth under the caption "Management of the Fund --
Merrill Lynch Asset Management" 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 30. Undertakings.
Not applicable.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant certifies that it meets all the requirements for
effectiveness of this Registration Statement pursuant to Rule 485(b) under the
Securities Act and has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 29th day of October, 1999.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC.
(Registrant)
By /s/ Donald C. Burke
------------------------------------
(Donald C. Burke, Vice President
and Treasurer)
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
TERRY K. GLENN* President and Director
- --------------------------------- (Principal Executive
(Terry K. Glenn) Officer)
DONALD C. BURKE* Vice President and
- --------------------------------- Treasurer (Principal
(Donald C. Burke) Financial and
Accounting Officer)
DONALD CECIL* Director
- ---------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director
- ---------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director
- ---------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director
- ---------------------------------
(Richard R. West)
ARTHUR ZEIKEL* Director
- ---------------------------------
(Arthur Zeikel)
EDWARD D. ZINBARG* Director
- ---------------------------------
(Edward D. Zinbarg)
*By: /s/DONALD C. BURKE October 29, 1999
-----------------------------
(Donald C. Burke,
Attorney-in-Fact)
C-8
<PAGE>
EXHIBIT INDEX
Exhibit
Numbers Description
- ------- -----------
9(a) -- Opinion of Brown & Wood LLP, counsel to the Registrant.
9(b) -- Consent of Brown & Wood LLP, counsel to the Registrant.
10 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
EXHIBIT 9(a)
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, N.Y. 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
10 EAST 53RD STREET
NEW YORK, NY 10022
TELEPHONE: 212-308-9300
FACSIMILE: 212-593-3500 815 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20006
555 CALIFORNIA STREET TELEPHONE: 202-223-0220
SAN FRANCISCO, CA 94104 FACSIMILE: 202-223-0485
TELEPHONE: 415-398-3909
FACSIMILE: 415-397-4621 BLACKWELL HOUSE
GUILDHALL YARD
10900 WILSHIRE BOULEVARD LONDON BC2V5AB
LOS ANGELES, CA 94104 TELEPHONE: 606-1888
TELEPHONE: 213-308-4343 FACSIMILE: 796-1807
FACSIMILE: 213-208-5740
July 21, 1989
Merrill Lynch Developing Capital Markets Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Dear Sirs:
We have acted as counsel for Merrill Lynch Developing Capital Markets
Fund, Inc., a corporation organized under the laws of the State of Maryland (the
"Fund"), in connection with the organization of the Fund, its registration as an
open-end investment company under the Investment Company Act of 1940 and the
registration of an indefinite number of its shares of common stock, par value
$.10 per share (the "Shares"), under the Securities Act of 1933 to be effected
pursuant to a registration statement on Form N-1a (File Nos. 33-28248 and
811-5723), as amended (the "Registration Statement").
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sales of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund and such other documents as we
have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock of the Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the prospectus and
statement of additional information constituting parts thereof.
Very truly yours,
/s/ BROWN & WOOD LLP
------------------------
BROWN & WOOD LLP
EXHIBIT 9(b)
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
October 29, 1999
Merrill Lynch Developing Capital Markets Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey
Ladies and Gentlemen:
We consent to the filing of our opinion dated July 21, 1989, originally filed on
July 21, 1989, as an Exhibit to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A (File Nos. 33-28248 and 811-5723), and to
the use of our name in the prospectus and statement of additional information
constituting parts of Post-Effective Amendment No. 14 to such Registration
Statement.
Very truly yours,
/s/ Brown & Wood LLP
--------------------
Brown & Wood LLP
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Developing Capital Markets Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 14 to Registration Statement No. 33-28248 of our report dated August 16,
1999 appearing in the annual report to shareholders of Merrill Lynch Developing
Capital Markets Fund, Inc. for the year ended June 30, 1999, and to the
reference to us under the caption "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Princeton, New Jersey
October 27, 1999
Exhibit 17(b)
DEVELOPING
CAPITAL MARKETS
FUND, INC.
FUND LOGO
Annual Report
June 30, 1999
Investing in emerging market securities involves a number of risk factors and
special considerations, including restrictions on foreign investments and on
repatriation of capital invested in emerging markets, currency fluctuations,
and potential price volatility and less liquidity of securities traded in
emerging markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which US companies are subject. Therefore,
the Fund is designed as a long-term investment for investors capable of
assuming the risks of investing in emerging markets. The Fund should be
considered as a vehicle for diversification and not as a complete investment
program. Please refer to the prospectus for details.
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the
Fund's current prospectus. Past performance results shown in this report
should not be considered a representation of future performance. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Statements and
other information herein are as dated and are subject to change.
Merrill Lynch
Developing
Capital Markets
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
Merrill Lynch Developing Capital Markets Fund, Inc.
Map Depicting the Fund's Asset Allocation As a Percentage* of Net
Assets as of June 30, 1999
VENEZUELA 0.6%
BRAZIL 12.3%
HUNGARY 2.5%
CZECH REPUBLIC 0.5%
POLAND 2.6%
RUSSIA 0.9%
GREECE 1.7%
TURKEY 1.7%
INDIA 6.6%
THAILAND 4.2%
CHINA 1.0%
HONG KONG 1.6%
SOUTH KOREA 16.0%
MEXICO 11.7%
CHILE 0.2%
ARGENTINA 1.3%
EGYPT 0.1%
SOUTH AFRICA 8.7%
ISRAEL 2.3%
INDONESIA 2.3%
MALAYSIA 6.8%
TAIWAN 7.9%
PHILIPPINES 1.8%
- ------------
*Total may not equal 100%.
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
DEAR SHAREHOLDER
Fiscal Year in Review
During the 12-month period ended June 30, 1999, total returns for Merrill
Lynch Developing Capital Markets Fund, Inc.'s Class A, Class B, Class C and
Class D Shares were +14.60%, +13.37%, +13.42% and +14.26%, respectively.
(Results shown do not reflect sales charges and would be lower if sales
charges were included. Complete performance information can be found on pages
6--8 of this report to shareholders.) The unmanaged Morgan Stanley Capital
International Emerging Markets Free (MSCI EMF) Index rose 28.71% during the
same period. Detrimental to performance was the Fund's overweighted position
in Hungary, which declined 16.12%. Stock selection in Poland, India and Mexico
also negatively impacted the Fund's performance relative to the MSCI EMF
Index. Also hurting performance was the Fund's large cash position during the
later months of 1998. Offsetting these negatives were positive performance
contributions of an overweighting in some Asian markets, specifically
Malaysia, Thailand and Taiwan.
Investment Overview and Activities
During the three-month period ended June 30, 1999, Merrill Lynch Developing
Capital Markets Fund, Inc.'s Class A, Class B, Class C and Class D Shares had
total returns of +27.88%, +27.42%, +27.40% and +27.68%, respectively. The
unmanaged MSCI EMF Index rose 24.40% during the same period. The Fund's
outperformance during the June quarter is attributable to its overweighted
positions in many of the Asian markets, including Indonesia, Malaysia Free,
South Korea and Thailand Free, whose markets were up 121.62%, 71.57%, 64.44%
and 61.19%, respectively. Also benefiting performance was the relative
outperformance of the Fund's stocks in Mexico as compared to their relative
market. (References to securities markets of all countries in this letter to
shareholders correspond to those countries' market weightings in the MSCI EMF
Index and are for the three-month period ended June 30, 1999.)
The recovery in emerging markets continued in the three-month period ended
June 30, 1999. Overall, emerging markets enjoyed a broad-based rally driven
primarily by the perception that these economies had seen their worst and were
on the road to recovery. This perception, which we partly share, was supported
by evidence such as rising industrial production in South Korea, a pickup in
consumer spending in Thailand and the recovery in the prices of some
commodities such as pulp and oil.
Bolstering the case for emerging markets recovery were reflationary efforts in
the major economies of the United States, Japan and the European Union. This
was indicated by the neutral monetary stance of the US Federal Reserve Board
through most of the period, the fiscal stimulus and the possibility of
monetization in Japan, and the decline in interest rates in the European
Union. In addition, investors regained confidence in these markets as
countries, such as Brazil, Malaysia, South Korea and Thailand, were successful
in raising capital in the foreign markets.
To add balance to this positive assessment of the developing markets, we note
that the evidence of recovery has so far been limited to relatively few
countries. In our view, the necessary structural reforms in countries such as
Indonesia and Brazil are still works in progress. Developing economies and
their emerging markets may appear to be recovering, but progress can easily be
slowed by external events.
These events could include a curtailment of capital flows to the developing
markets if there is a sharp rising trend in US interest rates or a prolonged
decline in the US stock market. Cyclical stocks and the Mexican, Brazilian and
South African stock markets in general could be particularly vulnerable to a
collapse in commodity prices if the European and Japanese economies fail to
reflate. Some Israeli, South Korean and Taiwanese technology shares could be
hurt by a decline in prices of US technology stock prices. Nonetheless,
assuming the investment environments continue to improve, we believe the case
for investing in these countries with a long-term view is very much intact.
South Korea was one of the best-performing markets during the three months
ended June 30, 1999, rising 64.44%. South Korea is a prime example of an
incomplete restructuring. Although the country has made progress in areas such
as recapitalizing and restructuring the banking sector and increasing
transparency in corporate financial disclosures, little has been achieved in
reforming the giant conglomerates, or chaebols. However, the stock market has
rewarded the South Korean government's stated desire to make the necessary
improvements to the economy.
Evidence of the seriousness of the South Korean government's intention to
reform will be the deregulation of state companies such as Korea Electric
Power Corporation (KEPCO). KEPCO is the state monopoly for generation and
distribution of electricity. In the past, the company has had to shoulder the
burden of subsidizing the industrial sectors for the sake of economic
development. We believe that the South Korean government is committed to
deregulating the pricing of electricity. South Korea had the largest country
weighting in the Fund, comprising 16.0% of net assets.
In Thailand, recovery and restructuring continued during the three- month
period ended June 30, 1999. The auctioning of bad loans taken from the finance
companies has been proceeding slowly. The three largest banks--including two
Fund investments, Bangkok Bank Public Company Limited and Thai Farmers Bank
Public Company Limited-- appear to be successfully recapitalizing themselves.
One of the largest conglomerates in Thailand, The Siam Cement Public Company
Limited, which is also a holding in the Fund, disposed of subsidiaries and
joint venture stakes in non-core businesses. The stock price of the foreign
shares of Siam Cement quadrupled from its lowest level last year.
Growth prospects for the South African economy improved during the three-month
period ended June 30, 1999. The beginning of a commodity cycle upturn has been
extremely positive for exports of commodities including platinum, diamonds and
coal, which comprise one-third of South Africa's exports. In addition,
interest rates have been declining and may decline further, particularly since
the currency has been relatively stable. Our investments in South Africa
comprised 8.7% of net assets.
Corporate earnings in South Africa were a positive surprise. For example,
Impala Platinum Holdings Limited reported first-half fiscal year earnings per
share up 127%. This was a strong result, despite the flat prices for its
metals. The substantial rise in earnings was driven by the company's cost
containment program, which limited the rise in cash costs to 2.5% for the
three-month period, and by fees from refining other platinum producers'
concentrate. In addition to this, the depreciation of the South African
currency during the six- month period ended June 30, 1999 also benefited the
company, since its costs are primarily rand-based, while its revenues are US
dollar- based prices for platinum, palladium and rhodium.
The two most prominent companies engaged in these restructuring activities are
Anglo American PLC and South African Breweries PLC. Both companies have
recently moved their domiciles to London in an effort to facilitate raising
capital and to potentially lower their costs of capital by diversifying their
asset bases. In anticipation of the changes in domicile, both companies
streamlined their operations, sold off non-core assets, and were developing
strategies intended to drive their future growth prospects, both within and
outside of South Africa.
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
Restructuring is also an ongoing theme in other countries. In Israel, Koor
Industries Limited continued to enhance its shareholder value through the
disposition of non-core assets in the food and ammunition industries and
consolidation of its positions in the telecommunications industry through
increased holdings in ECI and in the agrochemical industry through increased
ownership of MA Industries.
In Poland, Elektrim Spolka Akcyjna SA--one of the country's largest industrial
conglomerates and a long-term holding of the Fund--is transforming rapidly
under new management. The company was a post- Soviet era behemoth that
inherited a broad and unrelated array of activities, many of which operated at
a loss. Through divestments and acquisitions, it is focusing on what the
company's management deems to be businesses that are attractive in Poland and
could increase in value. These are telecommunications services, including
wireless and wired line telephone and cable television, and power, including
engineering services and generation equipment.
Our equity investments in Brazil comprised 12.3% of the Fund's net assets. As
noted above, fiscal reforms are still pending and their postponement is
causing some concern in the markets. However, there are investments that we
believe can make a positive contribution to the Fund's performance because of
their defensive qualities as well as attractive valuations. One example is the
diversified mining company Companhia Vale do Rio Doce (CVRD). CVRD benefits
from the weaker Brazilian real, as its revenue stream is primarily US dollar-
based, while the majority of its costs are in local currency. As the world's
largest producer of iron ore, the company stands to benefit from improving
conditions in the global steel market. We believe that values such as those in
CVRD are compelling enough to justify taking a long-term position in Brazil,
notwithstanding the near-term market volatility that we expect.
There has been value in emerging market investments for some time.
Nevertheless, the stock markets declined. We believe that aside from
compelling stock valuations, there are several drivers that could improve the
performance of these stock markets. These include the improving outlook for
earnings and economic growth, the scope for interest rate declines as
perceived risk subsides, and what we believe to be the bottoming out of the
global economic cycle and commodity prices.
In Conclusion
We thank you for your ongoing interest in Merrill Lynch Developing Capital
Markets Fund, Inc., and we look forward to reviewing our strategy with you in
our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Grace Pineda)
Grace Pineda
Senior Vice President and
Portfolio Manager
August 12, 1999
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Donald Cecil, Director
Roland M. Machold, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Arthur Zeikel, Director
Edward D. Zinbarg, Director
Grace Pineda, Senior Vice President
and Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Barbara G. Fraser, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02119
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class A
Shares are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales charge of
4% if redeemed during the first year, decreasing 1% each year thereafter to
0% after the fourth year. In addition, Class B Shares are subject to a
distribution fee of 0.75% and an account maintenance fee of 0.25%. These
shares automatically convert to Class D Shares after approximately 8 years.
(There is no initial sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and an account
maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Recent Performance Results" and "Average
Annual Total Return" tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Dividends paid
to each class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to each class,
which are deducted from the income available to be paid to shareholders.
Total Return Based on a $10,000 Investment--Class A Shares
A line graph depicting the growth of an investment in the Fund's Class A
Shares compared to growth of an investment in the Morgan Stanley Capital
International EAFE Index and the Morgan Stanley Capital International Emerging
Markets Free Index. Beginning and ending values are:
9/01/89** 6/99
ML Developing Capital Markets Fund, Inc.++--
Class A Shares* $ 9,475 $17,090
Morgan Stanley Capital International
EAFE Index++++ $10,000 $17,627
Morgan Stanley Capital International
Emerging Markets Free Index++++++ $10,000 $29,269
A line graph depicting the growth of an investment in the Fund's Class B
Shares compared to growth of an investment in the Morgan Stanley Capital
International EAFE Index and the Morgan Stanley Capital International Emerging
Markets Free Index. Beginning and ending values are:
7/01/94** 6/99
ML Developing Capital Markets Fund, Inc.++--
Class B Shares* $10,000 $ 9,283
Morgan Stanley Capital International
EAFE Index++++ $10,000 $14,836
Morgan Stanley Capital International
Emerging Markets Free Index++++++ $10,000 $ 9,594
A line graph depicting the growth of an investment in the Fund's Class C
Shares and Class D Shares compared to growth of an investment in the Morgan
Stanley Capital International EAFE Index and the Morgan Stanley Capital
International Emerging Markets Free Index. Beginning and ending values are:
10/21/94** 6/99
ML Developing Capital Markets Fund, Inc.++--
Class C Shares* $10,000 $ 8,078
ML Developing Capital Markets Fund, Inc.++--
Class D Shares* $ 9,475 $ 7,945
Morgan Stanley Capital International
EAFE Index++++ $10,000 $14,344
Morgan Stanley Capital International
Emerging Markets Free Index++++++ $10,000 $ 8,091
- -------------------
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of operations.
++ML Developing Capital Markets Fund, Inc. invests in securities,
principally equities, of issuers in countries having smaller capital
markets.
++++This unmanaged Index measures the total returns of developed foreign
stock markets in Europe, Asia and the Far East. The starting date for
the Index in the Class A Shares' graph is from 8/31/89, in the Class B
Shares' graph is from 6/30/94 and in the Class C & Class D Shares' graph
is from 10/31/94.
++++++This unmanaged Index measures the total returns of emerging foreign
stock markets in Europe, Asia and the Far East. The starting date for
the Index in the Class A Shares' graph is from 8/31/89, in the Class B
Shares' graph is from 6/30/94 and in the Class C & Class D Shares' graph
is from 10/31/94.
Average Annual
Total Return
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Year Ended 6/30/99 +14.60% +8.59%
Five Years Ended 6/30/99 - 0.52 -1.59
Inception (9/01/89) through 6/30/99 + 6.18 +5.60
- -----------
*Maximum sales charge is 5.25%. **Assuming maximum sales charge.
% Return % Return
Class B Shares* Without CDSC With CDSC**
Year Ended 6/30/99 +13.37% +9.37%
Inception (7/01/94)
through 6/30/99 - 1.48 -1.48
- ----------------
*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Class C Shares* Without CDSC With CDSC**
Year Ended 6/30/99 +13.42% +12.42%
Inception (10/21/94)
through 6/30/99 - 4.45 - 4.45
- -------------
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
Year Ended 6/30/99 +14.26% +8.26%
Inception (10/21/94)
through 6/30/99 - 3.69 -4.79
- ----------------
*Maximum sales charge is 5.25%. **Assuming maximum sales charge.
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
PERFORMANCE DATA (concluded)
<TABLE>
<CAPTION>
Recent
Performance
Results*
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Developing Capital Markets Fund Class A Shares +14.60% +27.88% +80.35%
ML Developing Capital Markets Fund Class B Shares +13.37 +27.42 - 7.17
ML Developing Capital Markets Fund Class C Shares +13.42 +27.40 -19.22
ML Developing Capital Markets Fund Class D Shares +14.26 +27.68 -16.16
- ------------
*Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the
ex-dividend date. The Fund's since inception dates are from 9/01/89 for Class
A Shares, from 7/01/94 for Class B Shares and from 10/21/94 for Class C &
Class D Shares.
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (in US dollars)
Shares Value Percent of
AFRICA Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
South Banking 96,766 Nedcor Limited $ 1,955,708 $ 2,190,626 1.0%
Africa
Beverages 120,159 ++South African Breweries PLC 876,599 1,043,476 0.5
35 ++South African Breweries PLC (c) 298 304 0.0
-------------- -------------- ------
876,897 1,043,780 0.5
Financial 2,329,267 FirstRand Limited 3,412,002 2,663,563 1.3
Services
Gold Mines 51,830 AngloGold Limited (ADR)(a) 1,128,679 1,114,345 0.5
Health Insurance 363,939 ++Sanlam Limited 388,152 431,250 0.2
Insurance 13,232 ++Liberty International PLC 91,631 87,607 0.0
28,380 Liberty Life Association of Africa
Limited 403,890 363,569 0.2
-------------- -------------- ------
495,521 451,176 0.2
Metals--Non-Ferrous 53,279 ++Anglo American PLC 2,549,343 2,490,003 1.2
615,066 Gencor Limited 1,447,453 1,692,094 0.8
64,652 Impala Platinum Holdings Limited 1,527,864 1,626,479 0.8
-------------- -------------- ------
5,524,660 5,808,576 2.8
Miscellaneous 44,395 De Beers (ADR)(a) 1,020,956 1,059,931 0.5
Materials & 571,894 Nampak Limited 862,910 1,582,802 0.7
Commodities -------------- -------------- ------
1,883,866 2,642,733 1.2
Retail 1,377,400 Metro Cash and Carry Limited 1,037,172 1,141,366 0.5
207,852 Pepkor Limited 667,665 837,057 0.4
-------------- -------------- ------
1,704,837 1,978,423 0.9
Retail--Stores 17,368 Edgars Consolidated Stores Limited 64,258 134,995 0.1
Total Investments in Africa 17,434,580 18,459,467 8.7
EUROPE
Czech Telephone Networks 67,928 ++SPT Telecom AS 904,584 1,101,884 0.5
Republic
Total Investments in the Czech Republic 904,584 1,101,884 0.5
Greece Banking 8,707 Alpha Credit Bank 541,568 561,011 0.3
Beverages 27,253 Hellenic Bottling Co. 899,249 658,272 0.3
Building & 25,021 Titan Cement Company 2,162,016 2,303,082 1.1
Construction
Total Investments in Greece 3,602,833 3,522,365 1.7
Hungary Banking 21,305 OTP Bank Rt. (GDR)(b) 950,150 873,505 0.4
Oil & Related 74,466 ++MOL Magyar Olaj-es Gazipari Rt.
(GDR)(b) 2,045,484 1,768,568 0.8
Telecommunications 498,975 Magyar Tavkozlesi Rt.--Matav 2,904,795 2,700,398 1.3
1,183 Magyar Tavkozlesi Rt. (ADR)(a) 31,202 32,533 0.0
-------------- -------------- ------
2,935,997 2,732,931 1.3
Total Investments in Hungary 5,931,631 5,375,004 2.5
Poland Banking 90,148 Wielkopolski Bank Kredytowy SA 886,674 528,795 0.2
Business & 100,135 ++ComputerLand SA 2,109,294 1,902,591 0.9
Public
Services
Multi-Industry 220,231 Elektrim Spolka Akcyjna SA 2,280,859 3,117,271 1.5
Total Investments in Poland 5,276,827 5,548,657 2.6
Russia Energy Sources 2,025,000 Irkutskenergo 255,918 202,500 0.1
26,483 LUKoil Holding (ADR)(a) 871,819 1,048,727 0.5
-------------- -------------- ------
1,127,737 1,251,227 0.6
Telecommuni- 3,268,800 ++Bashinformsvyaz 1,455,190 228,816 0.1
cations 169,200 Nizhnovsvyazinform 879,840 164,124 0.1
-------------- -------------- ------
2,335,030 392,940 0.2
Utilities-- 2,066,208 Bashkirenergo 1,187,599 146,701 0.1
Electric
Total Investments in Russia 4,650,366 1,790,868 0.9
Turkey Banking 155,373,140 ++Turkiye Garanti Bankasi AS 1,273,901 1,160,298 0.5
53,343,402 Yapi ve Kredi Bankasi AS 549,106 771,425 0.4
42,674,721 Yapi ve Kredi Bankasi AS (Receipts) 286,788 617,140 0.3
-------------- -------------- ------
2,109,795 2,548,863 1.2
Beverages 3,118,811 Ege Biracilik Ve Malt Sanayii AS 332,529 232,907 0.1
Retail 728,650 Migros Turk T.A.S. 968,064 906,904 0.4
Total Investments in Turkey 3,410,388 3,688,674 1.7
Total Investments in Europe 23,776,629 21,027,452 9.9
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
LATIN Shares Value Percent of
AMERICA Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Argentina Oil & Related 203,276 Perez Companc SA 'B' $ 1,300,801 $ 1,169,001 0.6%
Real Estate 33,761 ++IRSA Inversiones y Representaciones
SA (GDR)(b) 924,979 1,042,371 0.5
Telecommunications 9,112 Telecom Argentina Stet-France
Telecom SA (ADR)(a)(c) 310,355 243,746 0.1
7,898 Telefonica de Argentina SA (ADR)(a) 292,700 247,800 0.1
-------------- -------------- ------
603,055 491,546 0.2
Total Investments in Argentina 2,828,835 2,702,918 1.3
Brazil Banking 1,364,032 Banco Itau SA (Preferred) 709,168 700,490 0.3
80,710 Uniao de Bancos Brasileiros SA
(Unibanco) (GDR)(b) 1,156,684 1,942,084 0.9
-------------- -------------- ------
1,865,852 2,642,574 1.2
Beverages 3,083 Companhia Cervejaria Brahma (ADR)(a) 28,710 34,876 0.0
3,054,861 Companhia Cervejaria Brahma
(Preferred) 1,797,729 1,718,790 0.8
-------------- -------------- ------
1,826,439 1,753,666 0.8
Metals & Steel 185,245 Companhia Vale do Rio Doce 'A'
(Preferred) 3,643,010 3,637,994 1.7
Oil & Related 8,778,334 Petroleo Brasileiro SA--Petrobras
(Preferred) 2,088,949 1,357,372 0.6
Retail 7,500 Companhia Brasileira de Distribuicao
Grupo Pao de Acucar SA (ADR)(a) 118,901 140,156 0.1
Telecommuni- 66,120,526 ++Tele Celular Sul Participacoes SA 130,355 98,136 0.0
cations 119,678,442 ++Tele Norte Leste Participacoes SA 1,389,487 1,073,864 0.5
273,272 ++Tele Norte Leste Participacoes SA
(ADR)(a) 4,054,109 5,072,612 2.4
42,623 ++Telecomunicacoes Brasileiras SA--
Telebras (ADR)(a) 2,664 2,664 0.0
41,290 Telecomunicacoes Brasileiras SA--
Telebras (Preferred Block)(ADR)(a) 3,261,179 3,723,842 1.8
23,507,700 Telerj Celular SA 'B' 652,176 766,786 0.4
73,248,526 ++Telesp Participacoes SA 1,652,828 950,743 0.4
44,699 Telesp Participacoes SA (ADR)(a) 955,307 1,022,490 0.5
-------------- -------------- ------
12,098,105 12,711,137 6.0
Utilities 123,698,000 ++Centrais Eletricas Basileiras SA--
--Electric Eletrobras 3,811,773 2,338,534 1.1
78,293,870 Companhia Energetica de Minas
Gerais SA--CEMIG (Preferred) 2,070,190 1,643,641 0.8
-------------- -------------- ------
5,881,963 3,982,175 1.9
Total Investments in Brazil 27,523,219 26,225,074 12.3
Chile Utilities-- 17,626 Enersis SA (ADR)(a) 419,041 403,195 0.2
Electric & Gas
Total Investments in Chile 419,041 403,195 0.2
Mexico Beverages & 28,663 Fomento Economico Mexicano, SA de
Tobacco CV (ADR)(a) 1,006,365 1,142,937 0.6
109,729 Panamerican Beverages, Inc. 'A'
(US Registered Shares) 3,258,436 2,612,922 1.2
-------------- -------------- ------
4,264,801 3,755,859 1.8
Broadcasting/Media 122,372 ++Grupo Televisa SA (GDR)(b) 2,505,638 5,483,795 2.6
118,810 ++TV Azteca, SA de CV (ADR)(a) 902,019 616,327 0.3
-------------- -------------- ------
3,407,657 6,100,122 2.9
Building Materials 14,455 Cemex, SA de CV (ADR)(a) 125,617 142,291 0.1
60,800 Cemex, SA de CV 'B' 162,661 300,939 0.1
162,355 Cemex, SA de CV 'B' (ADR)(a) 1,603,563 1,605,042 0.8
2,335 Cemex, SA de CV-CPO 10,837 11,533 0.0
-------------- -------------- ------
1,902,678 2,059,805 1.0
Diversified 47,142 ++Grupo Sanborns SA 'B1' 85,323 88,938 0.0
Companies
Food 569,400 Grupo Industrial Bimbo, SA de CV 'A' 1,216,194 1,261,310 0.6
Healthcare/ 791,698 Kimberly-Clark de Mexico, SA de
Personal Care CV 'A' 2,694,146 3,255,737 1.5
Multi-Industry 472,514 ++Grupo Carso, SA de CV 'A1' 1,418,781 2,188,539 1.0
Telecommunications 75,858 Telefonos de Mexico SA (ADR)(a) 3,438,332 6,130,275 2.9
Total Investments in Mexico 18,427,912 24,840,585 11.7
Venezuela Telecommunications 48,672 Compania Anonima Nacional Telefonos
de Venezuela (CANTV)(ADR)(a) 782,493 1,326,312 0.6
Total Investments in Venezuela 782,493 1,326,312 0.6
Total Investments in Latin America 49,981,500 55,498,084 26.1
MIDDLE
EAST
Egypt Banking 29,677 Commercial International (c) 271,089 264,125 0.1
Total Investments in Egypt 271,089 264,125 0.1
Israel Banking 429,403 Bank Hapoalim 834,632 1,103,761 0.5
565,134 Bank Leumi Le-Israel 1,065,518 1,070,083 0.5
-------------- -------------- ------
1,900,150 2,173,844 1.0
Multi-Industry 34,155 Koor Industries Limited (ADR)(a) 830,584 798,373 0.4
Telecommunications 486,496 ++Bezeq Israeli Telecommunication
Corporation Ltd. 2,040,197 1,962,880 0.9
Total Investments in Israel 4,770,931 4,935,097 2.3
Total Investments in the Middle East 5,042,020 5,199,222 2.4
PACIFIC
BASIN/ASIA
China Electrical & 641,500 Eastern Communication Co., Ltd. 'B' 582,047 654,330 0.3
Electronics
Machinery & 3,192,774 Qingling Motor Company 'H' 1,504,408 769,531 0.4
Engineering
Utilities-- 2,056,000 Beijing Datang Power Generation Company
Electric Limited 'H' 944,745 662,491 0.3
Total Investments in China 3,031,200 2,086,352 1.0
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
PACIFIC
BASIN/ASIA Shares Value Percent of
(continued) Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Hong Kong Building 11,002,219 ++Anhui Conch Cement Co. Ltd. 'H' $ 3,013,733 $ 1,871,849 0.9%
Products
Insurance-- 731,800 ++Pacific Century Insurance Holdings
Multiline Limited 598,325 592,337 0.3
Transportation 9,060,000 Sichuan Expressway Co. 'H' 905,593 945,867 0.4
Total Investments in Hong Kong 4,517,651 3,410,053 1.6
India Banking 800 State Bank of India 5,934 4,375 0.0
96,780 State Bank of India 474,675 529,262 0.3
-------------- -------------- ------
480,609 533,637 0.3
Building Products 100 ++Associated Cement Companies Ltd. 330 395 0.0
7,110 ++Associated Cement Companies Ltd. 23,476 28,089 0.0
8,000 Associated Cement Companies Ltd.
(Rights) 4,467 5,361 0.0
-------------- -------------- ------
28,273 33,845 0.0
Business & Public 62,838 ++Pentafour Software & Exports Ltd. 1,106,893 1,654,013 0.8
Services 29,870 ++Satyam Computer Services Limited 1,056,086 874,479 0.4
-------------- -------------- ------
2,162,979 2,528,492 1.2
Chemicals 170 Reliance Industries Ltd. 726 693 0.0
177,785 ++Reliance Industries Ltd. 650,372 725,343 0.3
-------------- -------------- ------
651,098 726,036 0.3
Energy Sources 92,414 BSES Ltd. (GDR)(b) 1,183,826 901,037 0.4
682 Bombay Electrical Supply 3,819 2,349 0.0
-------------- -------------- ------
1,187,645 903,386 0.4
Financial Services 39 Housing Development Finance
Corporation Ltd. (HDFC) 3,324 2,001 0.0
1,004,527 ICICI Ltd. 1,709,178 1,704,750 0.8
80,850 ICICI Ltd. (GDR)(b) 829,133 808,500 0.4
-------------- -------------- ------
2,541,635 2,515,251 1.2
Food & Household 68,795 ++Hindustan Lever Limited 2,762,014 3,780,469 1.8
Products
Leisure & Tourism 51,397 ++EIH Limited 575,881 249,212 0.1
Metals--Non-Ferrous 133,000 Hindalco Industries Ltd. 1,347,790 1,930,051 0.9
Oil Services 400 Hindustan Petroleum Corporation Ltd. 5,058 2,295 0.0
Telecommunications 71,797 Videsh Sanchar Nigam Ltd. (GDR)(b) 928,676 886,693 0.4
Total Investments in India 12,671,658 14,089,367 6.6
Indonesia Building Products 1,098,500 P.T. Semen Gresik (Persero) Tbk 836,725 2,386,314 1.1
Telecommunications 123,835 P.T. Indosat (Persero) Tbk (ADR)(a) 3,227,397 2,414,783 1.2
Total Investments in Indonesia 4,064,122 4,801,097 2.3
Malaysia+++ Banking 473,000 Malayan Banking Berhad 993,395 1,419,000 0.7
Energy Sources 713,000 Petronas Gas Berhad 2,966,536 1,688,684 0.8
Telecommunications 1,784,000 Telekom Malaysia Berhad 4,655,281 6,666,526 3.1
Tobacco 627,400 Rothmans of Pall Mall (Malaysia)
Berhad 4,240,742 4,746,776 2.2
Total Investments in Malaysia 12,855,954 14,520,986 6.8
Phili- Banking 170,740 Metropolitan Bank & Trust Company 1,353,726 1,707,400 0.8
ppines
Utilities-- 603,160 Manila Electric Company 'B' 2,077,599 2,174,550 1.0
Electric & Gas
Total Investments in the Philippines 3,431,325 3,881,950 1.8
South Automobile 33,769 ++Hyundai Motor Company Ltd. 566,960 800,828 0.4
Korea
Banking 48,580 Housing & Commercial Bank, Korea 815,450 1,531,896 0.7
75,150 Kookmin Bank 692,266 1,525,723 0.7
-------------- -------------- ------
1,507,716 3,057,619 1.4
Chemicals 13,790 Honam Petrochemical Corporation 212,442 321,667 0.1
35,360 L.G. Chemical Limited 431,923 962,281 0.5
-------------- -------------- ------
644,365 1,283,948 0.6
Cosmetics 10,760 Pacific Corporation 204,618 260,285 0.1
Electronic 47,996 Samsung Display Devices Co., Ltd. 1,704,303 2,612,309 1.2
Components
Electronics 70,341 Samsung Electronics 2,886,843 7,717,760 3.6
Retail--Stores 24,160 ++Keumkang Development Ind. Company 206,479 320,394 0.2
Steel 32,746 Pohang Iron & Steel Company, Ltd.
(ADR)(a) 499,377 1,101,084 0.5
Telecommunications 110,066 ++Korea Telecom Corporation (ADR)(a) 3,035,664 4,402,640 2.1
Utilities-- 158,350 Korea Electric Power Corporation 3,823,755 6,580,246 3.1
Electric 287,307 Korea Electric Power Corporation
(ADR)(a) 3,657,450 5,889,794 2.8
-------------- -------------- ------
7,481,205 12,470,040 5.9
Total Investments in South Korea 18,737,530 34,026,907 16.0
Taiwan Banking 545 Bank Sinopac 235 380 0.0
3,243,240 ++E. Sun Commercial Bank 2,271,667 1,807,938 0.8
-------------- -------------- ------
2,271,902 1,808,318 0.8
Building Products 605,000 Asia Cement Corporation 523,604 543,357 0.3
628,000 Taiwan Cement Corporation 569,152 486,219 0.2
-------------- -------------- ------
1,092,756 1,029,576 0.5
Chemicals 1,363,446 Formosa Plastic Corporation 2,468,079 2,871,302 1.4
Electronic 471,636 ++Mosel Vitelic, Inc. 522,759 331,562 0.2
Components
Financial 1,327,000 ++Grand Cathay Securities Corporation 912,702 1,047,956 0.5
Securities
Financial 386,000 ++China Development Industrial Bank Inc. 767,464 962,310 0.5
Services
Health Insurance 463,000 Cathay Life Insurance Co., Ltd. 1,583,994 1,663,301 0.8
Semiconductors 1,313,640 ++Taiwan Semiconductor Manufacturing
Company 2,274,450 5,024,297 2.3
Steel 2,089,500 China Steel Corporation 1,314,133 1,578,935 0.7
Transportation-- 618,335 ++Yang Ming Marine Transport Corp. 683,132 402,138 0.2
Marine
Total Investments in Taiwan 13,891,371 16,719,695 7.9
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
PACIFIC
BASIN/ASIA Shares Value Percent of
(concluded) Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Thailand Banking 554,000 ++Bangkok Bank Public Company Limited
'Foreign' $ 1,338,620 $ 2,074,681 1.0%
1,297,000 Siam Commercial Bank Public Company
Limited (Warrants)(d) 0 835,923 0.4
979,300 ++Thai Farmers Bank Public Company
Limited 'Foreign' 3,610,451 3,029,585 1.4
-------------- -------------- ------
4,949,071 5,940,189 2.8
Broadcasting/Media 363,160 BEC World Public Company Limited
'Foreign' 3,123,757 2,266,670 1.1
Building Materials 23,349 ++The Siam Cement Public Company Limited 571,282 709,657 0.3
Total Investments in Thailand 8,644,110 8,916,516 4.2
Total Investments in the Pacific
Basin/Asia 81,844,921 102,452,923 48.2
SHORT-TERM Face
SECURITIES Amount
Commercial US$ 9,650,000 General Motors Acceptance Corp.,
Paper* 5.63% due 7/01/1999 9,650,000 9,650,000 4.5
Total Investments in Short-Term
Securities 9,650,000 9,650,000 4.5
Total Investments $ 187,729,650 212,287,148 99.8
==============
Unrealized Depreciation on Forward Foreign Exchange Contracts** (468,835) (0.2)
Other Assets Less Liabilities 816,623 0.4
-------------- ------
Net Assets $ 212,634,936 100.0%
============== ======
-----------------
++Non-income producing security.
+++Effective February 16, 1999, the Fund's Board of Directors
adopted a change in valuation for Malaysian securities. The Fund
will utilize a Malaysian exchange rate of 3.80 and record an
estimated exit tax on the value of any investments made before
February 15, 1999, based upon its value as of August 31, 1998, in
the amount of 30% through March 31, 1999, 20% from April 1, 1999
through May 31, 1999 and 10% from June 1, 1999 through August 31,
1999. These changes are due to the capital controls implemented
by the Malaysian government, which froze the Malaysian ringgit at
3.80 until September 1, 1999 and initiated a tax at various
rates, as described above, on any funds repatriated from
Malaysia.
(a)American Depositary Receipts (ADR). (b)Global Depositary Receipts
(GDR).
(c)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(d)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock and are non-income producing. The purchase
price and number of shares are subject to adjustment under
certain conditions until the expiration date.
*Commercial Paper is traded on a discount basis; the interest rate
shown reflects the discount rate paid at the time of purchase by
the Fund.
**Forward foreign exchange contracts sold as of June 30, 1999 were
as follows:
Unrealized
Foreign Expiration Depreciation
Currency Sold Date (Note 1b)
KRW 18,000,000,000 April 2000 $ (468,835)
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$15,000,000) $ (468,835)
==========
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$187,729,650) (Note 1a) $ 212,287,148
Foreign cash (Note 1c) 965,548
Receivables:
Securities sold $ 1,921,158
Dividends 949,100
Capital shares sold 488,836 3,359,094
--------------
Prepaid expenses and other assets (Note 1f) 23,757
--------------
Total assets 216,635,547
--------------
Liabilities: Unrealized depreciation on forward foreign exchange
contracts (Note 1b) 468,835
Payables:
Securities purchased 1,089,061
Capital shares redeemed 793,439
Investment adviser (Note 2) 183,750
Distributor (Note 2) 99,394 2,165,644
--------------
Accrued expenses and other liabilities 1,366,132
--------------
Total liabilities 4,000,611
--------------
Net Assets: Net assets $ 212,634,936
==============
Net Assets Class A Shares of Common Stock, $.10 par value,
Consist of: 100,000,000 shares authorized $ 699,753
Class B Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 795,743
Class C Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 154,096
Class D Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 166,302
Paid-in capital in excess of par 449,083,577
Accumulated distributions in excess of investment
income--net (Note 1g) (2,542,794)
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 6) (231,616,998)
Accumulated distributions in excess of realized capital
gains on investments and foreign currency
transactions--net (Note 1g) (27,312,230)
Unrealized appreciation on investments and foreign currency
transactions--net 23,207,487
--------------
Net assets $ 212,634,936
==============
Net Asset Class A--Based on net assets of $83,114,734 and 6,997,528
Value: shares outstanding $ 11.88
==============
Class B--Based on net assets of $92,104,098 and 7,957,431
shares outstanding $ 11.57
==============
Class C--Based on net assets of $17,768,346 and 1,540,963
shares outstanding $ 11.53
==============
Class D--Based on net assets of $19,647,758 and 1,663,022
shares outstanding $ 11.81
==============
See Notes to Consolidated Financial Statements.
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended June 30, 1999
<S> <S> <C> <C>
Investment Income Dividends (net of $572,802 foreign withholding tax) $ 5,514,199
(Notes 1d & 1e): Interest and discount earned 4,353,785
--------------
Total income 9,867,984
--------------
Expenses: Investment advisory fees (Note 2) $ 2,512,044
Account maintenance and distribution fees--Class B (Note 2) 1,023,333
Custodian fees 820,843
Transfer agent fees--Class B (Note 2) 445,084
Transfer agent fees--Class A (Note 2) 399,660
Accounting services (Note 2) 205,571
Account maintenance and distribution fees--Class C (Note 2) 200,590
Printing and shareholder reports 159,115
Professional fees 109,881
Transfer agent fees--Class C (Note 2) 88,818
Transfer agent fees--Class D (Note 2) 71,761
Registration fees (Note 1f) 70,593
Account maintenance fees--Class D (Note 2) 49,691
Directors' fees and expenses 44,243
Dividend fees 22,033
Pricing fees 12,599
Other 63,806
--------------
Total expenses 6,299,665
--------------
Investment income--net 3,568,319
--------------
Realized & Realized loss from:
Unrealized Gains Investments--net (122,154,044)
(Loss) on Foreign currency transactions--net (2,588,902) (124,742,946)
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 103,728,131
(Notes 1b, 1c, Foreign currency transactions--net (1,206,088) 102,522,043
1e & 3): -------------- --------------
Net realized and unrealized loss on investments and foreign
currency transactions (22,220,903)
--------------
Net Decrease in Net Assets Resulting from Operations $ (18,652,584)
==============
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year
Ended June 30,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 3,568,319 $ 282,261
Realized loss on investments and foreign currency trans-
actions--net (124,742,946) (116,151,091)
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 102,522,043 (227,927,015)
-------------- --------------
Net decrease in net assets resulting from operations (18,652,584) (343,795,845)
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A -- (3,476,156)
Shareholders Class B -- (1,510,618)
(Note 1g): Class C -- (306,010)
Class D -- (421,011)
In excess of investment income--net:
Class A -- (2,738,268)
Class B -- (1,189,956)
Class C -- (241,052)
Class D -- (331,643)
In excess of realized gain on investments--net:
Class A (567,181) (14,124,131)
Class B (682,842) (10,342,043)
Class C (135,257) (1,974,039)
Class D (129,720) (1,891,446)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (1,515,000) (38,546,373)
-------------- --------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (215,573,715) (184,994,706)
(Note 4): -------------- --------------
Net Assets: Total decreasein net assets (235,741,299) (567,336,924)
Beginning of year 448,376,235 1,015,713,159
-------------- --------------
End of year $ 212,634,936 $ 448,376,235
============== ==============
See Notes to Consolidated Financial Statements.
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have
been derived from information provided in the
financial statements. Class A
For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.44 $ 17.23 $ 15.05 $ 13.35 $ 14.61
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .18 .08 .36 .23 .24
Realized and unrealized gain (loss) on
investments and foreign currency trans-
actions--net 1.32 (6.18) 2.21 1.71 (.40)
-------- -------- -------- -------- --------
Total from investment operations 1.50 (6.10) 2.57 1.94 (.16)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.12) (.28) (.24) (.04)
In excess of investment income--net -- (.09) -- -- --
Realized gain on investments--net -- -- (.11) -- (.60)
In excess of realized gain on
investments--net (.06) (.48) -- -- (.46)
-------- -------- -------- -------- --------
Total dividends and distributions (.06) (.69) (.39) (.24) (1.10)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.88 $ 10.44 $ 17.23 $ 15.05 $ 13.35
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 14.60% (36.00%) 17.66% 14.82% (1.67%)
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.97% 1.63% 1.53% 1.54% 1.62%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 1.94% .53% 2.32% 1.66% 1.56%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 83,115 $219,422 $471,790 $342,884 $350,081
Data: ======== ======== ======== ======== ========
Portfolio turnover 84.92% 98.16% 86.68% 71.01% 63.37%
======== ======== ======== ======== ========
<CAPTION>
Class B
For the
The following per share data and ratios have Period
been derived from information provided in the July 1,
financial statements. 1994++++ to
For the Year Ended June 30, June 30,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.28 $ 17.04 $ 14.90 $ 13.24 $ 14.54
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .08 (.07) .19 .09 .08
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.27 (6.08) 2.20 1.69 (.32)
-------- -------- -------- -------- --------
Total from investment operations 1.35 (6.15) 2.39 1.78 (.24)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.07) (.14) (.12) --
In excess of investment income--net -- (.06) -- -- --
Realized gain on investments--net -- -- (.11) -- (.60)
In excess of realized gain on
investments--net (.06) (.48) -- -- (.46)
-------- -------- -------- -------- --------
Total dividends and distributions (.06) (.61) (.25) (.12) (1.06)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.57 $ 10.28 $ 17.04 $ 14.90 $ 13.24
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.37% (36.68%) 16.39% 13.63% (2.22%)+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 3.04% 2.67% 2.57% 2.56% 2.79%*
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net .91% (.53%) 1.22% .65% 1.01%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 92,104 $164,929 $398,468 $302,183 $162,774
Data: ======== ======== ======== ======== ========
Portfolio turnover 84.92% 98.16% 86.68% 71.01% 63.37%
======== ======== ======== ======== ========
<CAPTION>
Class C
For the
The following per share data and ratios have Period
been derived from information provided in the October 21,
financial statements. 1994++++ to
For the Year Ended June 30, June 30,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.24 $ 16.99 $ 14.87 $ 13.22 $ 16.71
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .08 (.07) .18 .09 .08
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.27 (6.08) 2.20 1.70 (2.50)
-------- -------- -------- -------- --------
Total from investment operations 1.35 (6.15) 2.38 1.79 (2.42)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.07) (.15) (.14) (.01)
In excess of investment income--net -- (.05) -- -- --
Realized gain on investments--net -- -- (.11) -- (.60)
In excess of realized gain on
investments--net (.06) (.48) -- -- (.46)
-------- -------- -------- -------- --------
Total dividends and distributions (.06) (.60) (.26) (.14) (1.07)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.53 $ 10.24 $ 16.99 $ 14.87 $ 13.22
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.42% (36.69%) 16.37% 13.68% (14.97%)+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 3.04% 2.68% 2.58% 2.56% 2.96%*
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net .90% (.51%) 1.19% 0.67% 1.32%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 17,768 $ 32,339 $ 71,769 $ 46,983 $ 18,573
Data: ======== ======== ======== ======== ========
Portfolio turnover 84.92% 98.16% 86.68% 71.01% 63.37%
======== ======== ======== ======== ========
-----------------
++Based on average shares outstanding.
++++Commencement of operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales
loads.
See Notes to Consolidated Financial Statements.
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D
For the
The following per share data and ratios have Period
been derived from information provided in the October 21,
financial statements. 1994++++ to
For the Year Ended June 30, June 30,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.41 $ 17.19 $ 15.02 $ 13.33 $ 16.77
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .16 .04 .32 .21 .13
Realized and unrealized gain (loss) on
investments and foreign currency trans-
actions--net 1.30 (6.15) 2.20 1.69 (2.48)
-------- -------- -------- -------- --------
Total from investment operations 1.46 (6.11) 2.52 1.90 (2.35)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.11) (.24) (.21) (.03)
In excess of investment income--net -- (.08) -- -- --
Realized gain on investments--net -- -- (.11) -- (.60)
In excess of realized gain on
investments--net (.06) (.48) -- -- (.46)
-------- -------- -------- -------- --------
Total dividends and distributions (.06) (.67) (.35) (.21) (1.09)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.81 $ 10.41 $ 17.19 $ 15.02 $ 13.33
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 14.26% (36.13%) 17.30% 14.55% (14.49%)+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 2.20% 1.88% 1.78% 1.76% 2.19%*
Net Assets: ======== ======== ======== ======== ========
Investment income--net 1.74% .28% 2.06% 1.48% 2.10%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 19,648 $ 31,686 $ 73,686 $ 57,821 $ 21,899
Data: ======== ======== ======== ======== ========
Portfolio turnover 84.92% 98.16% 86.68% 71.01% 63.37%
======== ======== ======== ======== ========
-----------
++Based on average shares outstanding.
++++Commencement of operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales
loads.
See Notes to Consolidated Financial Statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Developing Capital Markets Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non- diversified, open-end
management investment company. The Fund's consolidated financial statements
are prepared in accordance with generally accepted accounting principles,
which may require the use of management accruals and estimates. The Fund
offers four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B, Class C
and Class D Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain expenses related
to the distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of securities--Portfolio securities that are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Securities that are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased). Short-term
securities are valued at amortized cost, which approximates market value.
Other investments, including futures contracts and related options, are stated
at market value. Securities and assets for which market value quotations are
not available are valued at their fair value as determined in good faith by or
under the direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and currency markets. Losses may arise
due to changes in the value of the contract or if the counterparty does not
perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date
the Fund enters into such contracts.
* Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge
against possible variations in foreign exchange rates. Such transactions may
be effected with respect to hedges on non-US dollar denominated securities
owned by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
* Options--The Fund is authorized to write put and covered call options and
purchase call and put options. When the Fund writes an option, an amount equal
to the premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid
(or received) is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of the security sold.
When an option expires (or the Fund enters into a closing transaction), the
Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a
specific future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into US dollars. Realized and unrealized gains
or losses from investments include the effects of foreign exchange rates on
investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
Federal income tax provision is required. Under the applicable foreign tax
law, a withholding tax may be imposed on interest, dividends and capital gains
at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex- dividend dates. Dividends from foreign
securities where the ex- dividend date may have passed are subsequently
recorded when the Fund has determined the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates. Distributions in excess of investment
income and realized capital gains are due primarily to differing tax
treatments for foreign currency transactions.
(h) Basis of consolidation--The accompanying consolidated financial statements
include the accounts of Inversiones en Marcado Accionario de Valores Chile
Limitada., a wholly-owned subsidiary, which primarily invests in Chilean
securities. Intercompany accounts and transactions have been eliminated.
(i) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $2,534,408 have been reclassified between accumulated
distributions in excess of net investment income and accumulated distributions
in excess of net realized capital gains, $4,213,639 has been reclassified
between paid-in capital in excess of par and accumulated distribution in
excess of net investment income and $21 has been reclassified between paid-in
capital in excess of par and accumulated distributions in excess of net
realized capital gains. These reclassifications have no effect on net assets
or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
a limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor ("MLFD" or the "Distributor"), a division of Princeton
Funds Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary
of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee of 1.0%, on an annual basis, of the average daily value of the
Fund's net assets.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of
the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor and
MLPF&S for providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the year ended June 30, 1999, MLFD earned underwriting discounts and
direct commissions and MLPF&S earned dealer concessions on sales of the Fund's
Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $1,117 $16,684
Class D $2,167 $31,038
For the year ended June 30, 1999, MLPF&S received contingent deferred sales
charges of $447,441 and $7,544 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $30,000 relating to transactions subject to front-end sales charge
waivers in Class A Shares.
In addition, MLPF&S received $290,563 in commissions on the execution of
portfolio security transactions for the Fund for the year ended June 30, 1999.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 1999 were $195,418,481 and $376,209,356, respectively.
Net realized losses for the year ended June 30, 1999 and net unrealized gains
(losses) as of June 30, 1999 were as follows:
Unrealized
Realized Gains
Losses (Losses)
Long-term investments $(121,413,203) $ 24,557,497
Short-term investments (740,841) --
Foreign currency transactions (2,588,902) (881,175)
Forward foreign exchange
contracts -- (468,835)
------------- ------------
Total $(124,742,946) $ 23,207,487
============= ============
As of June 30, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $20,166,150, of which $40,272,341 related to appreciated
securities and $20,106,191 related to depreciated securities. The aggregate
cost of investments at June 30, 1999 for Federal income tax purposes was
$192,120,998.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$215,573,715 and $184,994,706 for the years ended June 30, 1999 and June 30,
1998, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended June 30, 1999 Shares Amount
Shares sold 1,619,556 $ 15,898,254
Shares issued to shareholders
in reinvestment of distributions 59,063 489,047
------------- -------------
Total issued 1,678,619 16,387,301
Shares redeemed (15,707,343) (133,315,366)
------------- -------------
Net decrease (14,028,724) $(116,928,065)
============= =============
Class A Shares for the Year Dollar
Ended June 30, 1998 Shares Amount
Shares sold 11,519,583 $ 161,951,614
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,430,204 17,663,020
------------- -------------
Total issued 12,949,787 179,614,634
Shares redeemed (19,311,328) (246,084,606)
------------- -------------
Net decrease (6,361,541) $ (66,469,972)
============= =============
Class B Shares for the Year Dollar
Ended June 30, 1999 Shares Amount
Shares sold 1,372,844 $ 12,591,100
Shares issued to shareholders
in reinvestment of distributions 73,184 594,258
------------- -------------
Total issued 1,446,028 13,185,358
Automatic conversion of shares (190,641) (1,779,556)
Shares redeemed (9,342,483) (83,600,044)
------------- -------------
Net decrease (8,087,096) $ (72,194,242)
============= =============
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
Class B Shares for the Year Dollar
Ended June 30, 1998 Shares Amount
Shares sold 4,893,597 $ 71,910,397
Shares issued to shareholders
in reinvestment of dividends
and distributions 933,535 11,426,467
------------- -------------
Total issued 5,827,132 83,336,864
Automatic conversion of shares (217,370) (2,811,462)
Shares redeemed (12,949,733) (170,607,474)
------------- -------------
Net decrease (7,339,971) $ (90,082,072)
============= =============
Class C Shares for the Year Dollar
Ended June 30, 1999 Shares Amount
Shares sold 302,107 $ 2,904,136
Shares issued to shareholders
in reinvestment of distributions 14,361 116,179
------------- -------------
Total issued 316,468 3,020,315
Shares redeemed (1,933,187) (17,202,260)
------------- -------------
Net decrease (1,616,719) $ (14,181,945)
============= =============
Class C Shares for the Year Dollar
Ended June 30, 1998 Shares Amount
Shares sold 1,356,907 $ 19,858,908
Shares issued to shareholders
in reinvestment of dividends
and distributions 181,874 2,217,051
------------- -------------
Total issued 1,538,781 22,075,959
Shares redeemed (2,604,945) (34,584,547)
------------- -------------
Net decrease (1,066,164) $ (12,508,588)
============= =============
Class D Shares for the Year Dollar
Ended June 30, 1999 Shares Amount
Shares sold 630,224 $ 5,544,815
Automatic conversion of shares 187,608 1,779,556
Shares issued to shareholders
in reinvestment of distributions 13,643 112,554
------------- -------------
Total issued 831,475 7,436,925
Shares redeemed (2,213,300) (19,706,389)
------------- -------------
Net decrease (1,381,825) $ (12,269,464)
============= =============
Class D Shares for the Year Dollar
Ended June 30, 1998 Shares Amount
Shares sold 2,736,989 $ 41,244,505
Automatic conversion of shares 215,130 2,811,462
Shares issued to shareholders
in reinvestment of dividends
and distributions 181,728 2,240,703
------------- -------------
Total issued 3,133,847 46,296,670
Shares redeemed (4,374,540) (62,230,744)
------------- -------------
Net decrease (1,240,693) $ (15,934,074)
============= =============
5. Commitments:
At June 30, 1999, the Fund entered into foreign exchange contracts under which
it had agreed to purchase and sell various foreign currencies with approximate
values of $598,000 and $755,000, respectively.
6. Capital Loss Carryforward:
At June 30, 1999, the Fund had a net capital loss carryforward of
approximately $226,180,000, all of which expires in 2007. This amount will be
available to offset like amounts of any future taxable gains.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Developing Capital Markets Fund, Inc.:
We have audited the accompanying consolidated statement of assets and
liabilities, including the consolidated schedule of investments, of Merrill
Lynch Developing Capital Markets Fund, Inc. and its subsidiary as of June 30,
1999, the related consolidated statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the consolidated financial highlights for each of the years in
the five- year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at June 30, 1999 by correspondence with the custodians and brokers;
where replies were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements and consolidated
financial highlights present fairly, in all material respects, the financial
position of Merrill Lynch Developing Capital Markets Fund, Inc. and its
subsidiary as of June 30, 1999, the results of their operations, the changes
in their net assets, and the consolidated financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 16, 1999
Merrill Lynch Developing Capital Markets Fund, Inc., June 30, 1999
IMPORTANT TAX INFORMATION (unaudited)
During the fiscal year ended June 30, 1999, Merrill Lynch Developing Capital
Markets Fund, Inc. paid a long-term capital gains distribution of $.058926 per
share to shareholders of record on December 14, 1998. All of this long-term
capital gains distribution is subject to the 20% tax rate.
Please retain this information for your records.
EQUITY PORTFOLIO CHANGES (unaudited)
For the Quarter Ended June 30, 1999
Additions
*Anglo American Corporation of South
Africa Limited
Anglo American PLC
Associated Cement Companies Ltd.
Bezeq Israeli Telecommunication
Corporation Ltd.
Cemex, SA de CV--CPO
*Commercial Bank of Greece
Companhia Brasileira de Distribuicao
Grupo Pao de Acucar SA (ADR)
Companhia Cervejaria Brahma (ADR)
De Beers (ADR)
Ege Biracilik Ve Malt Sanayii AS
Fomento Economico Mexicano, SA de CV
(ADR)
Grand Cathay Securities Corporation
Grupo Industrial Bimbo, SA de CV 'A'
Grupo Sanborns SA 'B1'
ICICI Ltd. (GDR)
Impala Platinum Holdings Limited
Koor Industries Limited (ADR)
Korea Telecom Corporation (ADR)
LUKoil Holding (ADR)
Liberty International PLC
Liberty Life Association of Africa Limited
Magyar Tavkozlesi Rt. (ADR)
Metro Cash and Carry Limited
*PT Bank Internasional Indonesia 'Foreign'
Pacific Century Insurance Holdings
Limited
*Portugal Telecom SA (Registered Shares)
Reliance Industries Ltd.
*Synergon Info Systems Ltd. (GDR)
Satyam Computer Services Limited
*Siam Commercial Bank Public Company
Limited 'Foreign'
State Bank of India
Telecom Argentina Stet-France Telecom
SA (ADR)
Telecomunicacoes Brasileiras SA--Telebras (ADR)
Telefonica de Argentina SA (ADR)
The Siam Cement Public Company
Limited
Yapi ve Kredi Bankasi AS (Receipts)
Deletions
*Anglo American Corporation of South
Africa Limited
BSES Ltd.
Banco Santander Chile (ADR)
*Commercial Bank of Greece
Credicorp Limited
Debica SA
Karachi Electric Supply
Minorco SA (Minerals & Resources
Corporation Limited)
National Bank of Greece SA
*PT Bank Internasional Indonesia 'Foreign'
*Portugal Telecom SA (Registered Shares)
*Synergon Info Systems Ltd. (GDR)
Shinhan Bank
*Siam Commercial Bank Public Company
Limited 'Foreign'
Teva Pharmaceutical Industries Ltd. (ADR)
YPF Sociedad Anonima (ADR)
- ----------------
*Added and deleted in the same quarter.
PORTFOLIO INFORMATION (unaudited)
Ten Largest Equity Holdings Percent of
As of June 30, 1999 Net Assets
Korea Electric Power Corporation* 5.9%
Samsung Electronics 3.6
Telekom Malaysia Berhad 3.1
Tele Norte Leste Participacoes SA* 2.9
Telefonos de Mexico SA (ADR) 2.9
Grupo Televisa SA (GDR) 2.6
Taiwan Semiconductor Manufacturing Company 2.3
Rothmans of Pall Mall (Malaysia) Berhad 2.2
Korea Telecom Corporation (ADR) 2.1
Hindustan Lever Limited 1.8
- -----------
*Includes combined holdings.
Exhibit 17(c)
MERRILL LYNCH
DEVELOPING
CAPITAL MARKETS
FUND, INC.
FUND LOGO
Semi-Annual Report
December 31, 1999
Investing in emerging market securities involves a number of risk factors and
special considerations, including restrictions on foreign investments and on
repatriation of capital invested in emerging markets, currency fluctuations,
and potential price volatility and less liquidity of securities traded in
emerging markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which US companies are subject. Therefore,
the Fund is designed as a long-term investment for investors capable of
assuming the risks of investing in emerging markets. The Fund should be
considered as a vehicle for diversification and not as a complete investment
program. Please refer to the prospectus for details.
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the
Fund's current prospectus. Past performance results shown in this report
should not be considered a representation of future performance. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Statements and
other information herein are as dated and are subject to change.
Merrill Lynch
Developing
Capital Markets
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
Map Depicting the Fund's Asset Allocation As a Percentage*
of Net Assets as of December 31, 1999
Venezuela 0.2%
Brazil 12.1%
Spain 0.1%
Hungary 2.6%
Czech Republic 0.4%
Poland 0.9%
Russia 1.7%
Greece 2.0%
Turkey 2.9%
India 9.0%
Thailand 2.4%
China 0.5%
Hong Kong 0.7%
South Korea 16.9%
Mexico 13.2%
Peru 0.3%
Argentina 0.9%
Egypt 0.2%
South Africa 10.2%
Israel 2.1%
Malaysia 5.4%
Indonesia 1.9%
Singapore 0.6%
Taiwan 10.1%
Philippines 0.9%
- ---------------
*Total may not equal 100%.
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
DEAR SHAREHOLDER
During the six-month period ended December 31, 1999, total returns for Merrill
Lynch Developing Capital Markets Fund, Inc.'s Class A, Class B, Class C and
Class D Shares were +21.89, +21.35%, +21.34% and +21.85%, respectively.
(Results shown do not reflect sales charges and would be lower if sales
charges were included.) The total return of the unmanaged Morgan Stanley
Capital International Emerging Markets Free (MSCI EMF) Index rose 18.98%
during the same period. The Fund's outperformance is attributable to stock
selection in South Korea, India, South Africa and Mexico compared to their
relative markets.
Investment Overview
Emerging stock market gains in 1999 more than reversed the declines from the
previous two years with a 66.41% rise during 1999, as measured by the MSCI EMF
Index. We believe this rally was based on fundamental factors, and we believe
it can continue. These factors include: the strength of US demand for goods,
an upturn in the commodity cycle, the recovery of several of the countries
that were in crisis, the improved perception of risk in emerging markets, and
a revaluation of the companies involved in technology and Internet- related
businesses.
A factor that was an important impetus early in 1999 was the growth policy
bias in the world's major economies. Most notably, the monetary policy of the
US Federal Reserve Board was relatively easy and US demand was strong. This
reflationary bias was also pervasive in Europe and in Japan. Prices of some
commodities recovered and this was beneficial to producers and exporters. This
recovery supported portfolio holdings such as Companhia Vale do Rio Doce 'A'
(Preferred) in Brazil and Impala Platinum Holdings Limited in South Africa.
The strength of US demand for electronics goods benefited semiconductor makers
such as Samsung Electronics, the largest holding in our portfolio, and Taiwan
Semicon-ductor Manufacturing Company, an integrated circuit foundry.
A clear beneficiary of reflation has been Mexico because of its trading
relationship with the United States and its exports of oil. Mexican economic
growth projections were raised throughout 1999, supported by a recovery in
indicators such as industrial production, exports and retail sales. As these
came through, corporate earnings estimates were revised upward as well.
An example of a company whose earnings outlook is improving is Tubos de Acero
de Mexico SA (Tamsa), a Mexican seamless pipe producer. For most of 1999, the
stock had languished at all-time lows given the poor outlook for both of these
sectors. However, the recent surge in oil prices has prompted oil companies to
expand their rig drilling projects for 2000. This bodes well for Tamsa as it
dominates the deep well pipe market. We also like the fact that each of a few
producers affects the market in the seamless pipe industry but does not
control it. This prevented the huge price declines witnessed earlier in 1999
for other more commodity-like steels. Tamsa is a subsidiary of the Italian DST
group, which controls more than 30% of the global market and therefore enjoys
a certain amount of price protection. Tamsa stock has begun to move given the
turnaround in sentiment.
During the period, another driving factor was evidence that the economies in
Asia were recovering and that critical reforms were being undertaken to
prevent a recurrence of the crises. The greatest progress in recovery has been
made by South Korea at the same time that its banking sector is undergoing
reforms. Furthermore, important companies throughout the region were
restructuring by disposing of non-core assets. The Siam Cement Public Company
Limited, one of our holdings in Thailand, is an example.
At the same time, the perception of risk by international investors in the
emerging markets improved. This was evident in the successful issuances of
securities by entities from Brazil, Malaysia, South Korea and Thailand in
foreign markets. This allowed interest rates and the cost of capital to
decline and stocks to rally.
Finally, a unique factor in 1999 was the positive reassessment and revaluation
by investors of the telecommunications and technology companies in emerging
markets. The stocks of companies in related businesses--including Internet
service providers, software developers and cellular phone operators--rallied
strongly in 1999. Nearly every initial public offering in this area was
extremely successful. We expect the revaluation of these companies to sustain
their rallies, and we believe we have positioned the Fund to participate in
several of them, including Videsh Sanchar Nigam Ltd. (VSNL).
VSNL is an Indian company whose core business is to provide international long
distance services. The company's monopoly position enables them to dominate
access to the Internet and to sell international bandwidth to Internet service
providers. The potential for VSNL to develop its Internet businesses is
extremely attractive to us, but its basic telephony business is compelling on
its own as it upgrades its network and as the Indian telephone traffic volume
expands. Furthermore, in our opinion, its valuation implies that it is one of
the most inexpensive telecommunications companies in the world.
In Conclusion
On January 19, 2000, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby the Fund would acquire substantially all of the assets and liabilities
of Merrill Lynch Middle East/Africa Fund, Inc. in exchange for newly issued
shares of the Fund. These Funds are registered, non-diversified, open-end
management investment companies. Both entities have a similar investment
objective and are managed by Merrill Lynch Asset Management, L.P.
We believe that the long-term potential of emerging markets is just starting
to be realized, and that in recent years, crises have set the stage for
stronger performance. We thank you for your continued interest in Merrill
Lynch Developing Capital Markets Fund, Inc., and we look forward to reviewing
our strategy with you in our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Grace Pineda)
Grace Pineda
Senior Vice President and
Portfolio Manager
January 21, 2000
To reduce shareholder expenses, Merrill Lynch Developing Capital Markets Fund,
Inc. will no longer be printing and mailing quarterly reports to shareholders.
We will continue to provide you with reports on a semi-annual and annual
basis.
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class A
Shares are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales charge of
4% if redeemed during the first year, decreasing 1% each year thereafter to
0% after the fourth year. In addition, Class B Shares are subject to a
distribution fee of 0.75% and an account maintenance fee of 0.25%. These
shares automatically convert to Class D Shares after approximately 8 years.
(There is no initial sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and an account
maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Recent Performance Results" and "Average
Annual Total Return" tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Dividends paid
to each class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to each class,
which are deducted from the income available to be paid to shareholders.
Average Annual
Total Return
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Year Ended 12/31/99 +67.59% +58.79%
Five Years Ended 12/31/99 + 3.01 + 1.90
Ten Years Ended 12/31/99 + 7.47 + 6.89
*Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class A Shares
were offered at a higher sales charge. Thus, actual returns would have been
lower than shown for the ten-year period.)
**Assuming maximum sales charge.
% Return % Return
Class B Shares* Without CDSC With CDSC**
Year Ended 12/31/99 +65.96% +61.96%
Five Years Ended 12/31/99 + 1.93 + 1.93
Inception (7/01/94) to 12/31/99 + 2.19 + 2.19
*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Class C Shares* Without CDSC With CDSC**
Year Ended 12/31/99 +65.95% +64.95%
Five Years Ended 12/31/99 + 1.94 + 1.94
Inception (10/21/94) to 12/31/99 - 0.39 - 0.39
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
Year Ended 12/31/99 +67.33% +58.54%
Five Years Ended 12/31/99 + 2.76 + 1.66
Inception (10/21/94) to 12/31/99 + 0.41 - 0.62
*Maximum sales charge is 5.25%. **Assuming maximum sales charge.
<TABLE>
<CAPTION>
Recent
Performance
Results*
Ten Years/
3 Month 12 Month Since Inception
As of December 31, 1999 Total Return Total Return Total Return
<S> <C> <C> <C>
ML Developing Capital Markets Fund Class A Shares+ +31.16% +67.59% +105.49%
ML Developing Capital Markets Fund Class B Shares +30.85 +65.96 + 12.65
ML Developing Capital Markets Fund Class C Shares +30.87 +65.95 - 1.99
ML Developing Capital Markets Fund Class D Shares +31.06 +67.33 + 2.16
*Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the
ex-dividend date. The Fund's ten year/since inception periods are ten years
for Class A Shares, from 7/01/94 for Class B Shares and from 10/21/94 for
Class C & Class D Shares.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (in US dollars)
Shares Percent of
AFRICA Industries Held Investments Value Net Assets
<S> <S> <C> <S> <C> <C>
South Banking 97,400 Nedcor Limited $ 2,169,724 1.0%
Africa
Beverages 119,617 South African Breweries PLC 1,217,565 0.5
35 South African Breweries PLC (c) 356 0.0
------------ ------
1,217,921 0.5
Beverages & Tobacco 99,200 Rembrandt Group Limited 945,223 0.4
Computers 110,200 ++Dimension Data Holdings Limited 691,662 0.3
Financial Services 1,576,289 FirstRand Limited 2,255,503 1.0
Gold Mines 50,661 AngloGold Limited (ADR)(a) 1,301,354 0.6
Health Insurance 360,046 Sanlam Limited 503,479 0.2
Insurance 28,151 Liberty Life Association of Africa Limited 324,995 0.1
33,014 Standard Bank Investment Corporation Limited 137,156 0.1
------------ ------
462,151 0.2
Metals--Non-Ferrous 49,723 Anglo American PLC 3,201,676 1.4
593,432 Gencor Limited 2,581,188 1.1
56,395 Impala Platinum Holdings Limited 2,283,310 1.0
------------ ------
8,066,174 3.5
Miscellaneous 52,103 De Beers (ADR)(a) 1,507,730 0.7
Materials & 553,968 Nampak Limited 1,666,408 0.7
Commodities 3,174,138 1.4
Retail 1,159,941 Metro Cash and Carry Limited 1,320,258 0.6
211,720 Pepkor Limited 998,354 0.4
------------ ------
2,318,612 1.0
Retail--Stores 17,524 Edgars Consolidated Stores Limited 223,965 0.1
Steel 379 Iscor Limited 1,437 0.0
Total Investments in Africa (Cost--$17,803,235) 23,331,343 10.2
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Percent of
EUROPE Industries Held Investments Value Net Assets
<S> <S> <C> <S> <C> <C>
Czech Banking-- 21,508 ++Komercni Banka AS $ 349,152 0.1%
Republic International
Telephone 38,387 ++SPT Telecom AS 619,941 0.3
Networks
Total Investments in the Czech Republic 969,093 0.4
Greece Banking 8,210 Alpha Credit Bank 643,106 0.3
Beverages 17,352 ++Hellenic Bottling Co. 398,866 0.2
Building & Construction 7,108 Titan Cement Company 424,206 0.2
Cellular Telephones 18,328 Panafon Hellenic Telecom Co. 246,179 0.1
Telecommunications 163,869 Hellenic Telecommunication Organization SA
(OTE) (ADR)(a) 1,956,186 0.8
31,900 ++STET Hellas Telecommunications SA (ADR)(a) 964,975 0.4
------------ ------
2,921,161 1.2
Total Investments in Greece 4,633,518 2.0
Hungary Banking 20,658 OTP Bank Rt. (GDR)(b) 1,192,999 0.6
Oil & Related 56,942 ++MOL Magyar Olaj-es Gazipari Rt. (GDR)(b) 1,167,311 0.5
Telecommunications 1,183 Magyar Tavkozlesi Rt (ADR)(a) 42,588 0.0
483,941 Magyar Tavkozlesi Rt.--Matav 3,391,573 1.5
------------ ------
3,434,161 1.5
Total Investments in Hungary 5,794,471 2.6
Poland Banking 16,808 ++Bank Polska Kasa Opieki Grupa Pekao SA 218,545 0.1
53,882 Wielkopolski Bank Kredytowy SA 365,302 0.2
------------ ------
583,847 0.3
Financial Services 17,000 Bank Rozwoju Eksportu SA (BRE) 539,225 0.2
Multi-Industry 22,778 ++Elektrim Spolka Akcyjna SA 226,125 0.1
Telephone 62,661 Telekomunikacja Polska SA 411,165 0.2
Communications 53,800 Telekomunikacja Polska SA (GDR)(b) 336,250 0.1
------------ ------
747,415 0.3
Total Investments in Poland 2,096,612 0.9
Russia Energy Sources 2,025,000 Irkutskenergo 151,875 0.1
35,138 LUKoil Holding (ADR)(a) 1,827,176 0.8
------------ ------
1,979,051 0.9
Oil/Integrated-- 109,632 Surgutneftegaz (ADR)(a) 1,574,250 0.7
International
Telecommuni- 3,268,800 Bashinformsvyaz 137,290 0.1
cations 150,704 Nizhnovsvyazinform 128,098 0.0
------------ ------
265,388 0.1
Utilities-- 2,066,208 Bashkirenergo 115,708 0.0
Electric
Total Investments in Russia 3,934,397 1.7
Spain Internet Content 2,400 ++Terra Networks, SA 131,111 0.1
Total Investments in Spain 131,111 0.1
Turkey Banking 107,161,218 ++Turkiye Garanti Bankasi AS 1,620,959 0.7
95,296,123 Yapi ve Kredi Bankasi AS 2,944,494 1.3
------------ ------
4,565,453 2.0
Beverages 8,186,933 Ege Biracilik Ve Malt Sanayii AS 626,744 0.3
Electronics 2,234,000 ++Vestel Elektronik Sanayi ve Ticaret AS 535,731 0.2
Retail 1,413,861 Migros Turk TAS 912,841 0.4
Total Investments in Turkey 6,640,769 2.9
Total Investments in Europe (Cost--$22,362,999) 24,199,971 10.6
LATIN
AMERICA
Argentina Oil & Related 203,276 Perez Companc SA 'B' 1,040,773 0.5
Real Estate 17,083 IRSA Inversiones y Representaciones SA (GDR)(b) 550,927 0.2
Telecommunications 9,022 Telecom Argentina Stet-France Telecom SA (ADR)(a)(c) 309,004 0.1
7,819 Telefonica de Argentina SA (ADR)(a) 241,412 0.1
------------ ------
550,416 0.2
Total Investments in Argentina 2,142,116 0.9
Brazil Banking 13,270,320 Banco Itau SA (Preferred) 1,140,188 0.5
35,027 Uniao de Bancos Brasileiros SA (Unibanco) (GDR)(b) 1,055,188 0.5
------------ ------
2,195,376 1.0
Beverages 2,521,861 Companhia Cervejaria Brahma (Preferred) 1,845,264 0.8
5,163 Companhia Cervejaria Brahma (Preferred) (ADR)(a) 72,282 0.0
------------ ------
1,917,546 0.8
Metals & Steel 141,122 Companhia Vale do Rio Doce 'A' (Preferred) 3,911,364 1.7
Oil & Related 9,425,734 Petroleo Brasileiro SA--Petrobras (Preferred) 2,403,458 1.1
Retail 37,134 Companhia Brasileira de Distribuicao Grupo Pao
de Acucar (ADR)(a) 1,199,892 0.5
Telecommuni- 172,922,000 Embratel Participacoes SA 2,894,814 1.3
cations 63,490,526 Tele Celular Sul Participacoes SA 138,314 0.1
18,500 Tele Centro Oeste Celular Participacoes SA (ADR)(a) 120,250 0.1
6,400 Tele Leste Celular Participacoes SA (ADR)(a) 272,000 0.1
2,900 Tele Nordeste Celular Participacoes SA (ADR)(a) 146,450 0.1
143,622 Tele Norte Leste Participacoes SA (ADR)(a) 3,662,361 1.6
8,896 Tele Sudeste Celular Participacoes SA (ADR)(a) 345,276 0.1
42,623 ++Telecomunicacoes Brasileiras SA--Telebras (ADR)(a) 666 0.0
18,417 Telecomunicacoes Brasileiras SA--Telebras
(Preferred Block) (ADR)(a) 2,366,584 1.0
7,980 Telesp Celular Participacoes SA (ADR)(a) 338,152 0.1
73,248,526 Telesp Participacoes SA 1,015,491 0.4
44,699 Telesp Participacoes SA (ADR)(a) 1,092,332 0.5
------------ ------
12,392,690 5.4
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
LATIN
AMERICA Shares Percent of
(concluded) Industries Held Investments Value Net Assets
<S> <S> <C> <S> <C> <C>
Brazil Utilities 39,450,000 Centrais Eletricas Basileiras SA--Eletrobras $ 864,007 0.4%
(concluded) --Electric 124,982,270 Companhia Energetica de Minas Gerais SA
--CEMIG (Preferred) 2,805,866 1.2
------------ ------
3,669,873 1.6
Total Investments in Brazil 27,690,199 12.1
Mexico Beverages & Tobacco 131,725 Panamerican Beverages, Inc. 'A' (US Registered Shares) 2,708,595 1.2
Broadcasting/Media 109,881 ++Grupo Televisa SA (GDR)(b) 7,499,378 3.3
456,215 TV Azteca, SA de CV (ADR)(a) 4,105,935 1.8
------------ ------
11,605,313 5.1
Building Materials 87,775 Cemex, SA de CV 491,503 0.2
57,009 ++Cemex, SA de CV (ADR)(a) 1,589,126 0.7
3,563 Cemex, SA de CV (ADR) (Warrants)(a)(d) 14,697 0.0
5,000 Cemex, SA de CV (Warrants)(d) 4,226 0.0
------------ ------
2,099,552 0.9
Diversified Companies 47,142 ++Grupo Sanborns, SA 'B1' 102,104 0.0
Financial Services-- 102,500 ++Grupo Financiero Banamex Accival, SA de CV
(Banacci) 'O' 412,058 0.2
Commercial 1,822,400 Grupo Financiero Bancomer, SA de CV 'O' 762,462 0.3
------------ ------
1,174,520 0.5
Food 445,545 ++Grupo Industrial Bimbo, SA de CV 'A' 988,531 0.4
Healthcare/ 714,360 Kimberly-Clark de Mexico, SA de CV 'A' 2,784,985 1.2
Personal Care
Multi-Industry 215,292 ++Grupo Carso, SA de CV 'A1' 1,066,793 0.5
Steel 49,089 Tubos de Acero de Mexico SA (ADR)(a) 665,770 0.3
Telecommunications 61,873 Telefonos de Mexico SA (ADR)(a) 6,960,712 3.1
Total Investments in Mexico 30,156,875 13.2
Peru Financial Services 58,000 Credicorp Limited 696,000 0.3
Total Investments in Peru 696,000 0.3
Venezuela Telecommunications 15,076 Compania Anonima Nacional Telefonos de Venezuela
(CANTV) (ADR)(a) 371,246 0.2
Total Investments in Venezuela 371,246 0.2
Total Investments in Latin America (Cost--42,834,101) 61,056,436 26.7
MIDDLE
EAST
Egypt Banking 29,677 ++Commercial International Bank (GDR)(b)(c) 418,446 0.2
Total Investments in Egypt 418,446 0.2
Israel Banking 416,306 Bank Hapoalim 1,298,072 0.6
552,450 Bank Leumi Le-Israel 1,163,473 0.5
------------ ------
2,461,545 1.1
Software--Computer 7,440 ++Check Point Software Technologies Ltd. 1,477,770 0.6
Telecommunications 161,009 ++Bezeq Israeli Telecommunication Corporation Ltd. 803,105 0.4
Total Investments in Israel 4,742,420 2.1
Total Investments in the Middle East
(Cost--3,833,167) 5,160,866 2.3
PACIFIC
BASIN/ASIA
China Electrical & 578,500 Eastern Communication Co., Ltd. 'B' 376,025 0.2
Electronics
Machinery & 2,775,774 Qingling Motor Company 'H' 339,249 0.2
Engineering
Utilities-- 1,741,000 Beijing Datang Power Generation Company Limited 'H' 288,935 0.1
Electric
Total Investments in China 1,004,209 0.5
Hong Kong Building Products 10,665,219 ++Anhui Conch Cement Co. Ltd. 'H' 850,693 0.4
Telecommunications & 31,000 ++i-CABLE Communications Limited (ADR)(a) 790,500 0.3
Equipment
Total Investments in Hong Kong 1,641,193 0.7
India Banking 122,543 State Bank of India 633,284 0.3
Building Products 100 Associated Cement Companies Ltd. 571 0.0
Business & Public 57,500 Pentafour Software & Exports Ltd. (New Shares) 1,766,383 0.8
Services 32,441 ++Satyam Computer Services Limited 1,640,326 0.7
------------ ------
3,406,709 1.5
Chemicals 160 Reliance Industries Ltd. 860 0.0
177,795 ++Reliance Industries Ltd. 955,408 0.4
------------ ------
956,268 0.4
Computer Software 6,447 ++Infosys Technologies Limited 2,151,903 0.9
Energy Sources 24,930 ++BSES Ltd. (GDR)(b) 311,625 0.1
682 Bombay Electrical Supply 2,995 0.0
------------ ------
314,620 0.1
Financial Services 837,015 ICICI Ltd. 1,770,646 0.8
46,250 ++ICICI Ltd. (ADR)(a) 682,187 0.3
------------ ------
2,452,833 1.1
Food & Household 49,685 ++Hindustan Lever Limited 2,570,505 1.1
Products
Leisure & Tourism 37,997 ++EIH Limited 174,739 0.1
Metals--Non-Ferrous 100,314 Hindalco Industries Ltd. 1,856,812 0.8
5,015 Hindalco Industries Ltd. (GDR)(b) 116,097 0.1
------------ ------
1,972,909 0.9
Oil & Gas Producers 45,119 Bharat Petroleum Corporation Ltd. 407,306 0.2
Oil Services 200 ++Hindustan Petroleum Corporation Ltd. 842 0.0
Pharmaceutical-- 1,129 Ranbaxy Laboratories Limited (GDR)(b) 24,386 0.0
Prescription
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
PACIFIC
BASIN/ASIA Shares Percent of
(continued) Industries Held Investments Value Net Assets
<S> <S> <C> <S> <C> <C>
India Software-- 48,000 Wipro Limited $ 2,870,508 1.2%
(concluded) Application
Development
Telecommunications 70,740 Videsh Sanchar Nigam Ltd. (GDR)(b) 1,718,982 0.8
Tobacco 53,000 ITC Limited 810,416 0.4
Total Investments in India 20,466,781 9.0
Indonesia Banking 38,428,000 ++PT Bank Internasional Indonesia 826,409 0.3
Foods/Food 714,000 ++PT Indofood Sukses Makmur Tbk 895,699 0.4
Processing
Forest Products/ 2,181,000 ++PT Indah Kiat Pulp & Paper Corporation Tbk 859,892 0.4
Paper & Packaging
Telecommunications 25,526 PT Indosat (Persero) Tbk (ADR)(a) 552,000 0.2
2,240,000 PT Telekomunikasi Indonesia 1,276,559 0.6
------------ ------
1,828,559 0.8
Total Investments in Indonesia 4,410,559 1.9
Malaysia Banking 432,000 Malayan Banking Berhad 1,534,737 0.7
Energy Sources 302,000 Petronas Gas Berhad 707,316 0.3
Leisure 594,000 Resorts World Berhad 1,703,842 0.7
Telecommunications 1,608,000 Telekom Malaysia Berhad 6,220,421 2.7
Tobacco 141,100 British American Tobacco Berhad 1,076,816 0.5
Utilities--Electric 450,000 Tenaga Nasional Berhad 1,160,526 0.5
Total Investments in Malaysia 12,403,658 5.4
Philippines Banking 103,084 Metropolitan Bank & Trust Company 743,641 0.3
Utilities-- 427,490 Manila Electric Company 'B' 1,222,919 0.6
Electric & Gas
Total Investments in the Philippines 1,966,560 0.9
Singapore Electronic Components 19,917 ++Chartered Semiconductor Manufacturing
Limited (ADR)(a) 1,434,024 0.6
Total Investments in Singapore 1,434,024 0.6
South Automobile 45,153 ++Hyundai Motor Company Ltd. 716,083 0.3
Korea
Banking 46,350 ++Housing & Commercial Bank, Korea 1,470,132 0.6
79,028 Kookmin Bank 1,239,382 0.5
------------ ------
2,709,514 1.1
Chemicals 15,530 Honam Petrochemical Corporation 217,557 0.1
34,820 L.G. Chemical Limited 1,101,355 0.5
------------ ------
1,318,912 0.6
Computer Software 17,670 Haansoft Inc. 818,892 0.4
Distribution 458,540 ++Kolon International Corporation 2,262,400 1.0
Electronic Components 4,506 Samsung Display Devices Co., Ltd. 187,386 0.1
Electronics 57,931 Samsung Electronics 13,576,781 5.9
Finance 35,960 Daewoo Securities 407,124 0.2
7,480 Dongwon Securities 161,463 0.1
24,510 Hyundai Securities 479,403 0.2
11,974 LG Investment & Securities Company Limited 203,611 0.1
18,785 Samsung Securities Company Ltd. 569,334 0.2
------------ ------
1,820,935 0.8
Food 9,250 Cheil Jedang Corporation 1,067,621 0.5
6,110 Cheil Jedang Corporation (Preferred) 274,546 0.1
------------ ------
1,342,167 0.6
Oil & Gas Producers 24,520 SK Corporation 743,161 0.3
Steel 32,746 Pohang Iron & Steel Company Ltd. (ADR)(a) 1,146,110 0.5
Telecommunications 78,901 Korea Telecom Corporation (ADR)(a) 5,897,850 2.6
6,500 ++Korea Thrunet Co., Ltd. (Class A) 440,375 0.2
41,331 SK Telecom Co. Ltd. (ADR)(a)(c) 1,586,070 0.7
------------ ------
7,924,295 3.5
Utilities-- 131,340 Korea Electric Power Corporation 4,073,276 1.8
Electric
Total Investments in South Korea 38,639,912 16.9
Taiwan Banking 567 Bank Sinopac 334 0.0
3,749,266 ++E. Sun Commercial Bank 1,475,572 0.7
------------ ------
1,475,906 0.7
Building Products 250,600 Asia Cement Corporation 220,413 0.1
256,800 Taiwan Cement Corporation 265,147 0.1
------------ ------
485,560 0.2
Chemicals 1,138,887 Formosa Plastic Corporation 2,268,338 1.0
Computer Equipment 150,150 Compal Electronics Inc. 504,806 0.2
Computers 119,000 Quanta Computer Inc. 932,887 0.4
Electrical 157,000 ++Chroma Ate Inc. 460,293 0.2
Instruments
Electronic 434,636 ++Mosel Vitelic, Inc. 692,537 0.3
Components
Electronic/ 858,000 ++Vanguard International Semiconductor Corporation 1,121,032 0.5
Semiconductors
Electronics 662,000 ++United Microelectronics Corporation, Ltd. 2,362,779 1.0
Financial Securities 698,300 Grand Cathay Securities Corporation 456,187 0.2
Financial Services 514,400 ++China Development Industrial Bank Inc. 819,630 0.4
Health Insurance 503,450 Cathay Life Insurance Co., Ltd. 1,211,296 0.5
Semiconductors 1,825,640 ++Taiwan Semiconductor Manufacturing Company 9,715,802 4.3
Wire & Cable 782,000 ++Pacific Electrical Wire & Cable Co. Ltd. 553,231 0.2
Total Investments in Taiwan 23,060,284 10.1
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
PACIFIC
BASIN/ASIA Shares Percent of
(concluded) Industries Held Investments Value Net Assets
<S> <S> <C> <S> <C> <C>
Thailand Banking 527,700 ++Bangkok Bank Public Company Limited 'Foreign' $ 1,335,416 0.6%
1,297,000 Siam Commercial Bank Public Company Limited
(Warrants)(d) 604,622 0.3
805,200 ++Thai Farmers Bank Public Company Limited 'Foreign' 1,351,295 0.6
------------ ------
3,291,333 1.5
Broadcasting/Media 150,860 BEC World Public Company Limited 'Foreign' 1,068,960 0.5
Building Materials 27,549 ++The Siam Cement Public Company Limited 918,789 0.4
Computers 10,300 ++Shin Corporations Public Company Limited 86,702 0.0
Total Investments in Thailand 5,365,784 2.4
Total Investments in the Pacific Basin/Asia
(Cost--$77,514,120) 110,392,964 48.4
Total Investments (Cost--$164,347,622) 224,141,580 98.2
Other Assets Less Liabilities 4,217,318 1.8
------------ ------
Net Assets $228,358,898 100.0%
============ ======
++Non-income producing security.
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
(c)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
+++On October 21, 1998, the Fund's Board of Directors decided to
discount the current Malaysian exchange rate of 3.80 by 12%. This
is due to the capital controls implemented by the Malaysian
government, which froze the Malaysian ringgit at 3.80 until
September 1, 1999. The discount will be amortized on a daily
basis from 12% to zero
(a)American Depositary Receipts (ADR). (b)Global Depositary Receipts
(GDR).
(c)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(d)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock and are non-income producing. The purchase
price and number of shares are subject to adjustment under
certain conditions until the expiration date.
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$164,347,622) $ 224,141,580
Foreign cash 5,927,091
Receivables:
Securities sold $ 2,915,760
Capital shares sold 899,447
Dividends 336,657
Foreign forward exchange contracts 197,368 4,349,232
--------------
Prepaid expenses and other assets 23,757
--------------
Total assets 234,441,660
--------------
Liabilities: Payables:
Securities purchased 3,134,505
Capital shares redeemed 1,329,904
Custodian bank 664,572
Investment adviser 203,730
Distributor 97,552 5,430,263
--------------
Accrued expenses and other liabilities 652,499
--------------
Total liabilities 6,082,762
--------------
Net Assets: Net assets $ 228,358,898
==============
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
Consist of: authorized $ 617,539
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 690,248
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 138,623
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 157,257
Paid-in capital in excess of par 424,452,339
Accumulated investment loss--net (1,119,779)
Accumulated distributions in excess of investment income--net (2,542,794)
Accumulated realized capital losses on investments and foreign currency
transactions--net (226,354,912)
Accumulated distributions in excess of realized capital gains on
investments and foreign currency transactions--net (27,312,230)
Unrealized appreciation on investments and foreign currency
transactions--net 59,632,607
--------------
Net assets $ 228,358,898
==============
Net Asset Class A--Based on net assets of $89,439,723 and 6,175,394 shares
Value: outstanding $ 14.48
==============
Class B--Based on net assets of $96,905,813 and 6,902,483 shares
outstanding $ 14.04
==============
Class C--Based on net assets of $19,387,043 and 1,386,230 shares
outstanding $ 13.99
==============
Class D--Based on net assets of $22,626,319 and 1,572,569 shares
outstanding $ 14.39
==============
See Notes to Consolidated Financial Statements.
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended December 31, 1999
<S> <S> <C> <C>
Investment Income: Dividends (net of $160,928 foreign withholding tax) $ 1,229,295
Interest and discount earned 114,500
--------------
Total income 1,343,795
--------------
Expenses: Investment advisory fees $ 1,007,888
Account maintenance and distribution fees--Class B 433,417
Custodian fees 248,308
Transfer agent fees--Class B 159,963
Transfer agent fees--Class A 123,886
Accounting services 105,887
Account maintenance and distribution fees--Class C 85,415
Printing and shareholder reports 62,041
Professional fees 51,539
Registration fees 35,027
Transfer agent fees--Class C 32,087
Transfer agent fees--Class D 30,306
Account maintenance fees--Class D 24,039
Directors' fees and expenses 22,302
Dividend fees 13,406
Pricing fees 6,320
Other 21,743
--------------
Total expenses 2,463,574
--------------
Investment loss--net (1,119,779)
--------------
Realized & Realized gain from:
Unrealized Investments--net 5,188,911
Gain on Foreign currency transactions--net 73,175 5,262,086
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions Investments--net 35,236,462
- --Net: Foreign currency transactions--net 1,188,658 36,425,120
-------------- --------------
Net realized and unrealized gain on investments and
foreign currency transactions 41,687,206
--------------
Net Increase in Net Assets Resulting from Operations $ 40,567,427
==============
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 1999 1999
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ (1,119,779) $ 3,568,319
Realized gain (loss) on investments and foreign currency
transactions--net 5,262,086 (124,742,946)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 36,425,120 102,522,043
-------------- --------------
Net increase (decrease) in net assets resulting from operations 40,567,427 (18,652,584)
-------------- --------------
Distributions to In excess of realized gain on investments--net:
Shareholders: Class A -- (567,181)
Class B -- (682,842)
Class C -- (135,257)
Class D -- (129,720)
-------------- --------------
Net decrease in net assets resulting from distributions to
shareholders -- (1,515,000)
-------------- --------------
Capital Share Net decrease in net assets derived from capital share
Transactions: transactions (24,843,465) (215,573,715)
-------------- --------------
Net Assets: Total increase (decrease) in net assets 15,723,962 (235,741,299)
Beginning of period 212,634,936 448,376,235
-------------- --------------
End of period $ 228,358,898 $ 212,634,936
============== ==============
See Notes to Consolidated Financial Statements.
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
<CAPTION>
Class A++
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Dec. 31, For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1999 1999 1998 1997 1996
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.88 $ 10.44 $ 17.23 $ 15.05 $ 13.35
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.03) .18 .08 .36 .23
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 2.63 1.32 (6.18) 2.21 1.71
-------- -------- -------- -------- --------
Total from investment operations 2.60 1.50 (6.10) 2.57 1.94
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.12) (.28) (.24)
In excess of investment income--net -- -- (.09) -- --
Realized gain on investments--net -- -- -- (.11) --
In excess of realized gain on
investments--net -- (.06) (.48) -- --
-------- -------- -------- -------- --------
Total dividends and distributions -- (.06) (.69) (.39) (.24)
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.48 $ 11.88 $ 10.44 $ 17.23 $ 15.05
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 21.89%+++ 14.60% (36.00%) 17.66% 14.82%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.87%* 1.97% 1.63% 1.53% 1.54%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net (.54%)* 1.94% .53% 2.32% 1.66%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 89,440 $ 83,115 $219,422 $471,790 $342,884
Data: ======== ======== ======== ======== ========
Portfolio turnover 29.08% 84.92% 98.16% 86.68% 71.01%
======== ======== ======== ======== ========
<CAPTION>
Class B++
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Dec. 31, For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1999 1999 1998 1997 1996
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.57 $ 10.28 $ 17.04 $ 14.90 $ 13.24
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.09) .08 (.07) .19 .09
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 2.56 1.27 (6.08) 2.20 1.69
-------- -------- -------- -------- --------
Total from investment operations 2.47 1.35 (6.15) 2.39 1.78
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.07) (.14) (.12)
In excess of investment income--net -- -- (.06) -- --
Realized gain on investments--net -- -- -- (.11) --
In excess of realized gain on
investments--net -- (.06) (.48) -- --
-------- -------- -------- -------- --------
Total dividends and distributions -- (.06) (.61) (.25) (.12)
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.04 $ 11.57 $ 10.28 $ 17.04 $ 14.90
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 21.35%+++ 13.37% (36.68%) 16.39% 13.63%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 2.92%* 3.04% 2.67% 2.57% 2.56%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net (1.59%)* .91% (.53%) 1.22% .65%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 96,906 $ 92,104 $164,929 $398,468 $302,183
Data: ======== ======== ======== ======== ========
Portfolio turnover 29.08% 84.92% 98.16% 86.68% 71.01%
======== ======== ======== ======== ========
<CAPTION>
Class C++
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Dec. 31, For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1999 1999 1998 1997 1996
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.53 $ 10.24 $ 16.99 $ 14.87 $ 13.22
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.09) .08 (.07) .18 .09
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 2.55 1.27 (6.08) 2.20 1.70
-------- -------- -------- -------- --------
Total from investment operations 2.46 1.35 (6.15) 2.38 1.79
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.07) (.15) (.14)
In excess of investment income--net -- -- (.05) -- --
Realized gain on investments--net -- -- -- (.11) --
In excess of realized gain on
investments--net -- (.06) (.48) -- --
-------- -------- -------- -------- --------
Total dividends and distributions -- (.06) (.60) (.26) (.14)
-------- -------- -------- -------- --------
Net asset value, end of period $ 13.99 $ 11.53 $ 10.24 $ 16.99 $ 14.87
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 21.34%+++ 13.42% (36.69%) 16.37% 13.68%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 2.93%* 3.04% 2.68% 2.58% 2.56%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net (1.60%)* .90% (.51%) 1.19% .67%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 19,387 $ 17,768 $ 32,339 $ 71,769 $ 46,983
Data: ======== ======== ======== ======== ========
Portfolio turnover 29.08% 84.92% 98.16% 86.68% 71.01%
======== ======== ======== ======== ========
*Annualized.
**Total investment returns exclude the effects of sales
charges. ++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Consolidated Financial Statements.
</TABLE>
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D++
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Dec. 31, For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1999 1999 1998 1997 1996
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.81 $ 10.41 $ 17.19 $ 15.02 $ 13.33
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.05) .16 .04 .32 .21
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 2.63 1.30 (6.15) 2.20 1.69
-------- -------- -------- -------- --------
Total from investment operations 2.58 1.46 (6.11) 2.52 1.90
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.11) (.24) (.21)
In excess of investment income--net -- -- (.08) -- --
Realized gain on investments--net -- -- -- (.11) --
In excess of realized gain on
investments--net -- (.06) (.48) -- --
-------- -------- -------- -------- --------
Total dividends and distributions -- (.06) (.67) (.35) (.21)
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.39 $ 11.81 $ 10.41 $ 17.19 $ 15.02
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 21.85%+++ 14.26% (36.13%) 17.30% 14.55%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 2.12%* 2.20% 1.88% 1.78% 1.76%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net (.79%)* 1.74% .28% 2.06% 1.48%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 22,626 $ 19,648 $ 31,686 $ 73,686 $ 57,821
Data: ======== ======== ======== ======== ========
Portfolio turnover 29.08% 84.92% 98.16% 86.68% 71.01%
======== ======== ======== ======== ========
*Annualized.
**Total investment returns exclude the effects of sales
charges. ++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Consolidated Financial Statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Developing Capital Markets Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non- diversified, open-end
management investment company. The Fund's consolidated financial statements
are prepared in accordance with generally accepted accounting principles,
which may require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are, in the
opinion of management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal recurring
nature. The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of securities--Portfolio securities that are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Securities that are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased). Short-term
securities are valued at amortized cost, which approximates market value.
Other investments, including futures contracts and related options, are stated
at market value. Securities and assets for which market value quotations are
not available are valued at their fair value as determined in good faith by or
under the direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and currency markets. Losses may arise
due to changes in the value of the contract or if the counterparty does not
perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date
the Fund enters into such contracts.
* Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge
against possible variations in foreign exchange rates. Such transactions may
be effected with respect to hedges on non-US dollar denominated securities
owned by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
* Options--The Fund is authorized to write put and covered call options and
purchase call and put options. When the Fund writes an option, an amount equal
to the premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid
(or received) is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of the security sold.
When an option expires (or the Fund enters into a closing transaction), the
Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a
specific future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into US dollars. Realized and unrealized gains
or losses from investments include the effects of foreign exchange rates on
investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
Federal income tax provision is required. Under the applicable foreign tax
law, a withholding tax may be imposed on interest, dividends and capital gains
at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex- dividend dates. Dividends from foreign
securities where the ex- dividend date may have passed are subsequently
recorded when the Fund has determined the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates. Distributions in excess of investment
income and realized capital gains are due primarily to differing tax
treatments for foreign currency transactions.
(h) Custodian bank--The Fund recorded an amount payable to the Custodian bank
reflecting an overdraft which resulted from management estimates of available
cash.
(i) Basis of consolidation--The accompanying consolidated financial statements
include the accounts of Inversiones en Marcado Accionario de Valores Chile
Limitada., a wholly-owned subsidiary, which primarily invests in Chilean
securities. Intercompany accounts and transactions have been eliminated.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
a limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor ("MLFD" or the "Distributor"), a division of Princeton
Funds Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary
of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee of 1.0%, on an annual basis, of the average daily value of the
Fund's net assets.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of
the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B .25% .75%
Class C .25% .75%
Class D .25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor and
MLPF&S for providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the six months ended December 31, 1999, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $246 $ 3,847
Class D $887 $13,124
For the six months ended December 31, 1999, MLPF&S received contingent
deferred sales charges of $93,974 and $1,392 relating to transactions in Class
B and Class C Shares, respectively.
In addition, MLPF&S received $104,769 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended December
31, 1999.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
six months ended December 31, 1999 were $56,851,501 and $76,040,564,
respectively.
Net realized gains (losses) for the six months ended December 31, 1999 and net
unrealized gains (losses) as of December 31, 1999 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $5,189,038 $59,793,959
Short-term investments (127) --
Foreign currency transactions (124,193) (161,352)
Forward foreign exchange
contracts 197,368 --
---------- -----------
Total $5,262,086 $59,632,607
========== ===========
As of December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $59,793,959, of which $73,476,701 related to appreciated
securities and $13,682,742 related to depreciated securities. The aggregate
cost of investments at December 31, 1999 for Federal income tax purposes was
$164,347,622.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$24,843,465 and $215,573,715 for the six months ended December 31, 1999 and
for the year ended June 30, 1999, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended December 31, 1999 Shares Amount
Shares sold 278,749 $ 3,438,690
Shares redeemed (1,100,883) (13,149,977)
------------ -------------
Net decrease (822,134) $ (9,711,287)
============ =============
Class A Shares for the Year Dollar
Ended June 30, 1999 Shares Amount
Shares sold 1,619,556 $ 15,898,255
Shares issued to shareholders
in reinvestment of distributions 59,063 489,047
------------ -------------
Total issued 1,678,619 16,387,302
Shares redeemed (15,707,343) (133,315,366)
------------ -------------
Net decrease (14,028,724) $(116,928,064)
============ =============
Class B Shares for the Six Months Dollar
Ended December 31, 1999 Shares Amount
Shares sold 398,980 $ 4,657,048
Automatic conversion of shares (92,954) (1,063,210)
Shares redeemed (1,360,974) (15,872,773)
------------ -------------
Net decrease (1,054,948) $ (12,278,935)
============ =============
Class B Shares for the Year Dollar
Ended June 30, 1999 Shares Amount
Shares sold 1,372,844 $ 12,591,100
Shares issued to shareholders
in reinvestment of distributions 73,184 594,258
------------ -------------
Total issued 1,446,028 13,185,358
Automatic conversion of shares (190,641) (1,779,556)
Shares redeemed (9,342,483) (83,600,044)
------------ -------------
Net decrease (8,087,096) $ (72,194,242)
============ =============
Merrill Lynch Developing Capital Markets Fund, Inc., December 31, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
Class C Shares for the Six Months Dollar
Ended December 31, 1999 Shares Amount
Shares sold 85,438 $ 987,908
Shares redeemed (240,171) (2,779,757)
------------ -------------
Net decrease (154,733) $ (1,791,849)
------------ -------------
Class C Shares for the Year Dollar
Ended June 30, 1999 Shares Amount
Shares sold 302,107 $ 2,904,136
Shares issued to shareholders
in reinvestment of distributions 14,361 116,179
------------ -------------
Total issued 316,468 3,020,315
Shares redeemed (1,933,187) (17,202,260)
------------ -------------
Net decrease (1,616,719) $ (14,181,945)
============ =============
Class D Shares for the Six Months Dollar
Ended December 31, 1999 Shares Amount
Shares sold 147,987 $ 1,804,837
Automatic conversion of shares 90,895 1,063,210
------------ -------------
Total issued 238,882 2,868,047
Shares redeemed (329,335) (3,929,441)
------------ -------------
Net decrease (90,453) $ (1,061,394)
============ =============
Class D Shares for the Year Dollar
Ended June 30, 1999 Shares Amount
Shares sold 630,224 $ 5,544,815
Automatic conversion of shares 187,608 1,779,556
Shares issued to shareholders
in reinvestment of distributions 13,643 112,554
------------ -------------
Total issued 831,475 7,436,925
Shares redeemed (2,213,300) (19,706,389)
------------ -------------
Net decrease (1,381,825) $ (12,269,464)
============ =============
5. Commitments:
At December 31, 1999, the Fund entered into foreign exchange contracts under
which it had agreed to purchase and sell various foreign currencies with
approximate values of $92,000 and $588,000, respectively.
6. Capital Loss Carryforward:
At June 30, 1999, the Fund had a net capital loss carryforward of
approximately $226,180,000, all of which expires in 2007. This amount will be
available to offset like amounts of any future taxable gains.
7. Reorganization Plan:
On January 19, 2000, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditons,
whereby the Fund would acquire substantially all of the assets and liabilities
of Merrill Lynch Middle East/Africa Fund, Inc. in exchange for newly issued
shares of the Fund. These Funds are registered, non-diversified, open-end
management investment companies. Both entities have a similar investment
objective and are managed by MLAM.
PORTFOLIO INFORMATION
Ten Largest Equity Holdings Percent of
As of December 31, 1999 Net Assets
Samsung Electronics 5.9%
Taiwan Semiconductor Manufacturing Company 4.3
Grupo Televisa SA (GDR) 3.3
Telefonos de Mexico SA (ADR) 3.1
Telekom Malaysia Berhad 2.7
Korea Telecom Corporation (ADR) 2.6
TV Azteca, SA de CV (ADR) 1.8
Korea Electric Power Corporation 1.8
Companhia Vale do Rio Doce 'A' (Preferred) 1.7
Tele Norte Leste Participacoes SA (ADR) 1.6
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Charles C. Reilly, Director
Richard R. West, Director
Arthur Zeikel, Director
Edward D. Zinbarg, Director
Robert C. Doll, Senior Vice President
Grace Pineda, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Susan B. Baker, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02119
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Donald Cecil and Edward H. Meyer, Directors of Merrill Lynch
Developing Capital Markets Fund, Inc. have recently retired. The
Fund's Board of Directors wishes Mr. Cecil and Mr. Meyer well in
their retirements.
Exhibit 17(d)
MERRILL LYNCH
MIDDLE EAST/
AFRICA FUND, INC.
FUND LOGO
Annual Report
November 30, 1999
Investing in emerging market securities involves a number of risk factors and
special considerations, including restrictions on foreign investments and on
repatriation of capital invested in emerging markets, currency fluctuations,
and potential price volatility and less liquidity of securities traded in
emerging markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which US companies are subject. Therefore,
the Fund is designed as a long-term investment for investors capable of
assuming the risks of investing in emerging markets. The Fund should be
considered as a vehicle for diversification and not as a complete investment
program. Please refer to the prospectus for details.
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the
Fund's current prospectus. Past performance results shown in this report
should not be considered a representation of future performance. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Statements and
other information herein are as dated and are subject to change.
Merrill Lynch
Middle East/Africa
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
Asset Allocation As a Percentage* of
Net Assets as of November 30, 1999
A map illustrating the following percentages:
Ghana 3.7%
Morocco 3.8%
South Africa 50.4%
Botswana 3.5%
Turkey 11.0%
Israel 14.6%
Egypt 10.3%
Zimbabwe 0.9%
- ------------
*Total may not equal 100%.
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
DEAR SHAREHOLDER
During the three-month period ended November 30, 1999, total returns for
Merrill Lynch Middle East/Africa Fund, Inc.'s Class A, Class B, Class C and
Class D Shares were +8.80%, +8.40%, +8.39% and +8.74%, respectively. The
unmanaged Morgan Stanley Capital International (MSCI) Indexes for the largest
equity markets in the region--Israel, South Africa and Turkey--registered
returns of +21.26%, +11.08% and +50.43%, respectively. (References to
securities markets of all countries in this letter to shareholders correspond
to those countries' market weightings in the MSCI Emerging Markets Free Index
and are denominated in US dollars.) Detrimental to the Fund's performance was
its investments in most of the smaller markets-- Botswana, Egypt, Ghana,
Morocco and Zimbabwe. The Fund's quarterly performance was also hurt by its
stock selection in South Africa.
Fiscal Year in Review
For the 12-month period ended November 30, 1999, total returns for Merrill
Lynch Middle East/Africa Fund, Inc.'s Class A, Class B, Class C and Class D
Shares were +23.96%, +22.56%, +22.54% and +23.68%, respectively. The unmanaged
MSCI Indexes for the largest equity markets in the region--Israel, South
Africa and Turkey-- registered returns of +37.59%, +26.32% and +101.46%,
respectively, for the same 12-month period. Detrimental to the Fund's
performance was its investments in the region's smaller markets--Botswana,
Egypt, Ghana, Morocco and Zimbabwe. The Fund's overall performance benefited
from stock selection in South Africa and its overweighted position in Turkey.
Investment Overview
The strong gains exhibited by the Middle East and African markets during the
quarter ended November 30, 1999 more than offset any declines in the previous
quarter and resulted in 1999 returns that were some of the strongest seen in
years. We believe that the rallies were largely based on favorable fundamental
factors and only moderately driven by inflows of foreign funds. One factor was
the improved perception of risk in emerging markets that allowed interest
rates to decline and stocks to rally. This contributed to Turkey's market
performance of +104.53% during 1999. In addition, global economic growth is
recovering and the clear beneficiaries are exporters of commodity goods such
as South Africa, which rose 38.32% so far this year. There were also factors
specific to each country, such as stronger domestic economic and corporate
earnings performance in Israel (+34.33%) and South Africa. Speculative drivers
also contributed, including Turkey's possible receipt of funds from the
International Monetary Fund and the Egyptian market's (+61.12%) inclusion in
emerging market benchmark indexes.
To seek to participate in the potential upturn in the global economic cycle
and the potential rising prices of commodities, we placed investments in a
number of South African resource companies such as Impala Platinum Holdings
Limited, Gencor Limited and Anglo American PLC. Our investments also included
companies that may participate in a potential increase in personal
consumption. These included retailers such as Metro Cash and Carry Limited and
Pepkor Limited, as well as the packaging company, Nampak Limited, which is our
largest Fund holding.
In addition, during the November quarter we added an important position in
Rembrandt Group Limited, a South African investment holding company. A
compelling feature of this company is that its stock is being priced at a
larger-than-usual discount to the value of its component businesses. We
believe that the realization of that value may occur through restructuring.
This will entail primarily the sale, or unbundling, of its non-core
businesses. The company has a substantial cash position and cash flows that
may be used to buy back its own shares. We believe this could also enhance the
value of our holdings in Rembrandt. The caveat is its interests in tobacco via
a stake in British American Tobacco. While the perceived risk of tobacco
litigation has been a constraint to the stock's performance, in our view,
investors are anticipating a more adverse outcome than is likely to occur.
In Conclusion
We believe that the long-term potential of the Middle Eastern and African
markets is just starting to be realized, and that recent years' weakness in
their economies has set the stage for stronger performance. We thank you for
your investment in Merrill Lynch Middle East/Africa Fund, Inc., and we look
forward to reviewing our outlook and strategy with you in our next report to
shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Grace Pineda)
Grace Pineda
Senior Vice President and
Portfolio Manager
January 11, 2000
To reduce shareholder expenses, Merrill Lynch Middle East/Africa Fund, Inc.
will no longer be printing and mailing quarterly reports to shareholders. We
will continue to provide you with reports on a semi-annual and annual basis.
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class A
Shares are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales charge of
4% if redeemed during the first year, decreasing 1% each year thereafter to
0% after the fourth year. In addition, Class B Shares are subject to a
distribution fee of 0.75% and an account maintenance fee of 0.25%. These
shares automatically convert to Class D Shares after approximately 8 years.
(There is no initial sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and an account
maintenance fee of 0.25% (but no distribution fee).
Any class of shares redeemed during the first 12 months after purchase will be
charged a redemption fee of 2.0%.
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Recent Performance Results" and "Average
Annual Total Return" tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Dividends paid
to each class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to each class,
which are deducted from the income available to be paid to shareholders.
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
PERFORMANCE DATA (continued)
Total Return
Based on a
$10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A and
Class B Shares compared to growth of an investment in the Morgan Stanley
Capital International Index--Israel, Morgan Stanley Capital International
Index-- Turkey, Morgan Stanley Capital International Index--South Africa
Index. Beginning and ending values are:
12/30/94* 11/99
ML Middle East/Africa Fund, Inc.++--
Class A Shares* $ 9,475 $11,371
ML Middle East/Africa Fund, Inc.++--
Class B Shares* $10,000 $11,383
Morgan Stanley Capital International
Index--Israel++++ $10,000 $19,251
Morgan Stanley Capital International
Index--Turkey++++ $10,000 $28,178
Morgan Stanley Capital International
Index--Africa++++ $10,000 $ 9,045
A line graph depicting the growth of an investment in the Fund's Class C and
Class D Shares compared to growth of an investment in the Morgan Stanley
Capital International Index--Israel, Morgan Stanley Capital International
Index-- Turkey, Morgan Stanley Capital International Index--South Africa
Index. Beginning and ending values are:
12/30/94* 11/99
ML Middle East/Africa Fund, Inc.++--
Class C Shares* $10,000 $11,417
ML Middle East/Africa Fund, Inc.++--
Class D Shares* $ 9,475 $11,216
Morgan Stanley Capital International
Index--Israel++++ $10,000 $19,251
Morgan Stanley Capital International
Index--Turkey++++ $10,000 $28,178
Morgan Stanley Capital International
Index--Africa++++ $10,000 $ 9,045
- -------------
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of operations.
++ML Middle East/Africa Fund, Inc. invests primarily in equity and
debt securities of corporate and governmental issuers in countries
located in the Middle East and Africa.
++++This unmanaged Index measures the total returns of countries within the
Middle East/Africa region.
Past performance is not predictive of future performance.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/99 +19.11% +10.60%
Inception (12/30/94)
through 9/30/99 + 2.72 + 1.56
- -----------------
*Maximum sales charge is 5.25%. Maximum redemption fee is 2% and is reduced
to 0% after 1 year.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/99 +17.88% +11.52%
Inception (12/30/94)
through 9/30/99 + 1.63 + 1.63
- ------------------------------
*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years. Maximum redemption fee is 2% and is reduced to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 9/30/99 +17.85% +14.50%
Inception (12/30/94)
through 9/30/99 + 1.69 + 1.69
- ------------------------------
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year. Maximum redemption fee is 2% and is reduced to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 9/30/99 +18.78% +10.29%
Inception (12/30/94)
through 9/30/99 + 2.44 + 1.29
- ------------------------------
*Maximum sales charge is 5.25%. Maximum redemption fee is 2% and is reduced
to 0% after 1 year.
**Assuming maximum sales charge.
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
PERFORMANCE DATA (concluded)
Recent
Performance
Results*
<TABLE>
<CAPTION>
3 Month 12 Month Since Inception
As of November 30, 1999 Total Return Total Return Total Return
<S> <C> <C> <C>
ML Middle East/Africa Fund, Inc. Class A Shares +8.80% +23.96% +20.00%
ML Middle East/Africa Fund, Inc. Class B Shares +8.40 +22.56 +13.83
ML Middle East/Africa Fund, Inc. Class C Shares +8.39 +22.54 +14.17
ML Middle East/Africa Fund, Inc. Class D Shares +8.74 +23.68 +18.38
</TABLE>
- --------------------
*Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the
ex-dividend date. The Fund commenced operations on 12/30/94.
PORTFOLIO INFORMATION
As of November 30, 1999
Percent of
Ten Largest Holdings (Equity Investments) Net Assets
Nampak Limited 7.3%
Impala Platinum Holdings Limited 6.2
Yapi ve Kredi Bankasi AS 6.1
Nedcor Limited* 6.0
Commercial International Bank (GDR) 5.1
Gencor Limited* 5.1
Rembrandt Group Limited 5.1
Anglo American PLC 4.2
Metro Cash and Carry Limited 4.1
AngloGold Limited (ADR) 4.0
Percent of
Ten Largest Industries Net Assets
Banking 24.9%
Beverages & Tobacco 9.1
Retail 7.7
Forest Products 7.3
Holding Company 6.2
Metals--Non-Ferrous 5.1
Mining 4.7
Merchandising 4.2
Gold Mines 4.0
Multi-Industry 3.5
- -----------------
*Includes combined holdings.
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Percent of
AFRICA Industries Shares Held Investments Value Net Assets
<S> <C> <C> <C> <C>
Botswana Multi-Industry 106,802 Sechaba Breweries Limited $ 117,054 3.5%
Total Investments in Botswana 117,054 3.5
Ghana Beverages & 432,827 Guinness Ghana Limited 123,368 3.7
Tobacco
Total Investments in Ghana 123,368 3.7
Morocco Banking 969 Banque Marocaine du Commerce Exterieur 64,173 1.9
Building Materials 591 Cimenterie de l'Oriental (CIOR) 62,729 1.9
Total Investments in Morocco 126,902 3.8
South Africa Banking 10,730 Nedcor Limited 196,830 5.9
248 ++Nedcor Limited (GDR) (b)(c) 4,546 0.1
3,825 Standard Bank Investment Corporation Limited 13,388 0.4
---------- ------
214,764 6.4
Beverages 713 South African Breweries PLC 6,701 0.2
1,465 South African Breweries PLC (GBP) 13,432 0.4
---------- ------
20,133 0.6
Beverages & 21,700 Rembrandt Group Limited 169,844 5.1
Tobacco
Computers 8,979 ++Dimension Data Holdings Limited 46,560 1.4
Forest Products 88,794 Nampak Limited 244,612 7.3
Gold Mines 5,199 AngloGold Limited (ADR) (a) 133,549 4.0
Holding Company 5,717 Impala Platinum Holdings Limited 208,447 6.2
Insurance 60,668 FirstRand Limited 73,635 2.2
2,138 Liberty Life Association of Africa Limited 21,307 0.6
7,620 Sanlam Limited 8,928 0.3
---------- ------
103,870 3.1
Merchandising 37,256 Pick'n Pay Stores Limited 55,543 1.7
Metals-- 21,896 Gencor Limited 83,738 2.5
Non-Ferrous 22,571 Gencor Limited (ADR) (a) 86,264 2.6
---------- ------
170,002 5.1
Mining 2,416 Anglo American PLC 141,804 4.2
3,296 Gold Fields Limited 14,822 0.4
1,370 Gold Fields of South Africa Limited 3,219 0.1
---------- ------
159,845 4.7
Retail 820 Edgars Consolidated Stores Limited 9,169 0.3
144,947 Metro Cash and Carry Limited 136,703 4.1
3,291 Pepkor Limited 13,386 0.4
---------- ------
159,258 4.8
Total Investments in South Africa 1,686,427 50.4
Zimbabwe Beverages & 35,125 Delta Corporation Limited 11,048 0.3
Tobacco
Entertainment & 148,229 Zimbabwe Sun Limited 10,296 0.3
Leisure
Real Estate 35,293 Hippo Valley Estates Ltd. 9,899 0.3
Total Investments in Zimbabwe 31,243 0.9
Total Investments in Africa 2,084,994 62.3
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
MIDDLE Shares Percent of
EAST Industries Held Investments Value Net Assets
<S> <C> <C> <C> <C>
Egypt Banking 14,262 Commercial International Bank (GDR) (b) $ 171,857 5.1%
Beverages 4,522 ++Al-Ahram Beverages Company S.A.E.
(GDR) (b)(c) 71,448 2.1
Finance 6,510 EFG-Hermes Holding, S.A.E. (GDR) (b)(c) 76,493 2.3
Housing 2,540 Madinet Nasr for Housing & Development Company 26,163 0.8
Total Investments in Egypt 345,961 10.3
Israel Banking 22,282 Bank Hapoalim 58,835 1.8
29,239 Bank Leumi Le-Israel 53,891 1.6
---------- ------
112,726 3.4
Food Chain 31,654 Supersol Ltd. 95,116 2.9
Media & 4,300 RT--Set Limited 41,561 1.2
Communications
Merchandising 6,041 Blue Square Chain Investments and
Properties Ltd. 83,043 2.5
Software--Computer 520 ++Check Point Software Technologies Ltd. 73,645 2.2
Telecommunications 3,226 ECI Telecom Limited 80,650 2.4
Total Investments in Israel 486,741 14.6
Turkey Banking 6,276,631 ++Turkiye Garanti Bankasi AS 67,880 2.0
11,111,248 Yapi ve Kredi Bankasi AS 203,852 6.1
---------- ------
271,732 8.1
Retail 232,584 Migros Turk T.A.S. 95,448 2.9
Total Investments in Turkey 367,180 11.0
Total Investments in the Middle East 1,199,882 35.9
Total Investments (Cost--$2,779,345) 3,284,876 98.2
Other Assets Less Liabilities 59,872 1.8
---------- ------
Net Assets $3,344,748 100.0%
========== ======
-----------------
(a)American Depositary Receipts (ADR). (b)Global Depositary
Receipts (GDR).
(c)The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the Securities Act
of 1933.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
<S> <C> <C> <C>
As of November 30, 1999
Assets: Investments, at value (identified cost--$2,779,345) $ 3,284,876
Cash 917
Foreign cash 72,676
Dividends receivable 558
Deferred organization expenses 4,991
Prepaid registration fees and other assets 140,825
------------
Total assets 3,504,843
------------
Liabilities: Payables:
Securities purchased $ 65,557
Capital shares redeemed 3,988
Distributor 2,235 71,780
------------
Accrued expenses and other liabilities 88,315
------------
Total liabilities 160,095
------------
Net Assets: Net assets $ 3,344,748
============
Net Assets Class A Shares of Common Stock, $.10 par value,
Consist of: 100,000,000 shares authorized $ 5,357
Class B Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 22,201
Class C Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 2,158
Class D Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 3,772
Paid-in capital in excess of par 3,786,925
Undistributed investment income--net 376,674
Accumulated realized capital losses on investments and
foreign currency transactions--net (1,356,274)
Unrealized appreciation on investments and foreign
currency transactions--net 503,935
------------
Net assets $ 3,344,748
============
Net Asset Class A--Based on net assets of $542,947 and 53,567
Value: shares outstanding $ 10.14
============
Class B--Based on net assets of $2,206,954 and 222,014
shares outstanding $ 9.94
============
Class C--Based on net assets of $214,681 and 21,578
shares outstanding $ 9.95
============
Class D--Based on net assets of $380,166 and 37,722
shares outstanding $ 10.08
============
See Notes to Financial Statements.
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
STATEMENT OF OPERATIONS
For the Year Ended November 30, 1999
Investment Dividends (net of $5,618 foreign withholding tax) $ 134,291
Income: Interest and discount earned 12,896
------------
Total income 147,187
------------
Expenses: Professional fees $ 79,460
Accounting services 77,575
Amortization of organization expenses 59,891
Registration fees 56,515
Directors' fees and expenses 45,087
Printing and shareholders reports 44,292
Investment advisory fees 36,873
Custodian fees 30,398
Account maintenance and distribution fees--Class B 25,207
Transfer agent fees--Class B 7,302
Account maintenance and distribution fees--Class C 2,516
Pricing fees 2,202
Transfer agent fees--Class A 1,273
Account maintenance fees--Class D 979
Transfer agent fees--Class D 941
Transfer agent fees--Class C 821
Other 3,814
------------
Total expenses before reimbursement 475,146
Reimbursement of expenses (428,007)
------------
Total expenses after reimbursement 47,139
------------
Investment income--net 100,048
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 196,773
(Loss) on Foreign currency transactions--net (20,704) 176,069
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net: Investments--net 494,263
Foreign currency transactions--net (1,785) 492,478
------------ -----------
Net realized and unrealized gain on investments and
foreign currency transactions 668,547
------------
Net Increase in Net Assets Resulting from Operations $ 768,595
============
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
November 30,
Increase (Decrease) in Net Assets: 1999 1998
Operations: Investment income--net $ 100,048 $ 221,252
Realized gain (loss) on investments and foreign
currency transactions--net 176,069 (1,233,675)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net 492,478 (621,631)
------------ ------------
Net increase (decrease) in net assets resulting from operations 768,595 (1,634,054)
------------ ------------
Dividends to Investment income--net:
Shareholders: Class A -- (34,496)
Class B -- (147,378)
Class C -- (18,526)
Class D -- (35,943)
------------ ------------
Net decrease in net assets resulting from dividends
to shareholders -- (236,343)
------------ ------------
Capital Share Net decrease in net assets derived from capital
Transactions: share transactions (1,949,725) (2,371,225)
------------ ------------
Net Assets: Total decreasein net assets (1,181,130) (4,241,622)
Beginning of year 4,525,878 8,767,500
------------ ------------
End of year* $ 3,344,748 $ 4,525,878
============ ============
-----------
*Undistributed investment income--net $ 376,674 $ --
============ ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived For the Dec. 30,
from information provided in the financial statements. Year Ended 1994++++ to
November 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.18 $ 10.96 $ 9.40 $ 10.66 $ 10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .32 .40 .48 .42 .57
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.64 (2.80) 1.52 (.80) .09
------- ------- ------- ------- -------
Total from investment operations 1.96 (2.40) 2.00 (.38) .66
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.38) (.44) (.85) --
Realized gain on investments--net -- -- -- (.03) --
------- ------- ------- ------- -------
Total dividends and distributions -- (.38) (.44) (.88) --
------- ------- ------- ------- -------
Net asset value, end of period $ 10.14 $ 8.18 $ 10.96 $ 9.40 $ 10.66
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 23.96% (22.59%) 22.43% (4.17%) 6.60%+++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .46% .47% .47% .47% .00%*
Net Assets: ======= ======= ======= ======= =======
Expenses 12.21% 6.51% 6.36% 4.84% 4.63%*
======= ======= ======= ======= =======
Investment income--net 3.55% 3.93% 4.35% 4.24% 8.43%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 543 $ 563 $ 989 $ 399 $ 648
Data: ======= ======= ======= ======= =======
Portfolio turnover 83.78% 17.03% 78.12% 46.36% 40.97%
======= ======= ======= ======= =======
Class B
For the
Period
The following per share data and ratios have been derived For the Dec. 30,
from information provided in the financial statements. Year Ended 1994++++ to
November 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
Per Share Net asset value, beginning of period $ 8.11 $ 10.87 $ 9.31 $10.56 $ 10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .22 .29 .37 .32 .79
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.61 (2.78) 1.51 (.80) (.23)
------- ------- ------- ------- -------
Total from investment operations 1.83 (2.49) 1.88 (.48) .56
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.27) (.32) (.74) --
Realized gain on investments--net -- -- -- (.03) --
------- ------- ------- ------- -------
Total dividends and distributions -- (.27) (.32) (.77) --
------- ------- ------- ------- -------
Net asset value, end of period $9.94 $ 8.11 $ 10.87 $ 9.31 $ 10.56
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 22.56% (23.40%) 21.02% (5.14%) 5.60%+++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.51% 1.51% 1.51% 1.50% 1.01%*
Net Assets: ======= ======= ======= ======= =======
Expenses 13.09% 7.51% 7.46% 5.90% 5.68%*
======= ======= ======= ======= =======
Investment income--net 2.48% 2.91% 3.40% 3.15% 8.33%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,207 $ 3,096 $ 5,947 $ 5,699 $ 7,701
Data: ======= ======= ======= ======= =======
Portfolio turnover 83.78% 17.03% 78.12% 46.36% 40.97%
======= ======= ======= ======= =======
Class C
For the
Period
The following per share data and ratios have been derived For the Dec. 30,
from information provided in the financial statements. Year Ended 1994++++ to
November 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
Per Share Net asset value, beginning of period $ 8.12 $ 10.89 $ 9.31 $10.56 $ 10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .22 .30 .36 .31 .83
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.61 (2.79) 1.55 (.79) (.27)
------- ------- ------- ------- -------
Total from investment operations 1.83 (2.49) 1.91 (.48) .56
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.28) (.33) (.74) --
Realized gain on investments--net -- -- -- (.03) --
------- ------- ------- ------- -------
Total dividends and distributions -- (.28) (.33) (.77) --
------- ------- ------- ------- -------
Net asset value, end of period $ 9.95 $ 8.12 $ 10.89 $ 9.31 $ 10.56
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 22.54% (23.38%) 21.42% (5.16%) 5.60%+++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.55% 1.53% 1.52% 1.50% 1.01%*
Net Assets: ======= ======= ======= ======= =======
Expenses 13.13% 7.45% 7.47% 5.91% 5.67%*
======= ======= ======= ======= =======
Investment income--net 2.47% 2.90% 3.33% 3.14% 8.45%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 215 $ 317 $ 723 $ 692 $ 1,012
Data: ======= ======= ======= ======= =======
Portfolio turnover 83.78% 17.03% 78.12% 46.36% 40.97%
======= ======= ======= ======= =======
----------------
*Annualized.
**Total investment returns exclude the effects of sales
charges; results would be lower if sales charges were
included.
++Based on average shares outstanding.
++++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
FINANCIAL HIGHLIGHTS (concluded)
Class D
For the
Period
The following per share data and ratios have been derived For the Dec. 30,
from information provided in the financial statements. Year Ended 1994++++ to
November 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
Per Share Net asset value, beginning of period $ 8.15 $ 10.93 $ 9.38 $10.63 $ 10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .29 .37 .46 .40 .77
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.64 (2.79) 1.50 (.80) (.14)
------- ------- ------- ------- -------
Total from investment operations 1.93 (2.42) 1.96 (.40) .63
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.36) (.41) (.82) --
Realized gain on investments--net -- -- -- (.03) --
------- ------- ------- ------- -------
Total dividends and distributions -- (.36) (.41) (.85) --
------- ------- ------- ------- -------
Net asset value, end of period $ 10.08 $ 8.15 $ 10.93 $ 9.38 $ 10.63
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 23.68% (22.84%) 21.95% (4.31%) 6.30%+++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .71% .72% .72% .72% .25%*
Net Assets: ======= ======= ======= ======= =======
Expenses 12.33% 6.70% 6.67% 5.08% 4.89%*
======= ======= ======= ======= =======
Investment income--net 3.23% 3.69% 4.18% 4.01% 9.07%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 380 $ 550 $ 1,109 $ 969 $ 1,569
Data: ======= ======= ======= ======= =======
Portfolio turnover 83.78% 17.03% 78.12% 46.36% 40.97%
======= ======= ======= ======= =======
-------------
*Annualized.
**Total investment returns exclude the effects of sales
charges; results would be lower if sales charges were
included.
++Based on average shares outstanding.
++++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non- diversified, open-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles, which may require the use of
management accruals and estimates. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class
D are sold with a front-end sales charge. Shares of Class B and Class C may be
subject to a contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of securities--Portfolio securities that are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Securities that are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased). Short-term
securities are valued at amortized cost, which approximates market value.
Other investments, including futures contracts and related options, are stated
at market value. Securities and assets for which market value quotations are
not available are valued at their fair value as determined in good faith by or
under the direction of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into US dollars. Realized and unrealized gains
or losses from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in equity, debt and currency markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not
perform under the contract.
* Options--The Fund is authorized to write and purchase call and put options.
When the Fund writes an option, an amount equal to the premium received by the
Fund is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date
the Fund enters into such contracts.
* Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge
against possible variations in foreign exchange rates. Such transactions may
be effected with respect to hedges on non-US dollar denominated securities
owned by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
NOTES TO FINANCIAL STATEMENTS (continued)
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex- dividend dates. Dividends from foreign
securities where the ex- dividend date may have passed are subsequently
recorded when the Fund has determined the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Deferred organization expenses and prepaid registration fees-- Deferred
organization expenses are charged to expense on a straight- line basis over a
period not exceeding five years. Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $297,331 have been reclassified between paid-in
capital in excess of par and undistributed net investment income and $20,705
has been reclassified between accumulated net realized capital losses and
undistributed net investment income. These relassifications have no effect on
net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch and Co., Inc. ("ML & Co."), which
is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or the "Distributor"), a division of
Princeton Funds Distributor, Inc. ("PFD"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. As compensation for its services to
the Fund, MLAM receives monthly compensation at the annual rate of 1.0% of the
average daily net assets of the Fund. For the year ended November 30, 1999,
MLAM earned fees of $36,873, all of which was voluntarily waived. MLAM also
reimbursed the Fund for additional expenses of $391,134.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of
the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B .25% .75%
Class C .25% .75%
Class D .25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor and
MLPF&S for providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the year ended November 30, 1999, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class D Shares as
follows:
MLFD MLPF&S
Class D -- $7
For the year ended November 30, 1999, MLPF&S received contingent deferred
sales charges of $10,506 and $12 relating to transactions in Class B and Class
C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $5,670 and $749 relating to transactions subject to front-end sales
charges waivers in Class A and Class D Shares, respectively.
In addition, MLPF&S received $3,088 in commissions on the execution of
portfolio security transactions for the year ended November 30, 1999.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1999, were $2,764,731 and $3,097,300, respectively.
Net realized gains (losses) for the year ended November 30, 1999 and net
unrealized gains (losses) as of November 30, 1999 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ 196,764 $505,531
Short-term investments 9 --
Foreign currency transactions (20,704) (1,596)
---------- --------
Total $ 176,069 $503,935
========== ========
As of November 30, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $504,204, of which $743,280 related to appreciated
securities and $239,076 related to depreciated securities. The aggregate cost
of investments at November 30, 1999 for Federal income tax purposes was
$2,780,672.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$1,949,725 and $2,371,225 for the years ended November 30, 1999 and November
30, 1998, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended November 30, 1999 Shares Amount
Shares sold 1,954 $ 15,952
Shares redeemed (17,234) (147,205)
---------- -----------
Net decrease (15,280) $ (131,253)
========== ===========
Class A Shares for the Year Dollar
Ended November 30, 1998 Shares Amount
Shares sold 20,494 $ 232,983
Shares issued to shareholders in
reinvestment of dividends 1,545 15,853
---------- -----------
Total issued 22,039 248,836
Shares redeemed (43,454) (442,125)
---------- -----------
Net decrease (21,415) $ (193,289)
========== ===========
Class B Shares for the Year Dollar
Ended November 30, 1999 Shares Amount
Shares sold 21,211 $ 174,157
Shares redeemed (181,073) (1,589,557)
---------- -----------
Net decrease (159,862) $(1,415,400)
========== ===========
Class B Shares for the Year Dollar
Ended November 30, 1998 Shares Amount
Shares sold 39,585 $ 433,589
Shares issued to shareholders in
reinvestment of dividends 5,885 60,441
---------- -----------
Total issued 45,470 494,030
Shares redeemed (210,753) (2,095,553)
---------- -----------
Net decrease (165,283) $(1,601,523)
========== ===========
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Year Dollar
Ended November 30, 1999 Shares Amount
Shares sold 871 $ 7,498
Shares redeemed (18,343) (161,370)
---------- -----------
Net decrease (17,472) $ (153,872)
========== ===========
Class C Shares for the Year Dollar
Ended November 30, 1998 Shares Amount
Shares sold 4,777 $ 50,253
Shares issued to shareholders in
reinvestment of dividends 1,244 12,801
---------- -----------
Total issued 6,021 63,054
Shares redeemed (33,289) (325,267)
---------- -----------
Net decrease (27,268) $ (262,213)
========== ===========
Class D Shares for the Year Dollar
Ended November 30, 1999 Shares Amount
Shares redeemed (29,716) $ (249,200)
---------- -----------
Net decrease (29,716) $ (249,200)
========== ===========
Class D Shares for the Year Dollar
Ended November 30, 1998 Shares Amount
Shares sold 4,163 $ 47,771
Shares issued to shareholders in
reinvestment of dividends 1,638 16,807
---------- -----------
Total issued 5,801 64,578
Shares redeemed (39,831) (378,778)
---------- -----------
Net decrease (34,030) $ (314,200)
========== ===========
The total redemption fees for Merrill Lynch Middle East/Africa Fund,
Inc. amounted to $469 for the year ended November 30, 1999.
5. Capital Loss Carryforward:
At November 30, 1999, the Fund had a net capital loss carryforward of
approximately $1,058,000, of which $366,000 expires in 2004 and $692,000
expires in 2006. This amount will be available to offset like amounts of any
future taxable gains.
6. Subsequent Event:
On December 17, 1999, the Fund's Board of Directors declared an ordinary
income dividend in the amount of $.340681 per Class A Share, $.219896 per
Class B Share, $.199163 per Class C Share and $.314559 per Class D Share,
payable on December 23, 1999 to shareholders of record as of December 17,
1999.
AUDIT REPORT:
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Middle East/Africa Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Middle East/Africa
Fund, Inc. as of November 30, 1999, the related statements of operations for
the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the four-year period then ended and the period December 30, 1994
(commencement of operations) to November 30, 1995. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at November 30, 1999, by correspondence with the custodian and broker.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Middle East/Africa Fund, Inc. as of November 30, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
January 14, 2000
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Charles C. Reilly, Director
Richard R. West, Director
Arthur Zeikel, Director
Edward D. Zinbarg, Director
Robert C. Doll, Senior Vice President
Grace Pineda, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Susan B. Baker, Secretary
Donald Cecil and Edward H. Meyer, Directors of Merrill Lynch Middle
East/Africa, Inc. have recently retired. The Fund's Board of
Directors wishes Mr. Cecil and Mr. Meyer well in their retirements.
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800)637-3863
