<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1997
SECURITIES ACT FILE NO. 33-41622
INVESTMENT COMPANY ACT FILE NO. 811-6349
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 7
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 9
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH LATIN AMERICA FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH LATIN AMERICA FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE FUND:
PHILIP L. KIRSTEIN, ESQ.
MERRILL LYNCH ASSET MANAGEMENT
P.O. BOX 9011 BROWN & WOOD LLP
ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
ATTENTION: THOMAS R. SMITH JR., ESQ.
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.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON JANUARY 24, 1997.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT OF MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock
(par value $.10 per
share)............... 11,157,215 $15.64 $329,988* $100
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
*(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 25,950,955 shares of Common Stock.
(3) 14,814,839 of the shares described in (2) above have been used for
reduction pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment
Company Act of 1940 in previous filings during Registrant's current fiscal
year.
(4) 11,136,116 of the shares redeemed during Registrant's previous fiscal year
are being used for the reduction of the registration fee in this amendment
to the Registration Statement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH LATIN AMERICA FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
PART A
<C> <S> <C>
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... Prospectus Summary; Fee Table; Merrill
Lynch Select PricingSM System
Item 3. Condensed Financial
Information................ Consolidated Financial Highlights
Item 4. General Description of Investment Objective and Policies;
Registrant................. Additional Information
Item 5. Management of the Fund...... Prospectus Summary; Fee Table;
Investment Objective and Policies;
Management of the Fund; Inside Back
Cover Page
Item 5A. Management's Discussion of
Fund Performance........... Not Applicable
Item 6. Capital Stock and Other
Securities................. Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered.................... Cover Page; Prospectus Summary; Fee
Table; Merrill Lynch Select PricingSM
System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase.... Prospectus Summary; Fee Table; Merrill
Lynch Select PricingSM System;
Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal Proceedings... Not Applicable
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Back Cover Page
Item 12. General Information and
History.................... Not Applicable
Item 13. Investment Objective and
Policies................... Investment Objective and Policies
Item 14. Management of the Fund...... Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities................. Management of the Fund
Item 16. Investment Advisory and
Other Services............. Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices............ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities................. General Information--Description of
Shares
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered.................... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status.................. Additional Information--Dividends and
Distributions; Additional
Information--Taxes
Item 21. Underwriters................ Purchase of Shares
Item 22. Calculation of Performance
Data....................... Performance Data
Item 23. Financial Statements........ Consolidated Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
MARCH 24, 1997
MERRILL LYNCH LATIN AMERICA FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Latin America Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks long-term capital
appreciation by investing primarily in Latin American equity and debt
securities. This objective of the Fund reflects the belief that investment
opportunities may result in Latin America from an evolving long-term
international trend encouraging greater market orientation and diminishing
governmental intervention in economic affairs. It is expected that under normal
conditions at least 65% of the Fund's total assets will be invested in Latin
American securities. The Fund may attempt to hedge against market and currency
risk. There can be no assurance that the Fund's investment objective will be
achieved. Investments on an international basis in Latin American securities
involve certain risk factors, and the Fund has established no rating criteria
for the debt securities in which it may invest. See "Risk Factors and Special
Considerations." For more information on the Fund's investment objective and
policies, please see "Investment Objective and Policies" on page 18.
Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. As a
result of the implementation of the Merrill Lynch Select PricingSM System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares offered by this Prospectus
differ from the Class A shares offered prior to October 21, 1994, in many
respects, including sales charges, exchange privilege and the classes of
persons to whom such shares are offered. See "Merrill Lynch Select PricingSM
System" on page 6.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], and other securities dealers that have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000,
and the minimum subsequent purchase is $50, except that for retirement plans
the minimum initial purchase is $100, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85,
but as of May 1, 1997, $5.35) for confirming purchases and repurchases.
Purchases and redemptions made directly through the Fund's transfer agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated March 24, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------------ -------
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge
Imposed on
Purchases (as
a percentage
of offering
price)....... 5.25%(c) None None 5.25%(c)
Sales Charge
Imposed on
Dividend
Reinvestments. None None None None
Deferred Sales
Charge (as a
percentage of
original
purchase
price or
redemption
proceeds,
whichever is
lower)....... None(d) 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% annually year(f)
thereafter to 0.0% after the
fourth year(e)
Exchange Fee.. None None None None
ANNUAL FUND
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS):
Management
Fees(g)...... 1.00% 1.00% 1.00% 1.00%
Rule 12b-1
Fees(h):
Account
Maintenance
Fees......... None 0.25% 0.25% 0.25%
Distribution
Fees......... None 0.75% 0.75% None
(Class B shares convert to Class D
shares automatically after
approximately eight years and cease
being subject to distribution fees)
Other
Expenses:
Custodial
Fees......... 0.19% 0.19% 0.19% 0.19%
Shareholder
Servicing
Costs(i)..... 0.22% 0.28% 0.28% 0.23%
Other......... 0.07% 0.07% 0.07% 0.07%
----- ----- ----- -----
Total Other 0.48% 0.54% 0.54% 0.49%
Expenses.... ----- ----- ----- -----
Total Fund Op-
erating Ex- 1.48% 2.54% 2.54% 1.74%
penses....... ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and certain participants in fee-based programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 36 and "Shareholder Services--Fee-Based Programs"--page
48.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 39.
(c) Reduced for purchases of $25,000 and over and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 36.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
may not be subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 48.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 48.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 48.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
32.
(h) See "Purchase of Shares--Distribution Plans"--page 42.
(i) See "Management of the Fund--Transfer Agency Services"--page 33.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
----------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a
$1,000 investment
including the maximum
$52.50 initial sales
charge (Class A and Class
D shares only) and
assuming (1) the Total
Fund Operating Expenses
for each class set forth
on page 2, (2) a 5%
annual return throughout
the periods and (3)
redemption at the end of
the period including any
applicable CDSC for Class
B and Class C shares:
Class A................. $67 $ 97 $129 $220
Class B................. $66 $ 99 $135 $269*
Class C................. $36 $ 79 $135 $288
Class D................. $69 $104 $142 $247
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
Class A................. $67 $ 97 $129 $220
Class B................. $26 $ 79 $135 $269*
Class C................. $26 $ 79 $135 $288
Class D................. $69 $104 $142 $247
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85 but as of May 1, 1997, $5.35) for confirming purchases and repurchases.
Purchases and redemptions made directly through the Fund's transfer agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information.
THE FUND
The Fund is a non-diversified, open-end management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in Latin American equity and debt
securities. The Fund seeks to benefit from economic and other developments in
Latin America. The investment objective of the Fund reflects the belief that
investment opportunities may result in Latin America from an evolving long-term
international trend encouraging greater market orientation and diminishing
governmental intervention in economic affairs. This trend may be facilitated by
local or international political, economic or financial developments that could
benefit the capital markets of certain Latin American countries. There can be
no assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies."
In recent years, there has been a significant trend in Latin America towards
democracy and market-oriented economic reform. While there have been distinct
differences in the approaches taken by the various countries and the degrees of
success in accomplishing the economic objectives, the countries have generally
sought to reduce the government's role in economic affairs and implement policy
initiatives designed to control inflation, reduce financial deficits and
external debt, establish stable currency exchange rates, liberalize trade
restrictions, increase foreign investment, privatize state-owned companies and
develop and modernize the securities markets. While considerable difficulties
remain, the economies of certain Latin American countries have improved, and
these improvements have been reflected in the performance of the securities
markets and the reversal of the capital flight which prevailed in the early
1980's. The Fund presently contemplates that it will emphasize investments in
the equity and debt markets of Argentina, Brazil, Chile, Colombia, Mexico, Peru
and Venezuela.
The Fund may also seek capital appreciation through investment in Latin
American debt securities. Capital appreciation in debt securities may arise as
a result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. The receipt of
income from such debt securities is incidental to the Fund's objective of long-
term capital appreciation.
The Fund is authorized to employ a variety of investment techniques to hedge
against market and currency risk, although at the present time suitable hedging
instruments may not be available with respect to Latin American securities on a
timely basis and on acceptable terms. Furthermore, even if hedging techniques
are available, the Fund will only engage in hedging activities from time to
time and may not necessarily be engaging in hedging activities when market or
currency movements occur.
4
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investments in securities of Latin American issuers involve special
considerations and risks not typically associated with investments in
securities of U.S. issuers, including the risks associated with international
investing generally, such as currency fluctuations, the risks of investing in
countries with smaller capital markets, such as limited liquidity, price
volatility and restrictions on foreign investment, and the risks associated
with Latin American economies, including high inflation and interest rates,
large amounts of external debt and political and social uncertainties.
Although there have been significant improvements in recent years, the Latin
American economies continue to experience significant problems, including high
inflation rates and high interest rates. The emergence of the Latin American
economies and securities markets will require economic and fiscal discipline,
which has been lacking at times in the past, as well as stable political and
social conditions. Recovery may also be influenced by international economic
conditions, particularly those in the United States, and by world prices for
oil and other commodities. There is no assurance that the economic initiatives
will be successful.
THE MANAGER
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager"), which is
owned and controlled by Merrill Lynch & Co., Inc. ("ML&Co."), acts as the
manager for the Fund and provides the Fund with management services. The
Manager, or its affiliate, Fund Asset Management, L.P. ("FAM"), acts as the
investment adviser for more than 130 registered investment companies and offers
portfolio management and portfolio analysis services to individuals and
institutions. As of February 28, 1997, the Manager and FAM had a total of
approximately $248.2 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of MLAM. See
"Management of the Fund--Management and Advisory Arrangements."
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share subject to the sales charges and ongoing fee
arrangements described below. See "Merrill Lynch Select PricingSM System" and
"Purchase of Shares."
Shareholders may redeem their Class A, Class B, Class C and Class D shares at
any time at the next determined net asset value, except that the redemption
price for shares will be subject to any applicable contingent deferred sales
charge. See "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income are paid at least annually. All net
realized long-term and short-term capital gains, if any, will be distributed to
the Fund's shareholders at least annually. See "Additional Information--
Dividends and Distributions."
5
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily as of
15 minutes after the close of business on the New York Stock Exchange (the
"NYSE") (generally, 4:00 p.m., New York time) on each day during which such
exchange is open for business. See "Additional Information--Determination of
Net Asset Value."
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by MLAM or its affiliate, FAM. Funds
advised by MLAM or FAM that utilize the Merrill Lynch Select PricingSM System
are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will
be calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not
be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select PricingSM System, followed
by a more detailed description of each class and a discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select PricingSM System that the investor believes is
most beneficial under his or her particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
6
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- -----------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- -----------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- -----------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class
A shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Other eligible investors
include certain retirement plans and participants in certain fee-
based programs. In addition, Class A shares will be offered to ML &
Co. and its subsidiaries (the term "subsidiaries," when used herein
with respect to ML & Co., includes the Manager, FAM and certain
other entities directly or indirectly wholly owned and controlled by
ML & Co.) and to their directors and employees and to members of the
Boards of MLAM-advised mutual funds. The maximum initial sales
charge of 5.25% is reduced for purchases of $25,000 and over and
waived for purchases by certain retirement plans and participants in
connection with certain fee-based programs. Purchases of $1,000,000
or more may not be subject to an initial sales charge but if the
initial sales charge is waived, such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase.
Such
7
<PAGE>
CDSC may be waived in connection with certain fee-based programs. Sales
charges also are reduced under a right of accumulation that takes into
account the investor's holdings of all classes of all MLAM-advised
mutual funds. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class B shares, and a CDSC if they are
redeemed within four years of purchase. The CDSC may be modified in
connection with certain fee-based programs. Approximately eight years
after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares, and the conversion and holding
periods for certain retirement plans is modified as described under
"Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC of 1.0% if they are redeemed within one year of purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived, such purchases may be subject to a 1.0% CDSC
if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. The
schedule of initial sales charges and reductions for Class D shares is
the same as the schedule for Class A shares, except that there is no
waiver for purchases in connection with certain fee-based
8
<PAGE>
programs. Class D shares also will be issued upon conversion of Class B
shares as described above under "Class B." See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a
9
<PAGE>
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period
of time. In addition, while both Class B and Class C distribution fees are
subject to the limitations on asset-based sales charges imposed by the NASD,
the Class B distribution fees are further limited under a voluntary waiver of
asset-based sales charges. See "Purchase of Shares--Limitations on the Payment
of Deferred Sales Charges."
10
<PAGE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the consolidated financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Consolidated financial statements
and the independent auditors' report thereon for the fiscal year ended November
30, 1996, are included in the Statement of Additional Information. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the front
cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the consolidated financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------- --------------------------------------------------------------------
FOR THE
YEAR ENDED FOR THE PERIOD FOR THE PERIOD
NOVEMBER 30, OCT. 21, 1994+ FOR THE YEAR ENDED NOVEMBER 30, SEPT. 27, 1991+
---------------- TO NOV. 30, ------------------------------------------------- TO NOV. 30,
1996++ 1995++ 1994++ 1996++ 1995++ 1994++ 1993 1992 1991
------- ------- -------------- -------- -------- -------- -------- -------- ---------------
<S> <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... $ 10.50 $ 17.37 $ 18.22 $ 10.31 $ 17.24 $ 14.39 $ 9.83 $ 9.80 $ 10.00
------- ------- ------- -------- -------- -------- -------- -------- -------
Investment income
(loss)--net........... .46 .16 -- .32 .05 (.09) .10 .08 .04
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net..... 1.87 (6.52) (.85) 1.83 (6.47) 2.99 4.68 .05 (.24)
------- ------- ------- -------- -------- -------- -------- -------- -------
Total from investment
operations............ 2.33 (6.36) (.85) 2.15 (6.42) 2.90 4.78 .13 (.20)
------- ------- ------- -------- -------- -------- -------- -------- -------
Less dividends and
distributions:
Investment income--net. -- -- -- -- -- (.05) (.13) (.10) --
Realized gain on
investments--net...... -- (.50) -- -- (.50) -- (.09) -- +++ --
In excess of realized
gain on investments--
net................... -- (.01) -- -- (.01) -- -- -- --
------- ------- ------- -------- -------- -------- -------- -------- -------
Total dividends and
distributions......... -- (.51) -- -- (.51) (.05) (.22) (.10) --
------- ------- ------- -------- -------- -------- -------- -------- -------
Net asset value, end of
period................ $ 12.83 $ 10.50 $ 17.37 $ 12.46 $ 10.31 $ 17.24 $ 14.39 $ 9.83 $ 9.80
======= ======= ======= ======== ======== ======== ======== ======== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share....... 22.19% (37.66)% (4.67)%# 20.85% (38.32)% 20.19% 49.80% 1.30% (2.00)%#
======= ======= ======= ======== ======== ======== ======== ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses............... 1.48% 1.66% 1.85 %* 2.54% 2.71% 2.51% 2.59% 2.65% 2.73%*
======= ======= ======= ======== ======== ======== ======== ======== =======
Investment income
(loss)--net........... 3.74% 1.40% (.20)%* 2.69% .43% (.54)% 1.09% 1.30% 3.28%*
======= ======= ======= ======== ======== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands). $46,369 $26,034 $10,350 $518,865 $505,038 $937,221 $305,301 $126,344 $63,012
======= ======= ======= ======== ======== ======== ======== ======== =======
Portfolio turnover..... 66.14% 54.86% 30.15% 66.14% 54.86% 30.15% 24.74% 36.50% --
======= ======= ======= ======== ======== ======== ======== ======== =======
Average commission rate
paid##................ $ .0001 -- -- $ .0001 -- -- -- -- --
======= ======= ======= ======== ======== ======== ======== ======== =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
+++ Amount less that $.01 per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "average commission rate paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
11
<PAGE>
CONSOLIDATED FINANCIAL HIGHLIGHTS -- (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
--------------------------------- -----------------------------------------------------------------
FOR THE
YEAR ENDED FOR THE PERIOD FOR THE PERIOD
NOVEMBER 30, OCT. 21, 1994+ FOR THE YEAR ENDED NOVEMBER 30, SEPT. 27, 1991+
---------------- TO NOV. 30, ---------------------------------------------- TO NOV. 30,
1996++ 1995++ 1994++ 1996++ 1995++ 1994++ 1993 1992 1991
------- ------- -------------- -------- -------- -------- ------- ------- ---------------
<S> <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... $ 10.31 $ 17.24 $18.10 $ 10.47 $ 17.37 $ 14.45 $ 9.90 $ 9.81 $ 10.00
------- ------- ------ -------- -------- -------- ------- ------- -------
Investment income
(loss)--net........... .32 .03 (.02) .42 .14 .03 .18 .15 .06
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net..... 1.83 (6.45) (.84) 1.88 (6.53) 3.00 4.69 .06 (.25)
------- ------- ------ -------- -------- -------- ------- ------- -------
Total from investment
operations............ 2.15 (6.42) (.86) 2.30 (6.39) 3.03 4.87 .21 (.19)
------- ------- ------ -------- -------- -------- ------- ------- -------
Less dividends and
distributions:
Investment income--net. -- -- -- -- -- (.11) (.23) (.12) --
Realized gain on
investments--net...... -- (.50) -- -- (.50) -- (.09) -- +++ --
In excess of realized
gain on investments--
net................... -- (.01) -- -- (.01) -- -- -- --
------- ------- ------ -------- -------- -------- ------- ------- -------
Total dividends and
distributions......... -- (.51) -- -- (.51) (.11) (.32) (.12) --
------- ------- ------ -------- -------- -------- ------- ------- -------
Net asset value, end of
period................ $ 12.46 $ 10.31 $17.24 $ 12.77 $ 10.47 $ 17.37 $ 14.45 $ 9.90 $ 9.81
======= ======= ====== ======== ======== ======== ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share....... 20.85% (38.32)% (4.75)%# 21.97% (37.84)% 21.07% 50.86% 2.19% (1.90)%#
======= ======= ====== ======== ======== ======== ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses............... 2.54% 2.72% 2.93%* 1.74% 1.91% 1.73% 1.83% 1.89% 1.97%*
======= ======= ====== ======== ======== ======== ======= ======= =======
Investment income
(loss)--net........... 2.68% .30% (1.22)%* 3.47% 1.18% .23% 1.83% 2.18% 4.05%*
======= ======= ====== ======== ======== ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands). $23,183 $14,659 $5,069 $112,833 $105,830 $204,907 $75,085 $30,685 $18,074
======= ======= ====== ======== ======== ======== ======= ======= =======
Portfolio turnover..... 66.14% 54.86% 30.15% 66.14% 54.86% 30.15% 24.74% 36.50% --
======= ======= ====== ======== ======== ======== ======= ======= =======
Average commission rate
paid##................ $ .0001 -- -- $ .0001 -- -- -- -- --
======= ======= ====== ======== ======== ======== ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
+++ Amount less than $.01 per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "average commission rate paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
12
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
GENERAL
Because the Fund intends to invest primarily in Latin American securities, an
investor in the Fund should be aware of certain risk factors and special
considerations relating not only to investing in Latin American economies, but
also, more generally, to international investing and investing in smaller
capital markets, each of which may involve risks which are not typically
associated with investments in securities of U.S. issuers. Consequently, the
Fund should be considered as a means of diversifying an investment portfolio
and not in itself a balanced investment program.
INVESTING ON AN INTERNATIONAL BASIS AND IN COUNTRIES WITH SMALLER CAPITAL
MARKETS
Investing on an international basis and in countries with smaller capital
markets involves certain risks not involved in domestic investments, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Since the Fund will invest heavily in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. In addition, with respect to certain
foreign countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which 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 national product, rates of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. Certain foreign investments may also be subject to foreign
withholding taxes. These risks are often heightened for investments in smaller
capital markets and in Latin American countries.
Most of the securities held by the Fund will not be registered with the
Commission nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign company than about a U.S. company, and such foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which U.S. companies are
subject. As a result, traditional investment measurements, such as
price/earnings ratios, as used in the United States, may not be applicable to
certain smaller capital markets. Foreign companies, and companies in smaller
capital markets in particular, are not generally subject to uniform accounting,
auditing and financial reporting standards or to practices and requirements
comparable to those applicable to 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.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
13
<PAGE>
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. There is generally
less government supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities since
the expenses of the Fund, such as management and advisory fees and custodial
costs, are higher.
INVESTING IN LATIN AMERICAN SECURITIES MARKETS AND ECONOMIES
The Latin American securities markets are not as large as the U.S. securities
markets and have substantially less trading volume, resulting in a lack of
liquidity and high price volatility. There is also a high concentration of
market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of
investors and financial intermediaries. Latin American brokers typically are
fewer in number and less capitalized than brokers in the United States. These
factors, combined with the U.S. regulatory requirements for open-end funds and
the restrictions on foreign investments discussed below, result in potentially
fewer investment opportunities for the Fund and may have an adverse impact on
the investment performance of the Fund. The Fund may not invest more than 15%
of its total assets in securities which are determined by the Manager to be
illiquid securities.
The investment objective of the Fund reflects the belief that investment
opportunities may result in Latin America from an evolving long-term
international trend encouraging greater market orientation and diminishing
governmental intervention in economic affairs. The Latin American economies
have experienced considerable difficulties in the past decade. Although there
have been significant improvements in recent years, the Latin American
economies continue to experience significant problems, including high inflation
rates and high interest rates. The emergence of the Latin American economies
and securities markets will require continued economic and fiscal discipline
which has been lacking at times in the past, as well as stable political and
social conditions. Recovery may also be influenced by international economic
conditions, particularly those in the United States, and by world prices for
oil and other commodities. There is no assurance that the economic initiatives
will be successful.
Certain of the risks associated with international investments and investing
in smaller capital markets are heightened for investments in Latin American
countries. For example, some of the currencies of Latin American countries have
experienced steady devaluations relative to the U.S. dollar, and major
adjustments have been made in certain of such currencies periodically. In
addition, governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government owns or controls many companies,
including the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in Latin American
countries, which could affect private sector companies and the Fund, as well as
the value of securities in the Fund's portfolio.
In addition to the relative lack of publicly available information about
Latin American issuers and the possibility that such issuers may not be subject
to the same accounting, auditing and financial reporting
14
<PAGE>
standards as are applicable to U.S. companies, inflation accounting rules in
some Latin American countries require, for companies that keep accounting
records in the local currency, for both tax and accounting purposes, that
certain assets and liabilities be restated on the company's balance sheet in
order to express items in terms of currency of constant purchasing power.
Inflation accounting may indirectly generate losses or profits for certain
Latin American companies.
Satisfactory custodial services for investment securities may not be
available in some Latin American countries, which may result in the Fund
incurring additional costs and delays in transporting and custodying such
securities outside such countries.
Most Latin American countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain Latin American
countries.
Certain Latin American countries are among the largest debtors to commercial
banks and foreign governments. Trading in debt obligations ("sovereign debt")
issued or guaranteed by Latin American governments or their agencies and
instrumentalities ("governmental entities") involves a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
willing or able to repay the principal and/or interest when due in accordance
with the terms of such obligations. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the relative size of the debt
service burden to the economy as a whole, the governmental entity's dependence
on expected disbursements from third parties, the governmental entity's policy
toward the International Monetary Fund and the political constraints to which a
governmental entity may be subject. As a result, governmental entities may
default on their sovereign debt. Holders of sovereign debt (including the Fund)
may be requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. There is no bankruptcy proceeding by
which sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
As a result, management of the Fund may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or
appropriate to invest in a particular Latin American country. The Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience.
RESTRICTIONS ON FOREIGN INVESTMENTS
Some Latin American countries prohibit or impose substantial restrictions on
investments in their capital markets, particularly their equity markets, by
foreign entities such as the Fund. As illustrations, certain countries may
require governmental approval prior to investments by foreign persons or limit
the amount of investment by foreign persons in a particular company or limit
the investment by foreign persons to only a specific class of securities of a
company which may have less advantageous terms than securities of the company
available for purchase by nationals. Certain countries may restrict investment
opportunities in issuers or industries deemed important to national interests.
15
<PAGE>
Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or the proceeds of
sales of securities by foreign investors. For example, in Chile, with limited
exceptions, invested capital cannot be repatriated for three years. The Fund
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. No more than 15% of
the Fund's total assets will be comprised, in the aggregate, of assets which
are (i) subject to material legal restrictions on repatriation or (ii) invested
in illiquid securities.
A number of Latin American countries, such as Chile and Brazil, have
authorized the formation of publicly traded closed-end investment companies to
facilitate indirect foreign investment in their capital markets. In accordance
with the Investment Company Act of 1940, as amended (the "Investment Company
Act"), the Fund may invest up to 10% of its total assets in securities of other
investment companies, not more than 5% of which may be invested in any one such
company. This restriction on investments in securities of investment companies
may limit opportunities for the Fund to invest indirectly in certain Latin
American countries. Shares of certain investment companies may at times be
acquired only at market prices representing premiums to their net asset values.
If the Fund acquires shares in other investment companies, shareholders would
bear both their proportionate share of expenses of the Fund (including
management and advisory fees) and, indirectly, the expenses of such other
investment companies.
In some countries, such as Venezuela, banks or other financial institutions
may constitute a substantial number of the leading companies or the companies
with the most actively traded securities. The Investment Company Act restricts
the Fund's investments in any equity security of an issuer which, in its most
recent fiscal year, derived more than 15% of its revenues from "securities
related activities," as defined by the rules thereunder. These provisions may
restrict the Fund's investments in certain foreign banks and other financial
institutions.
LIMITATIONS ON SHARE TRANSACTIONS
To permit the Fund to invest the net proceeds from the sale of its shares in
an orderly manner, the Fund may, from time to time, suspend the sale of its
shares, except for dividend reinvestments. The Fund also reserves the right to
limit the number of its shares that may be purchased by a person during a
specified period of time or in the aggregate.
FEES AND EXPENSES
The management fee (at the annual rate of 1.00% of the Fund's average daily
net assets) and other operating expenses of the Fund are higher than the
management fees and operating expenses of other mutual funds managed by the
Manager and other investment advisers. Any limitations on the growth of the
Fund could adversely affect its operating expense ratio.
HEDGING STRATEGIES
The Fund may engage in various portfolio strategies to seek to hedge against
movements in the equity markets, interest rates and exchange rates between
currencies by the use of options, futures, options on futures
16
<PAGE>
and forward currency transactions. However, suitable hedging instruments may
not be available with respect to Latin American securities on a timely basis
and on acceptable terms. Furthermore, even if hedging techniques are available,
the Fund will only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when market or currency movements
occur. In addition, utilization of options and futures transactions involves
the risk of imperfect correlation in movements in the price of options and
futures and movements in the price of the securities, interest rates or
currencies which are the subject of the hedge. Hedging transactions in foreign
markets are also subject to the risk factors associated with foreign
investments generally, as discussed above. Investors should be aware that U.S.
dollar denominated securities may not be available in some or all Latin
American countries; that the forward currency market for the purchase of U.S.
dollars in most, if not all, Latin American countries is not highly developed;
and that, in certain Latin American countries, no forward market for foreign
currencies currently exists or such market may be closed to investment by the
Fund.
NO RATING CRITERIA FOR DEBT SECURITIES
The Fund has established no rating criteria for the debt securities in which
it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality ("high yield/high risk securities") are predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. The sovereign
debt instruments in which the Fund may invest involve great risk and are deemed
to be the equivalent in terms of quality to high yield/high risk securities.
The Fund may have difficulty disposing of certain sovereign debt obligations
because there may be no liquid secondary trading market for such securities.
The Fund may invest up to 5% of its total assets in sovereign debt that is in
default. See "Investment Objective and Policies--Certain Risks of Debt
Securities."
BORROWING
The Fund currently may borrow up to 20% of its total assets, taken at market
value (including the amount borrowed), but only from a bank as a temporary
measure for extraordinary or emergency purposes including to meet redemptions
or to settle securities transactions. The Fund will not purchase securities
while borrowings exceed 5% of its total assets except (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding borrowings
have been obtained exclusively for settlements of other securities
transactions. The purchase of securities while borrowings are outstanding will
have the effect of leveraging the Fund. Such leveraging increases the Fund's
exposure to capital risk, and borrowed funds are subject to interest costs
which will reduce net income.
WITHHOLDING AND OTHER TAXES
Ordinary income and capital gains on securities held by the Fund may be
subject to withholding and other taxes imposed by Latin American countries,
which would reduce the return to the Fund on those securities. The Fund
intends, unless ineligible, to elect to "pass through" to the Fund's
shareholders the amount of foreign taxes paid by the Fund. The taxes passed
through to shareholders will be included in each
17
<PAGE>
shareholder's income and potentially offset by either a deduction or a credit.
Certain shareholders, including non-U.S. shareholders, will not be entitled to
the benefit of a deduction or credit with respect to foreign taxes paid by the
Fund and passed through to shareholders. Other taxes, such as transfer taxes,
may be imposed on the Fund, but will not give rise to a deduction or credit for
shareholders. See "Additional Information--Taxes."
NON-DIVERSIFIED STATUS
As a non-diversified investment company, the Fund may invest a larger
percentage of its assets in individual issuers than a diversified investment
company. In this regard, the Fund is not subject to the general limitation that
it may not invest more than 5% of its total assets in the securities of any one
issuer. To the extent the Fund makes investments in excess of 5% of its assets
in a particular issuer, its exposure to credit and market risks associated with
that issuer is increased. Also, as a non-diversified investment company, since
a relatively high percentage of the Fund's assets may be invested in the
securities of a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified
investment company.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
investment objective of the Fund is to seek long-term capital appreciation by
investing primarily in Latin American equity and debt securities. Except for
Temporary Investments, as defined below, at least 65% of the Fund's assets will
consist of direct or indirect investments in Latin American equity and debt
securities, including common stocks, preferred stocks, debt securities
convertible into common stocks and non-convertible debt securities. This
investment objective 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, as defined in the Investment Company Act. The Fund is
authorized to employ a variety of investment techniques to hedge against market
and currency risk, although suitable hedging instruments may not be available
on a timely basis and on acceptable terms. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund seeks to benefit from economic and other developments in Latin
America. The investment objective of the Fund reflects the belief that
investment opportunities may result in Latin America from an evolving long-term
international trend encouraging greater market orientation and diminishing
governmental intervention in economic affairs. This trend may be facilitated by
local or international political, economic or financial developments that could
benefit the capital markets of certain Latin American countries.
In recent years, there has been a significant trend in Latin America towards
democracy and market-oriented economic reform. While there have been distinct
differences in the approaches taken by the various countries and the degrees of
success in accomplishing the economic objectives, the countries have generally
sought to reduce the government's role in economic affairs and implement policy
initiatives designed to control inflation, reduce financial deficits and
external debt, establish stable currency exchange rates, liberalize trade
restrictions, increase foreign investment, privatize state-owned companies and
develop and modernize the securities markets. While considerable difficulties
remain, the economies of certain Latin American countries have improved, and
these improvements have been reflected in the performance of the securities
markets and the reversal of the capital flight which prevailed in the early
1980's.
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The Fund will not necessarily seek to diversify investments on a geographic
basis within Latin America. The allocation of the Fund's assets among the
various securities markets of Latin America will be determined by the Manager.
It is presently contemplated that the Fund will emphasize investments in the
equity and debt markets of Argentina, Brazil, Chile, Colombia, Mexico, Peru and
Venezuela. Under certain adverse investment conditions, the Fund may restrict
the Latin American securities markets in which its assets are invested.
Many investors, particularly individuals, lack the information, capability or
inclination to invest in Latin American countries. It also may not be
permissible for such investors to invest directly in certain Latin American
capital markets. Unlike many intermediary investment vehicles, such as closed-
end investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
For the purpose of the Fund's investment objective, Latin America includes
Mexico, Central America, South America and the Spanish speaking islands of the
Caribbean, including Puerto Rico. A security ordinarily will be considered to
be a Latin American security when its issuer is organized in Latin America or
its primary trading market is located in Latin America. The Fund may consider a
security to be Latin American, without reference to its issuer's domicile or to
its primary trading market, when at least 50% of the issuer's non-current
assets, capitalization, gross revenues or profits in any one of the two most
recent fiscal years represents (directly or indirectly through subsidiaries)
assets or activities located in such countries. The Fund may acquire Latin
American securities that are denominated in currencies other than a Latin
American currency. The Fund also may consider a debt security that is
denominated in a Latin American currency to be a Latin American security
without reference to its principal trading market or to the location of its
issuer. The Fund may consider investment companies to be located in the country
or countries in which they primarily make their portfolio investments.
The Fund may also seek capital appreciation through investment in Latin
American debt securities. Capital appreciation in debt securities may arise as
a result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. The receipt of
income from such debt securities is incidental to the Fund's objective of long-
term capital appreciation. In accordance with its investment objective, the
Fund will not seek to benefit from anticipated short-term fluctuations in
currency exchange rates. The Fund may, from time to time, invest in debt
securities with relatively high yields (as compared to other debt securities
meeting the Fund's investment criteria), notwithstanding that the Fund may not
anticipate that such securities will experience substantial capital
appreciation. Such income can be used, however, to offset the operating
expenses of the Fund. For a description of the risks involved in investing in
high yield debt see "Certain Risks of Debt Securities" below.
The Fund may invest in sovereign debt issued or guaranteed by Latin American
governmental entities, debt securities issued or guaranteed by international
organizations designated or supported by multiple foreign governmental entities
(which are not obligations of foreign governments) to promote economic
reconstruction or development ("supranational entities"), debt securities
issued by corporations or financial institutions or debt securities issued by
the U.S. Government or an agency or instrumentality thereof.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and
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related governmental agencies. Examples include the International Bank for
Reconstruction and Development (the "World Bank") and the Inter-American
Development Bank. The governmental members, or "stockholders," usually make
initial capital contributions to the supranational entity and in many cases are
committed to make additional capital contributions if the supranational entity
is unable to repay its borrowings.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in Latin American countries,
to hold cash or cash equivalents (in U.S. dollars or foreign currencies) and
short-term securities including money market securities denominated in U.S.
dollars or foreign currencies ("Temporary Investments"). The Fund may invest in
the securities of Latin American issuers in the form of American Depositary
Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary
Receipts (GDRs) or other securities convertible into securities of Latin
American issuers. The Fund may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
U.S., and therefore, there may not be a correlation between such information
and the market value of such ADRs.
CERTAIN RISKS OF DEBT SECURITIES
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest, and such securities
may not be rated at all for creditworthiness. These high yield/high risk
securities are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of such securities
and generally involve a greater volatility of price than securities in higher
rating categories. These securities are commonly referred to as "junk" bonds.
In purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer of such
securities. The Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund is not authorized to purchase debt securities that
are in default, except for sovereign debt (discussed below) in which the Fund
may invest no more than 5% of its total assets while such sovereign debt
securities are in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments or
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield/high risk
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
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The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers
or prices for actual sales.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Fund's net asset value. In addition, the Fund
may incur additional expenses to the extent it is required to seek recovery
upon a default on a portfolio holding or to participate in the restructuring of
the obligation.
Sovereign Debt. Certain Latin American countries such as Argentina, Brazil
and Mexico are among the largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared moratoria
on the payment of principal and/or interest on outstanding 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 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, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign
debt on which a governmental entity has defaulted may be collected in whole or
in part.
The sovereign debt instruments in which the Fund may invest involve great
risk and are deemed to be the equivalent in terms of quality to high yield/high
risk securities discussed above and are subject to many of the same risks as
such securities. Similarly, the Fund may have difficulty disposing of certain
sovereign debt obligations because there may be a thin trading market for such
securities. The Fund will not invest more than 5% of its total assets in
sovereign debt which is in default.
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PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund is authorized to engage in various portfolio strategies to hedge its
portfolio against adverse movements in the equity, debt and currency markets.
The Fund has authority to write (i.e., sell) covered put and call options on
its portfolio securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions and foreign currency options and
futures, and related options on such futures. Each of these portfolio
strategies is described below. Although certain risks are involved in options
and futures transactions (as discussed below and in "Risk Factors in Options
and Futures Transactions" further below), the Manager believes that, because
the Fund will engage in options and futures transactions only for hedging
purposes, the options and futures portfolio strategies of the Fund will not
subject the Fund to the risks frequently associated with the speculative use of
options and futures transactions. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of its shares, the net
asset value of the Fund's shares will fluctuate. When the Fund engages in
transactions denominated in foreign currencies, it will be subject to the risks
of adverse changes in the exchange rates between such foreign currencies and
the U.S. dollar, the currency used to value the Fund's assets. Reference is
made to the Statement of Additional Information for further information
concerning these strategies.
There can be no assurance that the Fund's hedging transactions will be
effective. Suitable hedging instruments may not be available with respect to
Latin American securities on a timely basis and on acceptable terms.
Furthermore, the Fund will only engage in hedging activities from time to time
and will not necessarily engage in hedging transactions when movements in any
particular equity, debt and currency markets occur.
Set forth below are descriptions of certain hedging strategies in which the
Fund is authorized to engage.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified price on
or before a specified 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 a specified date, in the case of an
option on a securities index. The principal reason for writing call options is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. By writing covered call options, the
Fund gives up the opportunity, while the option is in effect, to profit from
any price increase in the underlying security above the option exercise price.
In addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction. A closing purchase transaction cancels out the Fund's position as
the writer of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written. Covered call
options serve as a partial hedge against the price of the underlying security
declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained
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cash, cash equivalents, U.S. Government securities or other liquid securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written. The Fund will not write put options if the aggregate value of
the obligations underlying the put shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the stated exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an offsetting
sale of an identical option prior to the expiration of the option it has
purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Stock or Other Financial Index Options and Futures. The Fund is authorized to
engage in transactions in stock or other financial index options and futures
(including futures on government bonds), and related options on such futures.
The Fund may purchase or write put and call options on stock or other financial
indices to hedge against the risks of market-wide stock or bond price movements
in the securities in which the Fund invests. Options on indices are similar to
options on securities except that on exercise or assignment, the parties to the
contract pay or receive an amount of cash equal to the difference between the
closing value of the index and the exercise price of the option times a
specified multiple. The Fund may invest in stock or other financial index
options based on a broad market index or based on a narrow index representing
an industry or market segment.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
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The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market
advance, it may purchase futures in order to gain rapid market exposure that
may in part or entirely offset increases in the cost of securities that the
Fund intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. The Manager does not
consider purchases of futures contracts to be a speculative practice under
these circumstances. It is anticipated that, in a substantial majority of these
transactions, the Fund will purchase such securities upon termination of the
long futures position, whether the long position is the purchase of a futures
contract or the purchase of a call option or the writing of a put option on a
future, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies are utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
in which the Fund enters into futures transactions. The Fund may purchase put
options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of its securities. Similarly, the Fund may purchase call
options, or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which the Fund
intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in the over-the-counter markets ("OTC options"). Exchange-traded
contracts are third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation) which, in
general, have standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with prices and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" for information as to
restrictions on the use of OTC options.
To trade futures contracts, the Fund is not required to deposit funds equal
to the value of the futures contract. The Fund need only make a deposit, called
an "initial margin deposit," equal to a small percentage (typically between 2%
and 15%) of the value of the futures contract. As a result, a relatively small
adverse move in the price of a futures contract may result in immediate and
substantial losses to the Fund. For example, if at the time of purchase 10% of
the price of a futures contract is deposited as margin, a 10% decrease in the
price of that contract would, if the contract were then closed out, result in a
total loss of the initial margin deposit before any deduction for brokerage
commissions and other transaction costs. A decrease of more than 10% would
result in a loss of more than the total initial margin deposit.
To some extent, options on futures contracts are even more highly leveraged
than futures contracts. For example, if an in-the-money call (put) option is
sold for its intrinsic value plus a premium representing the time value of that
option, a 10% rise (drop) in the value of the underlying futures contract does
not create a loss equal to just 10% of the value of the option. Such a rise
(drop) creates a loss approximately equal to 10% of the value of the underlying
interest, less the time value, which loss may be many times greater than the
price for which the Fund sold the option. In addition, investors who sell
options are required only to deposit a percentage of the value of the option at
the time of sale as margin, thereby leveraging the investment even further.
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Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest
and multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund has no limitation on
transaction hedging. The Fund will not speculate in forward foreign exchange.
If the Fund enters into a position hedging transaction, the Fund's custodian
will place cash or liquid debt securities in a separate account of the Fund in
an amount equal to the value of the Fund's total assets committed to the
consummation of such forward contract. If the value of the securities placed in
the separate account declines, additional cash or securities will be placed in
the account so that the value of the account will equal the amount of the
Fund's commitment with respect to such contracts. Hedging against a decline in
the value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities
decline. Such transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be possible for the
Fund to hedge against a devaluation that is so generally anticipated that the
Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates. Investors should be aware that U.S. dollar
denominated securities may not be available in some or all Latin American
countries, that the forward currency market for the purchase of U.S. dollars in
most, if not all, Latin American countries is not highly developed and that in
certain Latin American countries no forward market for foreign currencies
currently exists or such market may be closed to investment by the Fund.
The Fund is also authorized to purchase or sell listed or over-the-counter
("OTC") foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund. As an illustration, the Fund may use such techniques to
hedge the stated value in U.S. dollars of an investment in a Mexican peso
denominated security. In such circumstances, for example, the Fund may purchase
a foreign currency put option enabling it to sell a specified amount of Mexican
pesos for dollars at a specified price by a future date. To the extent the
hedge is successful, a loss in the value of the Mexican peso relative to the
dollar will tend to be offset by an increase in the value of the put option. To
offset, in whole or in part, the cost of acquiring such a put option, the Fund
may also sell a call option which, if exercised, requires it to sell a
specified amount of Mexican pesos for dollars at a specified price by a future
date (a technique called a "spread"). By selling a call option in this
illustration, the Fund gives up the opportunity to profit without limit from
increases in the relative value of the Mexican peso to the dollar. The Manager
believes that "spreads" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. A futures
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contract on a foreign currency is an agreement between two parties to buy and
sell a specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of the securities denominated in
such currency which it owns, the expected acquisition price of securities which
it has committed or anticipates to purchase which are denominated in such
currency and, in the case of securities which have been sold by the Fund but
not yet delivered, the proceeds thereof in its denominated currency. Further,
the Fund will segregate at its custodian U.S. Government or other liquid
securities having a market value substantially representing any subsequent net
decrease in the market value of such hedged positions, including net positions
with respect to cross-currency hedges. The Fund may not incur potential net
liabilities of more than 20% of its total assets from foreign currency options,
futures or related options.
In connection with its trading in forward foreign currency contracts, the
Fund will contract with a foreign or domestic bank, or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks
and dealers have refused to quote prices for such forward contracts or have
quoted prices with an unusually wide spread between the price at which the bank
or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward
contract trading. With respect to its trading of forward contracts, if any, the
Fund will be subject to the risk of bank or dealer failure and the inability
of, or refusal by, a bank or dealer to perform with respect to such contacts.
Any such default would deprive the Fund of any profit potential or force the
Fund to cover its commitments for resale, if any, at the then-market price and
could result in a loss to the Fund.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Fund provide that the futures
trading activities described herein will not result in the Fund being deemed a
"commodity pool" under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell futures contracts
and options thereon (i) for bona fide hedging purposes and (ii) for non-hedging
purposes, if the aggregate initial margin and premiums required to establish
positions in such contracts and options does not exceed 5% of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts and options. These restrictions are in
addition to other restrictions on the Fund's hedging activities mentioned
herein.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
OTC stock index options, OTC foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having
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<PAGE>
capital of at least $50 million or any other bank or dealer having capital of
at least $150 million or whose obligations are guaranteed by an entity having
capital of at least $150 million.
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 15% of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is "in-the-
money" (i.e., current market value of the underlying security minus the
option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the premium
received for the option, plus the amount by which the option is "in-the-money."
This policy as to OTC options is not a fundamental policy of the Fund and may
be amended by the Directors of the Fund without the approval of the Fund's
shareholders. However, the Fund will not change or modify this policy prior to
the change or modification by the Commission staff of its position.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction. In addition, options and futures
transactions in foreign markets are subject to the risk factors associated with
foreign investments generally. See "Risk Factors and Special Considerations."
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. There can be
no assurance, however, that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions also could have
an adverse impact on the Fund's ability to hedge effectively its portfolio.
There is also the risk of loss by the Fund of margin deposits or collateral in
the event of the bankruptcy of a broker with whom the Fund has an open position
in an option, a futures contract or a related option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or
27
<PAGE>
currency (whether or not covered) that may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written
on one or more accounts or through one or more brokers). "Trading limits" are
imposed on the maximum number of contracts that any person may trade on a
particular trading day. The Manager does not believe that these trading and
position limits will have any adverse impact on the portfolio strategies for
hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
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 the
securities of a single issuer. The Fund's investments will be limited, however,
in order to qualify for the special tax treatment afforded regulated investment
companies under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Additional Information--Taxes." To qualify, the Fund must comply 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. Foreign government securities (unlike
U.S. Government securities) are not exempt from the diversification
requirements of the Code and the securities of each foreign government issuer
are considered to be the obligations 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.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Risk Factors and Special Considerations" above. In
executing the Fund's portfolio transactions, the Manager seeks to obtain the
best net results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. The Fund may invest
in certain securities traded in the OTC market and, where possible, will deal
directly with the dealers who make a market in the securities involved except
in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Such
portfolio securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. Securities firms may
receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options. The Fund has no obligation
to deal with any broker in the execution of transactions in portfolio
securities. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities
28
<PAGE>
unless a permissive order allowing such transactions is obtained from the
Commission. Affiliated persons of the Fund, and affiliated persons of such
affiliated persons, may serve as its broker in transactions conducted on an
exchange and in OTC transactions conducted on an agency basis and may receive
brokerage commissions from the Fund. In addition, consistent with the Conduct
Rules of the NASD, the Fund may consider sales of shares of the Fund as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund. It is expected that the majority of the shares of the Fund will
be sold by Merrill Lynch. Costs associated with transactions in foreign
securities are generally higher than those associated with transactions in U.S.
securities, although the Fund will endeavor to achieve the best net results in
effecting such transactions.
Portfolio Turnover. The Manager, will effect portfolio transactions without
regard to holding period, if, in its judgment, such transactions are advisable
in light of a change in circumstance of a particular company or within a
particular industry or due to general market, economic or financial conditions.
As a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. A high portfolio turnover rate
involves correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by the Fund.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other liquid securities denominated in U.S. dollars or non-U.S. currencies in
an aggregate amount equal to the amount of its commitment in connection with
such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities that may be issued and sold to the
Fund at the option of the issuer. The price and coupon of the security is fixed
at the time of the commitment. At the time of entering into the agreement, the
Fund is paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.5% of the aggregate
purchase price of the security that the Fund has committed to purchase. The
Fund will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price that is considered
advantageous to the Fund. The Fund will not enter into a standby commitment
with a remaining term in excess of 45 days and will limit its investment in
such commitments so that the aggregate purchase price of the securities subject
to such commitments, together with the value of portfolio securities subject to
legal restrictions on resale, will not exceed 15% of its total assets taken at
the time of acquisition of such commitment or security. The Fund will at all
times maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other liquid securities denominated
in U.S. dollars or non-
29
<PAGE>
U.S. currencies in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. Government) at a mutually agreed-upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with financial institutions that (i) have, in the opinion of the Manager,
substantial capital relative to the Fund's exposure, or (ii) have provided the
Fund with a third-party guaranty or other credit enhancement. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts, unlike repurchase agreements, allocate interest on the underlying
security to the purchaser during the term of the agreement. In all instances,
the Fund takes possession of the underlying securities when investing in
repurchase agreements or purchase and sale contracts. Nevertheless, if the
seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. The Fund may not invest more than 15% of its
total net assets in repurchase agreements or purchase and sale contracts
maturing in more than seven days, together with all other illiquid securities.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. During the period of
such a loan, the Fund receives the income on the loaned securities and receives
either the income on the collateral or other compensation, i.e., negotiated
loan premium or fee, for entering into the loan and thereby increases its
yield. Such loans are terminable at any time, and the borrower, after notice,
will be required to return borrowed securities within five business days. In
the event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience
delays and costs in gaining access to the collateral and could suffer a loss to
the extent that the value of the collateral falls below the market value of the
borrowed securities.
30
<PAGE>
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies that are fundamental policies
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (a) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(b) more than 50% of the outstanding shares). Among its fundamental policies,
the Fund may not invest more than 25% of its assets, taken at market value, in
the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies or instrumentalities). In addition, the Fund has
adopted non-fundamental restrictions which may be changed by the Board of
Directors without shareholder approval. As a non-fundamental policy, the Fund
may not borrow amounts in excess of 20% of its total assets (taken at market
value) and then only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities
transactions. In addition, the Fund will not purchase securities while
borrowings exceed 5% of its total assets except to honor prior commitments or
to exercise subscription rights where outstanding borrowings have been obtained
exclusively for settlements of other securities transactions. The purchase of
securities while borrowings are outstanding will have the effect of leveraging
the Fund. Such leveraging or borrowing increases the Fund's exposure to capital
risk, and borrowed funds are subject to interest costs which will reduce net
income.
As a non-fundamental policy, the Fund will not invest in securities that
cannot be readily resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 15% of its
total assets taken at market value would be invested in such securities.
Notwithstanding the foregoing, the Fund may purchase without regard to this
limitation securities that are not registered under the Securities Act of 1933,
as amended (the "Securities Act"), but that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act,
provided that the Fund's Board of Directors continuously determines, based on
the trading markets for the specific Rule 144A security, that it is liquid. The
Board of Directors may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of restricted securities. The
Board has determined that securities which are freely tradeable in their
primary market offshore should be deemed liquid. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President of the Manager and its affiliate, FAM; President
and Director of Princeton Services, Inc.; Executive Vice President of ML&Co.;
and Director of the Distributor.
31
<PAGE>
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive Officer
of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the Fund's investment adviser. The Manager is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Manager provides the Fund with management and investment
advisory services. The Manager or its affiliate, FAM, acts as the investment
adviser for more than 130 other registered investment companies and offers
portfolio management and portfolio analysis services to individuals and
institutions. As of February 28, 1997, the Manager and FAM had a total of
approximately $248.2 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio
and constantly reviews the Fund's holdings in light of its own research
analysis and that from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Manager,
subject to review by the Board of Directors.
The Manager provides the portfolio manager for the Fund who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions and places transactions
accordingly. The Manager is also obligated to perform certain administrative
and management services for the Fund and is obligated to provide all of the
office space, facilities, equipment and personnel necessary to perform its
duties under the Management Agreement.
The Fund pays the Manager a monthly fee at the annual rate of 1.00% of the
average daily net assets of the Fund. This fee is higher than that of most
mutual funds, including most other mutual funds managed by the Manager and
other investment advisers, but management of the Fund believes this fee is
justified by the additional investment research and analysis required in
connection with investing in Latin American capital markets. For the fiscal
year ended November 30, 1996, the Manager received a fee of $7,092,959 (based
on average net assets of approximately $711.2 million).
The Manager has also entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K."), a wholly-owned, indirect
subsidiary of ML & Co. and an affiliate of the
32
<PAGE>
Manager, pursuant to which the Manager pays MLAM U.K. a fee computed at a rate
to be determined from time to time between the Manager and MLAM U.K. for
providing investment advisory services to the Manager with respect to the Fund.
MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
For the fiscal year ended November 30, 1996, MLAM U.K. received no fee pursuant
to the Sub-Advisory Agreement.
Grace Pineda, Vice President of the Fund, is the Fund's Portfolio Manager.
Ms. Pineda has been a Vice President of the Manager and Senior Portfolio
Manager since 1989. Ms. Pineda has been primarily responsible for the
management of the Fund's investment portfolio since it commenced operations.
The Management Agreement obligates the Fund to pay certain expenses incurred
in its operations including, among other things, the management fee, legal and
audit fees, registration fees, unaffiliated Directors' fees and expenses,
custodian and transfer agency fees, accounting costs, the costs of issuing and
redeeming shares and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Manager, and the Fund reimburses the
Manager for its costs in connection with such services on a semi-annual basis.
For the fiscal year ended November 30, 1996, the Fund reimbursed the Manager
$128,292 for accounting services. For the fiscal year ended November 30, 1996,
the ratio of total expenses to average net assets for Class A, Class B, Class C
and Class D shares was 1.48%, 2.54%, 2.54% and 1.74%, respectively.
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 preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a 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
33
<PAGE>
Transfer Agent receives an annual fee of up to $11.00 per Class A or Class D
account and up to $14.00 per Class B or Class C account and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. The term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing a beneficial
interest of a person in the relevant share class or recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co. For
the fiscal year ended November 30, 1996, the fee paid by the Fund to the
Transfer Agent was $1,912,216.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and Merrill Lynch, acts as
the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000, and the minimum subsequent purchase is $50,
except that for retirement plans, the minimum initial purchase is $100, and the
minimum subsequent purchase is $1.
To permit the Fund to invest the net proceeds from the sale of its shares in
an orderly manner or in response to conditions in the securities markets or
otherwise, the Fund or the Distributor may from time to time, suspend the sale
of its shares, except for dividend reinvestments. The Fund may, thereafter,
resume such offering from time to time. The Fund also reserves the right to
limit the number of shares that may be purchased by a person during a specified
period of time or in the aggregate.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing SM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the NYSE
(generally, 4:00 p.m., New York time), which includes orders received after the
close of business on the previous day, the applicable offering price will be
based on the net asset value determined as of 15 minutes after the close of
business on the NYSE, on that day, provided the Distributor in turn receives
the order from the securities dealer prior to 30 minutes after the close of
business on the NYSE on that day. If the purchase orders are not received by
the Distributor prior to 30 minutes after the close of business on the NYSE,
such orders shall be deemed received on the next business day. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee
(presently $4.85, but as of May 1, 1997, $5.35) to confirm a sale of shares to
such customers. Purchases directly through the Transfer Agent are not subject
to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant
34
<PAGE>
circumstances. Shares of Class A and Class D are sold to investors choosing the
initial sales charge alternatives, and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Investors should
determine whether under their particular circumstances it is more advantageous
to incur an initial sales charge or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to a CDSC and
ongoing distribution fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing SM System is set forth under "Merrill Lynch Select Pricing SM
System" on page 6.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except the Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
35
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- -----------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years, at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- -----------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- -----------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
36
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* SELECTED DEALERS
PERCENTAGE OF OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ -------------- ----------------- ------------------
<S> <C> <C> <C>
Less than $25,000.......... 5.25% 5.54% 5.00%
$25,000 but less than
$50,000................... 4.75 4.99 4.50
$50,000 but less than
$100,000.................. 4.00 4.17 3.75
$100,000 but less than
$250,000.................. 3.00 3.09 2.75
$250,000 but less than
$1,000,000................ 2.00 2.04 1.80
$1,000,000 and over**...... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with certain fee-
based programs. If the sales charge is waived in connection with a purchase
of $1,000,000 or more, such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be waived
in connection with certain fee-based programs. A sales charge of 0.75% will
be charged on purchases of $1,000,000 or more of Class A or Class D shares
by certain employer sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. For the
fiscal year ended November 30, 1996, the Fund sold 2,334,477 Class A shares for
aggregate net proceeds to the Fund of $27,998,108. The gross sales charges for
the sale of Class A shares for the year were $2,523, of which $189 and $2,334
were received by the Distributor and Merrill Lynch, respectively. During such
year, the Distributor received no CDSCs with respect to redemptions within one
year after purchase of Class A shares purchased subject to a front-end sales
charge waiver.
For the fiscal year ended November 30, 1996, the Fund sold 5,255,871 Class D
shares for aggregate net proceeds to the Fund of $59,469,466. The gross sales
charges for the sale of Class D shares for the year were $199,218, of which
$15,673 and $183,545 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended November 30, 1996, the Distributor
received no CDSCs with respect to redemptions within one year after purchase of
Class D shares purchased subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors who currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer 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 provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
37
<PAGE>
at net asset value are participants in certain investment programs including
TMASM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies, including
the Fund. Certain persons who acquired shares of certain MLAM-advised closed-
end funds in their initial offering who wish to reinvest the net proceeds from
a sale of their closed-end fund shares of common stock in shares of the Fund
also may purchase Class A shares of the Fund if certain conditions set forth in
the Statement of Additional Information are met. In addition, Class A shares of
the Fund and certain other MLAM-advised mutual funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if
certain conditions set forth in the Statement of Additional Information are
met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill
Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock pursuant to a
tender offer conducted by such funds in shares of the Fund and certain other
MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee-Based Programs."
Class A and Class D shares are offered at net asset value to Employee Access
AccountsSM available through qualified employers with 500 or more eligible
employees which provide employer-sponsored retirement and savings plans that
are eligible to purchase such shares at net asset value. Class A shares are
offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. and, subject to certain conditions, Class A and Class D shares
of the Fund are offered at net asset value to shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc., who wish to reinvest in shares of the Fund the net proceeds from a
sale of certain of their shares of common stock pursuant to tender offers
conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
38
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and a distribution fee of 0.75% of net assets as discussed below under
"Distribution Plans."
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. Approximately eight years after issuance, Class B shares
will convert automatically into Class D shares of the Fund, which are subject
to an account maintenance fee but no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately ten years. If
Class B shares of the Fund are exchanged for Class B shares of another MLAM-
advised mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares 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.
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
39
<PAGE>
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- -----------------
<S> <C>
0-1........................................................ 4.00%
1-2........................................................ 3.00
2-3........................................................ 2.00
3-4........................................................ 1.00
4 and thereafter........................................... 0.00
</TABLE>
For the fiscal year ended November 30, 1996, the Distributor received CDSCs
of $1,557,160 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 shares (proceeds of $600), 10
shares will not be subject to a CDSC because of dividend reinvestment. With
respect to the remaining 40 shares, the CDSC is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per
share. Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 2.0% (the applicable rate in the third year after purchase for shares
purchased after October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans.
The CDSC also is waived for any Class B shares which are purchased by eligible
401(k) or eligible 401(a) plans which are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The Class B CDSC also is waived for any Class B shares which
are purchased by a Merrill Lynch rollover IRA that was funded by a rollover
from a terminated 401(k) plan managed by the MLAM Private Portfolio Group and
held in such account at the time of redemption. The Class B CDSC also is
waived for any Class B shares which are purchased within qualifying Employee
Access Accounts SM. Additional information concerning the waiver of the Class
B CDSC is set forth in the Statement of Additional Information. The terms of
the CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs."
40
<PAGE>
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended November 30, 1996, the Distributor
received CDSCs of $17,371 with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, 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.
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.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the
41
<PAGE>
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended November 30, 1996, the Fund paid the Distributor
$5,360,673 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $537.5
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
42
<PAGE>
November 30, 1996, the Fund paid the Distributor $207,045 pursuant to the Class
C Distribution Plan (based on average net assets subject to such Class C
Distribution Plan of approximately $20.8 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 November 30, 1996, the Fund paid the Distributor $283,093 pursuant to the
Class D Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of approximately $113.5 million), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
As of December 31, 1996, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch with respect to Class B shares for the period
since September 27, 1991 (commencement of operations) exceeded fully allocated
accrual revenues by approximately $9,559,000 (1.87% of Class B net assets at
that date). As of November 30, 1996, direct cash revenues for the period since
the commencement of operations of Class B shares exceeded direct cash expenses
by $12,696,860 (2.45% of Class B net assets at that date). As of December 31,
1996, the fully allocated accrual expenses incurred by the Distributor and
Merrill Lynch with respect to Class C shares for the period since October 21,
1994 (commencement of operations) exceeded fully allocated accrual revenues by
approximately $238,000 (1.03% of Class C net assets at that date). As of
November 30, 1996, direct cash revenues for the period since the commencement
of operations of Class C shares exceeded direct cash expenses by $199,016 (.86%
of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares."
43
<PAGE>
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 fees and the CDSCs). 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.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional 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 which may be applicable, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Merrill Lynch Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-
6484. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests should not
be sent to the Fund. A redemption request requires the signature(s) of all
persons in whose name(s) the shares are registered, signed exactly as the
name(s) appear(s) on the Transfer Agent's register or on the certificate, as
the case may be. The signature(s) on the redemption request must be guaranteed
by an "eligible guarantor institution" (including, for example, Merrill Lynch
branch offices and certain other financial institutions) as such is defined in
Rule 17Ad-15 under the Securities Exchange Act of
44
<PAGE>
1934, as amended, the existence and validity of which may be verified by the
Transfer Agent through the use of industry publications. Notarized signatures
are not sufficient. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice
of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment (e.g., cash, Federal funds or a 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 good payment has been collected for the
purchase of such shares. Normally this delay will not exceed ten days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
NYSE (generally, 4:00 p.m., New York time), on the day received and that such
request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85, but as of May 1, 1997, $5.35) to
confirm a repurchase of shares. Repurchases directly through the Transfer Agent
are not subject to the processing fee. The Fund reserves the right to reject
any order for repurchase, which right of rejection might affect adversely
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem
shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
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.
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SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various plans
and services, or to change options with respect thereto, can be obtained from
the Fund by calling the telephone number on the cover page or from the
Distributor or Merrill Lynch. Certain of these services are available only to
U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened, automatically,
without charge, at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Shareholders considering transferring a tax-
deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of the Fund, a shareholder must either redeem
the shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
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Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in his or her account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares
of a second MLAM-advised mutual fund, and the shareholder does not hold Class
A shares of the second fund in his or her account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period for the newly acquired shares of
the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of
the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class
B shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share next determined after the close of business
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on the NYSE on the ex-dividend date of such dividend or distribution. A
shareholder may at any time, by written notification to Merrill Lynch if the
shareholder's account is maintained with Merrill Lynch or by written
notification or telephone call (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividend or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. Cash payments can also be directly deposited to the shareholder's
bank account. No CDSC will be imposed on redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on
either a monthly or quarterly basis. A Class A or Class D shareholder whose
shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have
shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis
through the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain
conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be made
to an investor's Investment Account by prearranged charges of $50 or more to
his or her regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND or (800) 637-3863.
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PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified periods in advertisements or information furnished to present
or prospective shareholders. Average annual total return is computed separately
for Class A, Class B, Class C and Class D shares in accordance with a formula
specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B
and Class C shares and the maximum sales charge in the case of Class A and
Class 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 fees 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 total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements 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 charges in the
case of Class A and Class D shares, performance data may take into account the
reduced, and not the maximum, sales charges or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or waiver of the CDSC, a lower amount of expenses may be
deducted. See "Purchase of Shares." The Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate the effect
of such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
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On occasion, the Fund may compare its performance to the Standard & Poor's
500 Index, the Dow Jones Industrial Average, or performance data published by
Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money
Magazine, U.S. News & World Report, Business Week, CDA Investment Technology,
Inc., Forbes Magazine, Fortune Magazine or other industry publications. In
addition, from time to time the Fund may include the Fund's risk-adjusted
performance ratings assigned by Morningstar Publications, Inc. in advertising
or supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. See "Determination of Net Asset Value"
below. Dividends and distributions may be reinvested automatically in shares of
the Fund, at net asset value without a sales charge. Such dividends and
distributions will be automatically reinvested in shares unless the shareholder
elects, at any time, in writing or by telephone (1-800-MER-FUND) to the
Transfer Agent, to receive any such dividends or distributions, or both, in
cash. See "Shareholder Services--Automatic Reinvestment of Dividends and
Distributions" for information as to how to elect either dividend reinvestment
or cash payments. Dividends and distributions are taxable to shareholders as
described below whether they are reinvested in shares of the Fund or received
in cash. From time to time, the Fund may declare a special distribution at or
about the end of the calendar year in order to comply with Federal tax
requirements that certain percentages of its ordinary income and capital gains
be distributed during the calendar year.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class. See "Determination of Net Asset Value"
below.
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other income during a taxable year, (a)
the Fund would not be able to make any ordinary income dividend distributions,
and (b) all or a portion of distributions made before the losses were realized
but in the same taxable year would be recharacterized as a return of capital to
shareholders, rather than as ordinary income dividends, thereby reducing each
shareholder's tax basis in his or her Fund shares for Federal income tax
purposes and resulting in a capital gain for any shareholder who received such
a distribution greater than such shareholder's tax basis in Fund shares
(assuming the shares were held as a capital asset). For a detailed discussion
of the Federal tax considerations relevant to foreign currency transactions,
see "Taxes" below. If in any fiscal year the Fund has net income from certain
foreign currency transactions, such income will be distributed annually.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York time), on each day during which
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the NYSE is open for trading. Any assets or liabilities initially expressed in
terms of non-U.S. dollar currencies are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or dealers on the day of
valuation. The net asset value per share 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. Expenses, including the management fees payable to
the Manager and any account maintenance and/or distribution fees payable to the
Distributor, are accrued daily. The per share net asset value of Class A shares
will generally be higher than the per share net asset value of shares of the
other classes, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance fees applicable with respect to Class D shares; moreover,
the per share net asset value of the Class D shares generally will be higher
than the per share net asset value of Class B and Class C shares, reflecting
the daily expense accruals of the distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares. It is expected, however,
that the per share net asset value of the classes will tend to converge
(although not necessarily meet) immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to time of valuation. 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. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund.
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 which it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six
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months or less, however, will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are
held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. 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
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no 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.
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Due to investment laws in certain Latin American countries, it is anticipated
that the Fund's investments in equity securities in such countries will consist
primarily of shares of investment companies (or similar investment entities)
organized under foreign law or of ownership interests in special accounts,
trusts or partnerships. The Fund currently may invest up to 10% of its total
assets in securities of other investment companies. If the Fund purchases
shares of an investment company (or similar investment entity) organized under
foreign law, the Fund will be treated as owning shares in a passive foreign
investment company ("PFIC") for U.S. Federal income tax purposes. The Fund may
be subject to U.S. Federal income tax, and an additional tax in the nature of
interest (the "interest charge"), on a portion of the distributions from such a
company and on gain from the disposition of the shares of such a company
(collectively referred to as "excess distributions"), even if such excess
distributions are paid by the Fund as a dividend to its shareholders. The Fund
may be eligible to make an election with respect to certain PFICs in which it
owns shares that will allow it to avoid the taxes on excess distributions.
However, such election may cause the Fund to recognize income in a particular
year in excess of the distributions received from such PFICs. Alternatively,
under proposed regulations the Fund would be able to elect to "mark to market"
at the end of each taxable year all shares that it holds in PFICs. If it made
this election, the Fund would recognize as ordinary income any increase in the
value of such shares. Unrealized losses, however, would not be recognized. By
making the mark-to-market election, the Fund could avoid imposition of the
interest charge with respect to its distributions from PFICs, but in any
particular year might be required to recognize income in excess of the
distributions it received from PFICs and its proceeds from dispositions of PFIC
stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and 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 tax
basis in Fund shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
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beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on July 1, 1991. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock, each of which consists of 100,000,000 shares. Shares of
Class A, Class B, Class C and Class D Common Stock represent interests in the
same assets of the Fund and are identical in all respects except that the Class
B, Class C and Class D shares bear certain expenses related to the account
maintenance associated with such shares, and Class B and Class C shares bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to such account
maintenance and/or distribution expenditures. See "Purchase of Shares." 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 matters 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. Also, the by-laws of the Fund require that a special
meeting of shareholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and non-
assessable and have no preemptive rights. Shares have the conversion rights
described in this Prospectus. Each share of Common Stock is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction
of outstanding liabilities, except that, as noted above, expenses related to
the distribution and/or account maintenance of the shares of a class will be
borne solely by such class.
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SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch Financial
Consultant or Merrill Lynch Financial Data Services, Inc. at 1-800-637-3863.
55
<PAGE>
[This page is intentionally left blank]
56
<PAGE>
MERRILL LYNCH LATIN AMERICA FUND, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Latin America Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Latin America Fund, Inc.
Authorization Form.
Specify type of account (check one): [_] checking [_] savings
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
57
<PAGE>
MERRILL LYNCH LATIN AMERICA FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Additional Information--Taxes") either because I have not been notified
that I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH-SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Latin America Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Latin America
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Latin America Fund, Inc. held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
- - - We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
- - - shareholder's signature.
This form when completed should be .....................................
mailed to: Dealer Name and Address
Merrill Lynch Latin America By ..................................
Fund, Inc. Authorized Signature of Dealer
c/o Merrill Lynch Financial Data [ ][ ][ ] [ ][ ][ ][ ]
Services, Inc. Branch-Code F/C No.
P.O. Box 45289 ...............
Jacksonville, FL 32232-5289 F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ]
Dealer's Customer Account No.
58
<PAGE>
MERRILL LYNCH LATIN AMERICA FUND, INC. -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
[ ]
Name of Owner...................... Social Security No. or
First Name Initial Last Name Taxpayer Identification
No.
Address............................ Account Number ....................
(if existing account)
...................................
(Zip Code)
Name of Co-Owner (if any)..........
First Name
Initial
Last Name
Address............................
...................................
(Zip Code)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A or [_] Class D shares in Merrill Lynch Latin America Fund,
Inc., at cost or current offering price. Withdrawals to be made either (check
one) [_] monthly on the 24th day of each month, or [_] quarterly on the 24th
day of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on _______ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner..................................... Date..................
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
59
<PAGE>
MERRILL LYNCH LATIN AMERICA FUND, INC.--AUTHORIZATION FORM (PART 2)--
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Latin America Fund, Inc., subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. DATA SERVICES, INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
Lynch Latin America Fund, Inc., as Bank Address.........................
indicated below:
Amount of each ACH debit $........ City...... State...... Zip Code......
Account No. ......................
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay and
or as soon thereafter charge to my account ACH debits
------------- drawn on my account by and payable
(month) as possible. to Merrill Lynch Financial Data
Services, Inc. I agree that your
I agree that you are drawing these rights in respect to each such debit
ACH debits voluntarily at my request shall be the same as if it were a
and that you shall not be liable for check drawn on you and signed
any loss arising from any delay in personally by me. This authority is
preparing or failure to prepare any to remain in effect until revoked by
such debit. If I change banks or me in writing. Until you receive
desire to terminate or suspend this such notice, you shall be fully
program, I agree to notify you protected in honoring any such
promptly in writing. I hereby debit. I further agree that if any
authorize you to take any action to such debit be dishonored, whether
correct erroneous ACH debits of my with or without cause and whether
bank account or purchases of Fund intentionally or inadvertently, you
shares including liquidating shares shall be under no liability.
of the Fund and crediting my bank
account. I further agree that if a ............ .....................
debit is not honored upon Date Signature of
presentation, Merrill Lynch Financial Depositor
Data Services, Inc. is authorized to
discontinue immediately the Automatic ............ .....................
Investment Plan and to liquidate Bank Signature of Depositor
sufficient shares held in my account Account (If joint account,
to offset the purchase made with the Number both must sign)
dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
60
<PAGE>
[This page is intentionally left blank]
61
<PAGE>
[This page is intentionally left blank]
62
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Prospectus Summary......................................................... 4
Merrill Lynch Select PricingSM System...................................... 6
Consolidated Financial Highlights.......................................... 11
Risk Factors and Special Considerations.................................... 13
Investment Objective and Policies.......................................... 18
Certain Risks of Debt Securities.......................................... 20
Portfolio Strategies Involving Options and Futures........................ 22
Other Investment Policies and Practices................................... 28
Management of the Fund..................................................... 31
Board of Directors........................................................ 31
Management and Advisory Arrangements...................................... 32
Code of Ethics............................................................ 33
Transfer Agency Services.................................................. 33
Purchase of Shares......................................................... 34
Initial Sales Charge Alternatives--Class A and Class D Shares............. 36
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 39
Distribution Plans........................................................ 42
Limitations on the Payment of Deferred Sales Charges...................... 44
Redemption of Shares....................................................... 44
Redemption................................................................ 44
Repurchase................................................................ 45
Reinstatement Privilege--Class A and Class D Shares....................... 45
Shareholder Services....................................................... 46
Investment Account........................................................ 46
Exchange Privilege........................................................ 46
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 47
Systematic Withdrawal Plans............................................... 48
Automatic Investment Plans................................................ 48
Fee-Based Programs........................................................ 48
Performance Data........................................................... 49
Additional Information..................................................... 50
Dividends and Distributions............................................... 50
Determination of Net Asset Value.......................................... 50
Taxes..................................................................... 51
Organization of the Fund.................................................. 54
Shareholder Inquiries..................................................... 55
Shareholder Reports....................................................... 55
Authorization Form......................................................... 57
</TABLE>
Code #13989-0397
[LOGO] MERRILL LYNCH
Merrill Lynch
Latin America Fund, Inc.
[ART]
PROSPECTUS
March 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH LATIN AMERICA FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Latin America Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company seeking long-term capital appreciation
by investing primarily in Latin American equity and debt securities. This
objective of the Fund reflects the belief that investment opportunities may
result in Latin America from an evolving long-term international trend
encouraging greater market orientation and diminishing governmental
intervention in economic affairs. The Fund may employ a variety of instruments
and techniques to hedge against market and currency risk, although suitable
hedging investments may not be available on a timely basis and on acceptable
terms.
Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated March 24,
1997 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is March 24, 1997.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in Latin American equity and debt
securities. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Manager") will effect portfolio transactions without regard to holding period
if, in its judgment, such transactions are advisable in light of a change in
circumstances of a particular company or within a particular industry or due to
general market, economic or financial conditions. 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 U.S. Government
securities and of all other securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of securities
in the portfolio during the year. The Fund's portfolio turnover rates for the
fiscal years ended November 30, 1995 and 1996 were 54.86% and 66.14%,
respectively. The Fund is subject to the Federal income tax requirement that
less than 30% of the Fund's gross income must be derived from gains from the
sale or other disposition of securities held for less than three months.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such
as the Fund. If such restrictions should be reinstituted, it might become
necessary for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes
in the investment objective or in the fundamental policies set forth under
"Investment Restrictions" below would require the approval of the holders of a
majority of the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis on each day the Fund determines its net assets in U.S. dollars, the
Fund intends to manage its portfolio so as to give reasonable assurance that it
will be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. See "Redemption of Shares." Under present conditions, the Fund
does not believe that these considerations will have any significant effect on
its portfolio strategy, although there can be no assurance in this regard.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The Fund may seek to hedge its portfolio against
movements in the equity, debt and currency markets. The Fund has authority to
write (i.e., sell) covered put and call options on its portfolio securities,
purchase put and call options on securities and engage in transactions in stock
index options, stock index futures and stock futures and financial futures, and
related options on such futures. The Fund may also deal in forward foreign
exchange transactions, foreign currency options and futures and related options
on such futures. Each of such portfolio strategies is described in the
Prospectus. Although certain risks are involved in options and futures
transactions (as discussed in the Prospectus and below), the
2
<PAGE>
Manager believes that, because the Fund will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions. While
the Fund's use of hedging strategies is intended to reduce the volatility of
the net asset value of its shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Suitable hedging instruments may not be available with
respect to Latin American securities on a timely basis and on acceptable terms.
The following is further information relating to portfolio strategies involving
options and futures that the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
price on or before a specified 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 a specified date, in the
case of an option on a securities index. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a particular hedge against the price of the underlying
security declining.
The writer of a covered call option has no control over when he or she may be
required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her obligation
as a writer. If an option expires unexercised, the writer would realize a gain
in the amount of the premium. Such a gain, of course, may be offset by a
decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer would realize a gain or loss
from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other liquid securities denominated in U.S. dollars or
non-U.S. currencies with a securities depository with a value equal to or
greater than the exercise price of the underlying securities. By writing a put,
the Fund will be obligated to purchase the underlying security at a price that
may be higher than the market value of that security at the time of exercise
for as long as the option is outstanding. The Fund may engage in closing
transactions in order to terminate put options that it has written. The Fund
will not write put options if the aggregate value of the obligations underlying
puts shall exceed 50% of the Fund's net assets.
Options referred to herein and in the Fund's Prospectus may be options traded
on foreign securities exchanges. An options position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
If a secondary market does not exist, it might not be possible to effect
closing
3
<PAGE>
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange
or the clearing corporation may not, at all times, be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
The Fund may also enter into over-the-counter options transactions ("OTC
options"), which are two party contracts with prices and terms negotiated
between the buyer and seller. The staff of the Commission has taken the
position that OTC options and the assets used as cover for written OTC options
are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities which it intends to purchase. The Fund
may purchase either exchange-traded options or OTC options. The Fund will not
purchase options on securities (including stock index options discussed below)
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the
Fund's total assets.
Stock or Other Financial Index Options and Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock or other
financial index options and futures and related options on such futures. Set
forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the
4
<PAGE>
relevant contract market, which varies, but is typically between 2% and 15% of
the value of the futures contract, must be deposited with the broker. This
amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "mark to the market." At any
time prior to the settlement date of the futures contract, the position may be
closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. In addition, a nominal commission is
paid on each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a futures contract may
be a "senior security" under the Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of the
Fund will be conducted on a spot, i.e., cash basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate
in an amount generally less than one tenth of one percent due to the costs of
converting from one currency to another. The Fund has authority, however, to
deal in forward foreign exchange among currencies of the different countries in
which it will invest as a hedge against possible variations in the foreign
exchange rate among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. If the Fund enters
into a position hedging transaction, its custodian bank will place cash or
liquid equity or debt securities in a separate account of the Fund in an amount
equal to the value of the Fund's total assets committed to the consummation of
such forward contract. If the value of the securities placed in the separate
account declines, additional cash or securities will be placed in the account
so that the value of the account will equal the amount of the Fund's commitment
with respect to such contracts. Alternatively, no such segregation of funds
need be made when the Fund "covers" its open positions. The position is
considered "covered" if the Fund holds securities denominated in the currency
underlying the forward contract, or in a demonstrably correlated currency,
having a value equal to or greater than the Fund's
5
<PAGE>
obligation under the forward contract. The Fund will enter into such
transactions only to the extent, if any, deemed appropriate by the Manager. The
Fund will not enter into a forward contract with a term of more than one year.
Investors should be aware that U.S. dollar denominated securities may not be
available in some or all Latin American countries, that the forward currency
market for the purchase of U.S. dollars in most, if not all, Latin American
countries is not highly developed and that in certain Latin American countries,
no forward market for foreign currencies currently exists or such market may be
closed to investment by the Fund.
The Fund is also authorized to purchase or sell listed or over-the-counter
("OTC") foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund. As an illustration, the Fund may use such techniques to
hedge the stated value in U.S. dollars of an investment in a Mexican peso
denominated security. In such circumstances, for example, the Fund may purchase
a foreign currency put option enabling it to sell a specified amount of Mexican
pesos for dollars at a specified price by a future date. To the extent the
hedge is successful, a loss in the value of the Mexican pesos relative to the
dollar will tend to be offset by an increase in the value of the put option. To
offset, in whole or in part, the cost of acquiring such a put option, the Fund
may also sell a call option which, if exercised, requires it to sell a
specified amount of Mexican pesos for dollars at a specified price by a future
date (a technique called a "spread"). By selling such call option in this
illustration, the Fund gives up the opportunity to profit without limit from
increases in the relative value of the Mexican peso to the dollar. The Manager
believes that "spreads" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange
usually are conducted on a principal basis, no fees or commissions are
involved.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures and movements in the prices of the securities
and currencies which are the subject of the hedge. If the prices of the options
and futures move more or less than the prices of the hedged securities or
currencies, the Fund will experience a gain or loss which will not be
completely offset by movements in the prices of the securities and currencies
which are the subject of the hedge. The successful use of options and futures
also depends on the Manager's ability to correctly predict price movements in
the market involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange
6
<PAGE>
only if there appears to be a liquid secondary market for such options or
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular call or put option or futures contract at any specific
time. Thus, it may not be possible to close an option or futures position. The
Fund will acquire only OTC options for which management believes the Fund can
receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option), unless there is
only one dealer, in which case such dealer's price is used, or which can be
sold at a formula price provided for in the OTC option agreement. In the case
of a futures position or an option on a futures position written by the Fund in
the event of adverse price movements, the Fund would continue to be required to
make daily cash payments of variation margin. In such situations, if the Fund
has insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to take or make delivery of the
security or currency underlying the futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to hedge its portfolio effectively. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option. The
risk of loss from investing in futures transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) which may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day. An
exchange may order the liquidation of positions found to be in violation of
these limits, and it may impose other sanctions or restrictions. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
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 will be limited, however, in order to
qualify for the special tax treatment afforded regulated investment companies
under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Dividends, Distributions and Taxes--Taxes." To qualify, the Fund will comply
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 which 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 investment 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.
7
<PAGE>
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell securities which it is entitled to receive on a when-issued
basis, and it may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future to secure what is considered an
advantageous yield and price to the Fund at the time of entering into the
transaction. Although the Fund has not established any limit on the percentage
of its assets that may be committed in connection with such transactions, the
Fund will maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other liquid securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
amount of its commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the
agreement, the Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price that
is considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
total assets taken at the time of acquisition of such commitment or security.
The Fund will at all times maintain a segregated account with its custodian of
cash, cash equivalents, U.S. Government securities or other liquid securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
to the purchase price of the securities underlying the commitment.
There can be no assurance that the security subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Because the issuance of the
security underlying the commitment is at the option of the issuer, the Fund may
bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with financial institutions
which (i) have, in the opinion of the Manager, substantial capital relative to
the Fund's exposure, or (ii) have provided the Fund with a third-party guaranty
or other credit enhancement. Under such agreements, the other party agrees,
upon entering into the contract with the Fund, to repurchase the security at a
mutually agreed upon time and price in a specified currency, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations
8
<PAGE>
during such period although it may be affected by currency fluctuations. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect the accrued interest on the underlying obligations; whereas, in the
case of purchase and sale contracts, the prices take into account accrued
interest. Such agreements usually cover short periods, often less than one
week. Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require
the seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term of the
repurchase agreement; the Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. In the event of default
by the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but constitute only
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the collateral. A purchase and sale contract
differs from a repurchase agreement in that the contract arrangements stipulate
that the securities are owned by the Fund. In the event of a default under such
a repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund would depend
on intervening fluctuations of the market values of such securities and the
accrued interest on the securities. In such event, the Fund would have rights
against the seller for breach of contract with respect to any losses resulting
from market fluctuations following the failure of the seller to perform. The
Fund may not invest more than 15% of its total assets in repurchase agreements
or purchase and sale contracts maturing in more than seven days. While the
substance of purchase and sale contracts is similar to the substance of
repurchase agreements, because of the different treatment with respect to
accrued interest and additional collateral, management believes that purchase
and sale contracts are not repurchase agreements as such term is understood in
the banking and brokerage community.
Lending of Portfolio Securities. Subject to the investment restriction stated
below, the Fund may lend securities from its portfolio to approved borrowers
and receive collateral therefor in cash or securities issued or guaranteed by
the U.S. Government. Such collateral is maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
The purpose of such loans is to permit the borrower to use such securities for
delivery to purchasers when such borrower has sold short. If cash collateral is
received by the Fund, it is invested in short-term money market securities, and
a portion of the yield received in respect of such investment is retained by
the Fund. Alternatively, if securities are delivered to the Fund as collateral,
the Fund and the borrower negotiate a rate for the loan premium to be received
by the Fund for lending its portfolio securities. In either event, the total
yield on the Fund's portfolio is increased by loans of its portfolio
securities. The Fund will have the right to regain record ownership of loaned
securities to exercise beneficial rights such as voting rights, subscription
rights and rights to dividends, interest or other distributions. Such loans are
terminable at any time, and the borrower, after notice, will be required to
return borrowed securities within five business days. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans. With respect to the lending of portfolio securities, there is the risk
of failure by the borrower to return the securities involved in such
transactions.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders
9
<PAGE>
of a majority of the Fund's outstanding voting securities (which for this
purpose and under the Investment Company Act means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under
the laws of certain countries will not be deemed the making of 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 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 of 1933,
as amended (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 restrictions which may be
changed by the Board of Directors. Under the non-fundamental investment
restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
10
<PAGE>
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 cannot 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 and determined to be
liquid by the Fund's Board of Directors are not subject to the limitations
set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed) and then only from a bank as a temporary
measure for extraordinary or emergency purposes including to meet
redemptions or to settle securities transactions. The Fund will not
purchase securities while borrowings exceed 5% of total assets except (a)
to honor prior commitments or (b) to exercise subscription rights where
outstanding borrowings have been obtained exclusively for settlements of
other securities transactions.
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options if, as a result of such transaction, the sum
of the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceeds 15% of the total
assets of the Fund, taken at market value, together with all other assets of
the Fund which are illiquid or are otherwise not readily marketable. However,
if the OTC option is sold by the Fund to a primary U.S. Government securities
dealer recognized by the Federal Reserve Bank of New York and 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 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 Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with the Manager or any of
its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firm
or any of its affiliates participate as an underwriter or dealer.
11
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund, including
their ages and their principal occupations for at least the last five years, is
set forth below. Unless otherwise noted, the address of each executive officer
and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (64)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
Donald Cecil (70)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (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 (70)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (65)--Director(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Richard R. West (59)--Director(2)--Box 604, Genoa, Nevada 89491. Professor of
Finance since 1984, Dean from 1984 to 1993 and currently Dean Emeritus of New
York University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's Inc. (real estate company).
Edward D. Zinbarg (62)--Director(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. Executive Vice President of The Prudential Insurance Company of
America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice President
of the Manager and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of the Distributor since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Norman R. Harvey (63)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982.
12
<PAGE>
Grace Pineda (40)--Vice President(1)(2)--Vice President of the Manager and
Senior Portfolio Manager since 1989.
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990.
Gerald M. Richard (47)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981 and
Treasurer thereof since 1984.
Mark B. Goldfus (50)--Secretary(1)(2)--Vice President of the Manager and FAM
since 1985.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Manager, or its affiliate, FAM, acts as
investment adviser or manager.
At February 28, 1997, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Manager (each a "non-
affiliated Director") a fee of $3,500 per year plus $500 per Board meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all of the non-
affiliated Directors, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended November 30, 1996, fees and
expenses paid to the non-affiliated Directors aggregated $37,812.
The following table sets forth for the fiscal year ended November 30, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR FROM FUND AND OTHER
RETIREMENT BENEFITS MLAM/FAM
COMPENSATION ACCRUED AS PART ADVISED FUNDS PAID
NAME OF DIRECTOR FROM FUND OF FUND EXPENSES TO DIRECTORS(/1/)
- ---------------- ------------ ------------------- ----------------------
<S> <C> <C> <C>
Donald Cecil............ $8,500 None $268,933
Edward H. Meyer......... $6,500 None $227,933
Charles C. Reilly....... $7,500 None $293,833
Richard R. West......... $7,500 None $269,833
Edward D. Zinbarg....... $7,500 None $127,333
</TABLE>
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(/1/The)Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios);
Mr. West (41 registered investment companies consisting of 54 portfolios)
and Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
13
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
The Fund has entered into a management agreement (the "Management Agreement")
with the Manager. As discussed in the Prospectus, the Manager receives for its
services to the Fund monthly compensation at the annual rate of 1.00% of the
average daily net assets of the Fund. For the fiscal years ended November 30,
1994, 1995 and 1996, the management fees paid by the Fund to the Manager
aggregated $9,298,782, $7,649,241 and $7,092,959, respectively.
As described in the Prospectus, the Manager has also 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
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Fund connected with investment and economic research,
trading and investment management of the Fund, as well as the fees of all
Directors of the Fund who are affiliated persons of the Manager or its
affiliates. The Fund pays all other expenses incurred in its operation,
including, among other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent
paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the fiscal years
ended November 30, 1994, 1995 and 1996, the amount of such reimbursement was
$211,687, $152,840 and $128,292, respectively. The Distributor will pay certain
promotional expenses of the Fund incurred in connection with the offering of
its shares. Certain expenses in connection with the distribution of Class B,
Class C and Class D shares will be financed by the Fund pursuant to
distribution plans in compliance with Rule 12b-1 under the Investment Company
Act. See "Purchase of Shares--Distribution Plans."
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment
14
<PAGE>
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors 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 contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares. The Fund issues four classes of
shares under the Merrill Lynch Select Pricing SM System: shares of Class A and
Class D are sold to investors choosing the initial sales charge alternatives,
and shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. Each Class A, Class B, Class C and Class D share of
the Fund represents identical interests in the investment portfolio of the
Fund and has the same rights, except that Class B, Class C and Class D shares
bear the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. Class B, Class C and Class D shares each have exclusive
voting rights with respect to the Rule 12b-1 distribution plan adopted with
respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan).
Each class has different exchange privileges. See "Shareholder Services--
Exchange Privilege."
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM that utilize the Merrill Lynch Select
Pricing SM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offerings of each class of
shares of the Fund (the "Distribution Agreements"). The Distribution
Agreements obligate the Distributor to pay certain expenses in connection with
the offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
For the period October 21, 1994 (commencement of operations) to November 30,
1994 and for the fiscal years ended November 30, 1995 and 1996, the Fund sold
its Class A shares through the Distributor and Merrill Lynch, as a dealer. For
the fiscal years ended November 30, 1994, 1995 and 1996, the Fund sold its
Class D shares through the Distributor and Merrill Lynch, as a dealer. For the
period October 21, 1994
15
<PAGE>
(commencement of operations) to November 30, 1994, the Distributor and Merrill
Lynch received no sales charges for the sale of Class A shares. The gross
sales charges for the sale of its Class A shares for the fiscal year ended
November 30, 1995, were $2,872, of which the Distributor received $188, and
Merrill Lynch received $2,684. The gross sales charges for the sale of Class A
shares for the fiscal year ended November 30, 1996, were $2,523, of which the
Distributor received $189 and Merrill Lynch received $2,334. The gross sales
charges for the sale of its Class D shares (including redesignated Class A
shares) for the fiscal year ended November 30, 1994, were $3,143,373, of which
the Distributor received $225,515, and Merrill Lynch received $2,917,858. The
gross sales charges for the sale of its Class D shares for the fiscal year
ended November 30, 1995 were $645,246, of which the Distributor received
$40,794 and Merrill Lynch received $604,452. The gross sales charges for the
sale of its Class D shares for the fiscal year ended November 30, 1996 were
$199,218, of which the Distributor received $15,673 and Merrill Lynch received
$183,545. During such periods, the Distributor received no contingent deferred
sales charges ("CDSCs") with respect to redemptions within one year after
purchase of Class A or Class D shares purchased subject to a front-end sales
charge waiver. For information as to brokerage commissions received by Merrill
Lynch, see "Portfolio Transactions and Brokerage."
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 (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Code) although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as
that term is defined in the Investment Company Act, but does not include
purchases by any such company which has not been in existence for at least six
months or which has no purpose other than the purchase of shares of the Fund
or shares of other registered investment companies at a discount. The term
"purchase" shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders
of a company, policyholders of an insurance company, customers of either a
bank or broker-dealer or clients of an investment adviser. The term "purchase"
also includes purchases by employee benefit plans not qualified under Section
401 of the Code, including purchases by employees or by employers on behalf of
employees, by means of a payroll deduction plan or otherwise, of shares of the
Fund. Purchases by such a company or non-qualified employee benefit plan will
qualify for the quantity discounts discussed above only if the Fund and the
Distributor are able to realize economies of scale in sales effort and sales
related expense by means of the company, employer or plan making the Fund's
Prospectus available to individual investors or employees and forwarding
investments by such persons to the Fund and by any such employer or plan
bearing the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing SM System commenced
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
16
<PAGE>
shares on or after October 21, 1994, and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class D Shares"), if the following conditions
are met. First, the sale of the closed-end fund shares must be made through
Merrill Lynch, and the net proceeds therefrom must be immediately reinvested
in Eligible Class A or Class D Shares. Second, the closed-end fund shares must
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 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.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the 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 other MLAM-advised mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or of any
other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in
the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's
17
<PAGE>
transfer agent. The Letter of Intention is not available to employee benefit
plans for which Merrill Lynch provides plan-participant record-keeping
services. The Letter of Intention is not a binding obligation to purchase any
amount of Class A or Class D shares but its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intention may be
included under a subsequent Letter of Intention executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class A and Class D shares of the Fund and of other
MLAM-advised mutual funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intention, may be included as a credit toward completion of such Letter but the
reduced sales charge applicable to the amount covered by such Letter will be
applied only to new purchases. If the total amount of shares purchased does not
equal the amount stated in the Letter of Intention (minimum of $25,000), the
investor will be notified and must pay, within 20 days of the expiration of
such Letter, the difference between the sales charge on the Class A or Class D
shares purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares equal
to five percent of the intended amount will be held in escrow during the 13-
month period (while remaining registered in the name of the purchaser) for this
purpose. The first purchase under the Letter of Intention must be at least five
percent of the dollar amount of such Letter. If a purchase during the term of
such Letter would otherwise be subject to a further reduced sales charge based
on the right of accumulation, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the Class A
or Class D shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-
advised money market fund into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption 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 who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer
18
<PAGE>
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, 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 of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
the other mutual 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.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through qualified employers
with 500 or more eligible employees that provide employer-sponsored retirement
or savings plans that are eligible to purchase such shares at net asset value.
The initial minimum for such accounts is $500 except that the initial minimum
for shares purchased for such accounts pursuant to the Automatic Investment
Program is $50.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a public or private investment company. The value of the
assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund
which might result from an acquisition of assets having net unrealized
appreciation which is disproportionately higher at the time of acquisition
than the realized or unrealized appreciation of the Fund. The issuance of
Class D shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
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
19
<PAGE>
eligible to participate in the plan, the aggregate amount invested by the plan
in specified investments and/or the services provided by Merrill Lynch to the
plan. Certain other plans may purchase Class B shares with a waiver of the
CDSC upon redemption, based on similar criteria. Such Class B shares will
convert into Class D shares approximately ten years after the plan purchases
the first share of any MLAM-advised mutual fund. Minimum purchase requirements
may be waived or varied for such plans. Additional information regarding
purchases by employer-sponsored retirement or savings plans and certain other
arrangements is available toll-free from Merrill Lynch Business Financial
Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the disbursement
of the account maintenance fees and/or distribution fees paid to the
Distributor. In their consideration of each Distribution Plan, the Directors
must consider all factors they deem relevant, including information as to the
benefits of the Distribution Plan to the Fund and its related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Directors
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that such Distribution Plan
will benefit the Fund and its related class of shareholders. Each Distribution
Plan can be terminated at any time, without penalty, by the vote of a majority
of the Independent Directors or by the vote of the holders of a majority of
the outstanding related class of voting securities of the Fund. A Distribution
Plan cannot be amended to increase materially the amount to be spent by the
Fund without the approval of the related class of shareholder, and all
material amendments are required to be approved by the vote of the Directors,
including a majority of the Independent Directors who have no direct or
indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such
Distribution Plan or such report, the first two years in an easily accessible
place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (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
20
<PAGE>
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 fees and the CDSCs). 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 November 30,
1996, with respect to Class B and Class C shares, indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and, with respect to Class B shares, the Distributor's voluntary maximum for
the periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1996
-----------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(/1/) CHARGES BALANCE(/2/) PAYABLE DISTRIBUTOR(/3/) BALANCE LEVEL(/4/)
---------- --------- ------------ ------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD SEPTEMBER 27,
1991 (COMMENCEMENT OF
OPERATIONS) TO NOVEMBER
30, 1996:
Under NASD Rule as
Adopted................ $967,836 $60,490 $13,303 $73,793 $22,542 $51,251 $3,891
Under Distributor's
Voluntary Waiver....... $967,836 $60,490 $ 4,839 $65,329 $22,542 $42,787 $3,891
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO NOVEMBER
30, 1996:
Under NASD Rule as
Adopted................ $ 31,487 $ 1,968 $ 244 $ 2,212 $ 275 $ 1,937 $ 174
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 7, 1993, under the distribution plan in effect at that time, at the
1.0% rate, 0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. See "Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
21
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
NYSE is restricted as determined by the Commission or the NYSE is closed (other
than customary weekend and holiday closings) for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal
of portfolio securities or determination of the net asset value of the Fund is
not reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability of a
Class B shareholder. Redemptions for which the waiver applies are: (a) any
partial or complete redemption in connection with a tax-free distribution
following retirement under a tax-deferred retirement plan or attaining age 59
1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) or any redemption resulting from the tax-free return of an
excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal years ended
November 30, 1994 and 1995 the Distributor received CDSCs of $1,483,069 and
$2,264,262, respectively, with respect to redemptions of Class B shares, all of
which were paid to Merrill Lynch. For the fiscal year ended November 30, 1996,
the Distributor received CDSCs of $1,557,160 with respect to redemptions of
Class B shares, $1,544,900 of which were paid to Merrill Lynch. For the period
October 21, 1994 (commencement of operations) to November 30, 1994 and for the
fiscal years ended November 30, 1995 and 1996, the Distributor received CDSCs
of $11, $14,661 and $17,371, respectively, with respect to redemptions of Class
C shares, all of which were paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices--Portfolio Transactions" in the Prospectus.
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. In executing such transactions, the Manager seeks to obtain the
best net results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While the Manager
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generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commission or spread available. The Fund has no
obligation to deal with any broker or group of brokers in the execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, brokers who provide supplemental investment research to the Manager
may receive orders for transactions by the Fund. Information so received will
be in addition to and not in lieu of the services required to be performed by
the Manager under the Management Agreement, and the expenses of the Manager
will not necessarily be reduced as a result of the receipt of such supplemental
information. In addition, consistent with the Conduct Rules of the NASD and
policies established by the 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. It is possible that certain of
the supplementary investment research so received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions
effected for such other accounts or investment companies.
The Fund anticipates that its brokerage transactions involving securities of
companies 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 are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
The Fund may invest in certain securities traded in the OTC market and
intends, where possible, to deal directly with the dealers who make a market in
the 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 dealers acting as principal for their
own accounts, affiliated persons of the Fund, including Merrill Lynch and any
of its affiliates, will not serve as the Fund's dealer in such transactions.
However, affiliated persons of the Fund may serve as its broker in listed or
OTC transactions conducted on an agency basis provided that, among other
things, the fee or commission received by such affiliated broker is reasonable
and fair compared to the fee or commission received by non-affiliated brokers
in connection with comparable transactions. See "Investment Objective and
Policies--Investment Restrictions."
For the fiscal year ended November 30, 1994, the Fund paid total brokerage
commissions of $2,970,555, of which $112,754, or 3.8%, was paid to Merrill
Lynch for effecting 6.0% of the aggregate dollar amount of transactions on
which the Fund paid brokerage commissions. For the fiscal year ended November
30, 1995, the Fund paid total brokerage commissions of $2,724,059, of which
$280,047, or 10.3%, was paid to Merrill Lynch for effecting 13.6% of the
aggregate dollar amount of transactions on which the Fund paid brokerage
commissions. For the fiscal year ended November 30, 1996, the Fund paid total
brokerage commissions of $2,285,881, of which $173,055, or 7.57%, was paid to
Merrill Lynch for effecting 7.23% of the aggregate dollar amount of
transactions on which the Fund paid brokerage commissions.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are
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redeemable on a daily basis in U.S. dollars, the Fund intends to manage its
portfolio so as to give reasonable assurance that it will be able to obtain
U.S. dollars to the extent necessary to meet anticipated redemptions. Under
present conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund.
The Board of Directors has considered the possibility of seeking to recapture
for the benefit of the Fund brokerage commissions and other expenses of
possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 15 minutes after the close of business on the New York
Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York time), on each day
the NYSE is open for trading. The NYSE is not open on New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. Net asset value is computed by dividing the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the management fees and any
account maintenance and/or distribution fees, are accrued daily. The per share
net asset value of Class B, Class C and Class D shares generally will be lower
than the per share net asset value of the Class A shares reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; moreover, the per share net asset value of Class B and Class C
shares generally will be lower than the per share net asset value of Class D
shares reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions which will differ
by approximately the amount of the expense accrual differentials between the
classes.
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Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. 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. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund. Such valuation
and procedures will be reviewed periodically by the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases, reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check
directly to the Fund's transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the transfer
agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such
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<PAGE>
shares at the transfer agent may request their new brokerage firm to maintain
such shares in an account registered in the name of the brokerage firm for the
benefit of the shareholder at the transfer agent. If the new brokerage firm is
willing to accommodate the shareholder in this manner, the shareholder must
request that he or she be issued certificates for the shares and then must turn
the certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an IRA from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of the
Fund, a shareholder must either redeem the shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm, or
such shareholder must continue to maintain a retirement account at Merrill
Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. An
investor whose shares of the Fund are held within a CMA (R) or CBA (R) account
may arrange to have periodic investments made in the Fund in amounts of $100 or
more ($1 for retirement accounts) through the CMA (R) or CBA (R) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of shares of the Fund as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
or Class D shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more and monthly withdrawals are available for
shareholders with Class A or Class D shares with such a value of $10,000 or
more.
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At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined as of 15
minutes after the close of business on the NYSE (generally, 4:00 p.m. New York
time) on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the NYSE is not open for business on such
date, the Class A or Class D shares will be redeemed at the close of business
on the following business day. The check for the withdrawal payment will be
mailed, or the direct deposit of the withdrawal payment will be made, on the
next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or Class D
shares in the Investment Account are reinvested automatically in Class A or
Class D shares of the Fund, respectively. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by
the shareholder, the Fund, the transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly
accept purchase orders for Class A or Class D shares of the Fund from
investors who maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held within
a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R)
or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to
the shareholder's account five business days after the date the shares are
redeemed. Monthly systematic redemptions will be made at net asset value on
the first Monday of each month, bimonthly systematic redemptions will be made
at net asset value on the first Monday of every other month, and quarterly,
semiannual or annual redemptions are made at net asset value on the first
Monday of months selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net asset value on
the next business day. The Systematic Redemption Program is not available if
Fund shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the CMA(R) or CBA(R) Systematic
Redemption Program, eligible shareholders should contact their Merrill Lynch
Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill
Lynch Select Pricing SM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund,
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<PAGE>
but does not hold Class A shares of the second fund in his or her account at
the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D shares
are exchangeable with shares of the same class of other MLAM-advised mutual
funds. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for the
previously owned shares of the Fund is "tacked" to the holding period for the
newly acquired shares of the other Fund as more fully described below. Class A,
Class B, Class C and Class D shares are also exchangeable for shares of certain
MLAM-advised money market funds as follows: Class A shares may be exchanged for
shares of Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves
Money Fund (available only for exchanges within certain retirement plans),
Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money
Fund; Class B, Class C and Class D shares may be exchanged for shares of
Merrill Lynch Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch
Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a
net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of certain money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ("new Class B or
Class C shares"), of another MLAM-advised mutual fund 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
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<PAGE>
exchange has been made. For purposes of computing the sales charge that may be
payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the holding
period for the new Class B or Class C shares. For example, an investor may
exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for
two and a half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two and a half year
holding period of Fund Class B shares to the three year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
new Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively,
of any fund offering such shares, in which event the holding period for Class B
or Class C shares of that fund will be aggregated with previous holding periods
for purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch Financial Consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised mutual
funds, with shares for which certificates have not been issued, may exercise
the exchange privilege by wire through their securities dealers. The Fund
reserves the right to require a properly completed Exchange Application. This
exchange privilege may be modified or terminated in accordance with the rules
of the Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. Premiums from expired options written by
the Fund and net gains from closing purchase transactions with respect to such
options are treated as short-term capital gains for Federal income tax
purposes. See "Shareholder Services--Automatic Reinvestment of Dividends and
Distributions" in the Prospectus for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Fund. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as described below whether they are invested in shares of the Fund
or received in cash. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions 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 and distributions on Class D
shares will be lower than the per share dividends and distributions on Class A
shares as a result of the account maintenance fees applicable with respect to
the Class D shares. See "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 Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. 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
which was declared in the previous October, November or December to
shareholders of record on a specified date
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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 taxpayer identification number is
on file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. When establishing an account, an investor must certify under
penalty of perjury that such number is correct and that such investor is not
otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes. For this purpose, the Fund will
allocate foreign taxes and foreign source income among the Class A, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the 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 of 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
31
<PAGE>
upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield securities may be purchased at a discount and may
therefore cause the Fund to accrue and distribute income before amounts due
under the obligations are paid. In addition, a portion of the interest payments
on such high yield/high risk securities may be treated as dividends for Federal
income tax purposes; in such case, if the issuer of such high yield/high risk
securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
Due to investment laws in certain Latin American countries, it is anticipated
that the Fund's investments in equity securities in such countries will consist
primarily of shares of investment companies (or similar investment entities)
organized under foreign law or of ownership interests in special accounts,
trusts or partnerships. The Fund may invest up to 10% of its total assets in
securities of other investment companies. If the Fund purchases shares of an
investment company (or similar investment entity) organized under foreign law,
the Fund will be treated as owning shares in a passive foreign investment
company ("PFIC") for U.S. Federal income tax purposes. The Fund may be subject
to U.S. Federal income tax, and an additional tax in the nature of interest
(the "interest charge"), on a portion of distributions from such a company and
on gain from the disposition of the shares of such a company (collectively
referred to as "excess distributions"), even if such excess distributions are
paid by the Fund as a dividend to its shareholders. The Fund may be eligible to
make an election with respect to certain PFICs in which it owns shares that
will allow it to avoid the taxes on excess distributions. However, such
election may cause the Fund to recognize income in a particular year in excess
of the distributions received from such PFICs. Alternatively, under proposed
regulations the Fund would be able to elect to "mark to market" at the end of
each taxable year all shares that it holds in PFICs. If it made this election,
the Fund would recognize as ordinary income any increase in the value of such
shares. Unrealized losses, however, would not be recognized. By making the
mark-to-market election, the Fund could avoid imposition of the interest charge
with respect to its distributions from PFICs, but in any particular year might
be required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
32
<PAGE>
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.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
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, foreign currency futures and forward foreign
exchange contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Code Section 988 is elected by the Fund. In general, however,
Code
33
<PAGE>
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 tax basis in Fund shares (assuming the shares were held as a
capital asset). These rules and the mark-to-market rules described above,
however, will not apply to certain transactions entered into by the Fund solely
to reduce the risk of currency fluctuations with respect to its investments.
The 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 Latin American countries in which the Fund intends to
invest. No such regulations have been issued.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return data are determined separately for Class A, Class
B, Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital
34
<PAGE>
gains or losses on portfolio investments over such periods) that would equate
the initial amount invested to the redeemable value of such investment at the
end of each period. Average annual total return is computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum sales
charge in the case of Class A and Class D shares and the CDSC that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included. 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 longer periods of time.
Set forth in the tables below is total return information for Class A, Class
B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select Pricing System SM,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares, and historical performance data pertaining to
such shares are provided below under the caption "Class D."
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF $1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
November 30,
1996........... 15.78 % $1,157.80 16.85 % $1,168.50 19.85 % $1,198.50 15.56 % $1,155.60
Inception
(October 21,
1994) to
November 30,
1996........... (16.24)% $ 688.00 (14.98)% $ 710.10
Five Years Ended
November 30,
1996........... 6.34 % $1,359.60 6.04 % $1,340.70
Inception
(September 27,
1991) to
November 30,
1996........... 5.70 % $1,332.40 5.44 % $1,315.20
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF $1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
November 30,
1996........... 22.19% $1,221.90 20.85 % $1,208.50 20.85 % $1,208.50 21.97 % $1,219.70
Year Ended
November 30,
1995........... (37.66)% $ 623.40 (38.32)% $ 616.80 (38.32)% $ 616.80 (37.84)% $ 621.60
Year Ended
November 30,
1994........... 20.19 % $1,201.90 21.07 % $1,210.70
Inception
(October 21,
1994) to
November 30,
1994........... (4.67)% $ 953.30 (4.75)% $ 952.50
Year Ended
November 30,
1993........... 49.80 % $1,498.00 50.86 % $1,508.60
Year Ended
November 30,
1992........... 1.30 % $1,013.00 2.19 % $1,021.90
Inception
(September 27,
1991)
to November 30,
1991........... (2.00)% $ 980.00 (1.90)% $ 981.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October 21,
1994) to
November 30,
1996........... (31.20)% $ 688.00 (28.99)% $ 710.10
Inception
(September 27,
1991) to
November 30,
1996........... 33.24 % $1,332.40 31.52 % $1,315.20
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or Class
D shares, or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares," respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charges, 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 is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on July 1, 1991. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock, each of which consists of 100,000,000 shares. Each share
of Class A, Class B, Class C and Class D Common Stock represents 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 fees, and have exclusive voting rights
with respect to matters relating to such account maintenance and/or
distribution expenditures. The Board of Directors of
36
<PAGE>
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 a management agreement; (iii) approval
of a distribution agreement; and (iv) ratification of selection of independent
accountants. Also, the by-laws of the Fund require that a special meeting of
shareholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and non-
assessable 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, except that expenses related to the distribution of
the shares of a class will be borne solely by such class. Stock certificates
are issued by the transfer agent only on specific request. Certificates for
fractional shares are not issued in any case.
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 on November 30, 1996, and its shares outstanding on that date is set
forth below. The offering price for Class B and Class C shares of the Fund is
the net asset value of Class B and Class C shares, respectively.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets................... $46,369,262 $518,864,442 $23,183,190 $112,833,015
=========== ============ =========== ============
Number of Shares Outstanding. 3,614,256 41,633,526 1,860,500 8,838,830
=========== ============ =========== ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 12.83 $ 12.46 $ 12.46 $ 12.77
Sales Charge (for Class A and
Class D shares:
5.25% of offering price
(5.54% of net asset value
per share))*................ 0.71 ** ** 0.71
----------- ------------ ----------- ------------
Offering Price............... $ 13.54 $ 12.46 $ 12.46 $ 13.48
=========== ============ =========== ============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus and "Redemption of Shares--Deferred Sales Charges--Class B and
Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the
37
<PAGE>
independent Directors of the Fund. The independent auditors are responsible for
auditing the annual consolidated financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the custodian of the Fund's assets (the "Custodian"). Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the U.S. and with certain foreign banks
and securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on November 30 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on February 28, 1997.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Merrill Lynch Latin America Fund,
Inc.:
We have audited the accompanying consolidated statement of assets and
liabilities, including the consolidated schedule of investments, of Merrill
Lynch Latin America Fund, Inc. and its subsidiary as of November 30, 1996, 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 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
November 30, 1996, by correspondence with the custodian. 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 Latin America Fund, Inc. and its subsidiary as of
November 30, 1996, 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
January 6, 1997
39
<PAGE>
[This page is intentionally left blank.]
40
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (in US dollars)
Shares Held/ Value Percent of
COUNTRY Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Argentina Banking 82,847 Banco de Galicia y Buenos Aires
S.A. (ADR)(1) $ 1,010,375 $ 1,832,990 0.3%
208,075 Banco Frances del Rio de la Plata
S.A. (ADR)(1) 4,784,517 6,294,269 0.9
------------ ------------ ------
5,794,892 8,127,259 1.2
Beverages & 637,000 Quilmes Industrial S.A. 6,688,500 6,608,875 0.9
Tobacco
Foreign ARS 20,139,000 Republic of Argentina, Floating
Government Rate Bond, 6.625% due 3/31/2005
Obligations (4) (5) 15,591,823 17,396,068 2.5
Merchandising 563,144 Grimoldi S.A. (Class B) 3,318,672 2,366,222 0.3
Multi-Industry 3,500,533 Compania Naviera Perez Companc
S.A.C.F.I.M.F.A. 16,362,581 23,813,864 3.4
Real Estate 1,166,915 Inversiones y Representaciones
S.A. (IRSA) 3,126,377 3,595,644 0.5
134,981 Inversiones y Representaciones S.A.
(IRSA)(GDR)(2) 3,742,358 4,184,411 0.6
------------ ------------ ------
6,868,735 7,780,055 1.1
Telecommunications 159,300 Telefonica de Argentina S.A.
(ADR)(1) 4,992,344 4,062,150 0.6
525,000 Telefonica de Argentina S.A.
(Class B) 1,497,352 1,339,326 0.2
------------ ------------ ------
6,489,696 5,401,476 0.8
Total Long-Term Investments in
Argentina 61,114,899 71,493,819 10.2
Brazil Automobiles 293,900 ++Companhia Fabricadora de Pecas
S.A.(COFAP)(Preferred) 2,450,495 2,404,352 0.3
Banking 2,278,270,217 Banco Bradesco S.A. (Preferred) 13,024,887 16,542,768 2.4
31,410,050 Banco Itau S.A. (Preferred) 6,757,023 12,407,107 1.8
364,129,908 Banco Nacional S.A. PN (Preferred) 9,903,203 352 0.0
------------ ------------ ------
29,685,113 28,950,227 4.2
Beverages & 61,552,159 Companhia Cervejaria Brahma S.A.
Tobacco PN (Preferred) 19,377,805 36,321,077 5.2
Diversified 1,106,400 Souza Cruz S.A. 8,336,307 6,309,126 0.9
Energy Sources 111,520,000 Petroleo Brasileiro S.A.
(Preferred) 13,542,832 15,276,372 2.2
Machinery & 8,304,000 ++Iochpe-Maxion S.A. (Ordinary) 3,421,870 924,543 0.1
Engineering 9,273,000 Weg Exportadora S.A. (Preferred) 5,597,682 4,399,042 0.6
------------ ------------ ------
9,019,552 5,323,585 0.7
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Brazil Metals & Steel 729,397,000 Companhia Siderurgica de Tubarao
(concluded) S.A. 'B' (Preferred) $ 11,553,259 $ 10,733,696 1.5%
477,009,000 Companhia Siderurgica Nacional
S.A.--CSN 13,431,428 13,023,191 1.9
1,104,720 Companhia Vale do Rio Doce S.A.
(Preferred) 23,025,915 23,198,157 3.3
15,881,741,007 Usinas Siderurgicas de Minas Gerais
--Usiminas S.A. (Preferred) 16,976,532 15,683,394 2.2
------------ ------------ ------
64,987,134 62,638,438 8.9
Telecommuni- 172,000 Multicanal Participacoes S.A.
cations (ADR)(1) 2,408,000 2,408,000 0.3
268,885 Telecomunicacoes Brasileiras S.A.
--Telebras (ADR)(1) 14,220,231 20,368,039 2.9
136,517,454 Telecomunicacoes Brasileiras S.A.
--Telebras (Ordinary) 7,929,737 8,802,461 1.3
198,590,596 Telecomunicacoes Brasileiras S.A.
--Telebras (Preferred) 8,915,759 15,054,355 2.1
99,937,288 Telecomunicacoes de Minejeros S.A.
--TELEMIG (Class B)(Preferred) 7,132,438 11,173,161 1.6
3,265,379 ++Telecomunicacoes de Sao Paulo S.A.
--TELESP 524,948 576,950 0.1
------------ ------------ ------
41,131,113 58,382,966 8.3
Textiles & 58,702,363 Companhia de Tecidos Norte de Minas
Apparel S.A. (Preferred) 20,107,723 20,175,563 2.9
Utilities 80,800 ++Centrais Eletricas de Santa
Catarina S.A. (CELESC)(ADR)(1)++++ 6,499,552 6,595,300 0.9
2,267,199 Centrais Eletricas de Santa Catarina
S.A. (CELESC) 'B' (Preferred) 662,053 1,865,736 0.3
76,000 Companhia Energetica de Minas Gerais
S.A. (CEMIG) (ADR)(1)++++ 1,628,295 2,356,000 0.3
28,470 Companhia Energetica de Minas Gerais
S.A. (CEMIG) (ADR)(1) 638,750 882,570 0.1
403,000,000 Companhia Energetica de Minas Gerais
S.A. (CEMIG)(Preferred) 10,590,238 12,797,367 1.8
173,020,000 ++Companhia Paulista de Forca e
Luz S.A. 10,106,226 17,270,173 2.5
198,000 ++Globex Utilidades S.A. (Preferred) 3,579,246 3,412,141 0.5
44,397,251 ++Light Participacoes S.A. 5,144,362 8,343,021 1.2
------------ ------------ ------
38,848,722 53,522,308 7.6
Total Long-Term Investments in
Brazil 247,486,796 289,304,014 41.2
Chile Closed-End Funds 229,968 The Chile Fund, Inc. 5,993,326 5,145,534 0.7
Merchandising 528,846 Santa Isabel S.A. 430,047 886,229 0.1
521,716 Santa Isabel S.A. (ADR)(1) 14,267,791 13,108,115 1.9
------------ ------------ ------
14,697,838 13,994,344 2.0
Multi-Industry 138,650 Cristalerias de Chile S.A. (ADR)(1) 3,035,094 2,686,344 0.4
Publishing 1,675,421 Editorial Lord Cochrane S.A. 783,815 334,527 0.0
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Telecommuni- 21,742 Compania de Telecomunicaciones de
cations Chile S.A. (ADR)(1) 1,846,746 2,068,208 0.3
98,732 Empresa Nacional de Telecomunicaciones
S.A. (ENTEL) 677,828 844,866 0.1
------------ ------------ ------
2,524,574 2,913,074 0.4
Utilities 35,000 Distribuidora Chilectra Metropolitana
S.A. (ADR)(1)++++ 1,473,750 1,890,000 0.3
3,724,465 Empresa Nacional de Electricidad S.A.
(ENDESA) 2,032,168 2,022,915 0.3
2,057,425 Enersis S.A. 930,264 1,134,591 0.2
190,300 Enersis S.A. (ADR)(1) 4,797,095 5,375,975 0.8
------------ ------------ ------
9,233,277 10,423,481 1.6
Total Long-Term Investments in Chile 36,267,924 35,497,304 5.1
Colombia Banking 1,431,252 Banco de Bogota S.A. 7,327,647 8,493,735 1.2
26,951 Banco Industrial Colombiano S.A. 98,851 93,524 0.0
------------ ------------ ------
7,426,498 8,587,259 1.2
Beverages & Tobacco 587,154 La Compania Cervecera Bavaria S.A. 3,401,356 2,356,435 0.3
Building Materials 90,000 Cementos Diamante S.A. 590,537 383,015 0.1
Merchandising 1,428,814 Gran Cadena de Almacenes Colombianos
S.A. (CADENALCO) 4,043,019 1,279,076 0.2
35,000 Gran Cadena de Almacenes Colombianos
S.A. (CADENALCO)(ADR)(1)++++ 611,250 420,000 0.1
------------ ------------ ------
4,654,269 1,699,076 0.3
Total Long-Term Investments in
Colombia 16,072,660 13,025,785 1.9
Mexico Banking 1,730,143 Grupo Financiero Banamex-Accival,
S.A. de C.V. (Banacci) 3,675,406 3,121,008 0.4
9,584,000 ++Grupo Financiero Bancomer, S.A. de
C.V. 'B' (Ordinary) 2,626,470 3,860,796 0.6
------------ ------------ ------
6,301,876 6,981,804 1.0
Beverages 641,660 Panamerican Beverages Inc. (Class A) 20,478,455 29,997,605 4.3
Beverages & Tobacco 2,419,000 Fomento Economico Mexicano, S.A. de
C.V. (Femsa) (ADR)(1)++++ 7,091,035 8,176,220 1.2
1,679,000 Fomento Economico Mexicano, S.A. de
C.V. (Femsa) (Ordinary) 'B' 4,255,011 5,742,716 0.8
------------ ------------ ------
11,346,046 13,918,936 2.0
Building Materials 3,763,000 Apasco, S.A. de C.V. 'A' 12,906,646 24,930,948 3.6
2,318,000 Cementos Mexicanos, S.A. de C.V. 'B'
(Cemex) 9,544,015 8,412,807 1.2
901,000 Cementos Mexicanos, S.A. de C.V. 'B'
(Cemex) (ADR)(1) 7,864,424 6,419,625 0.9
------------ ------------ ------
30,315,085 39,763,380 5.7
Chemicals 193,700 Desc, S.A. de C.V. (ADR)(1) 4,125,948 4,188,763 0.6
Distribution 404,000 Grupo Casa Autrey, S.A. de C.V.
(ADR)(1) 8,544,799 7,827,500 1.1
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Mexico Financial Services 651,900 ++Banca Quadrum, S.A. de C.V. (ADR)(1) $ 10,545,780 $ 2,689,087 0.4%
(concluded) 248,539 Grupo Financiero Inbursa, S.A. de
C.V. 'B' 889,303 790,262 0.1
6,107 Grupo Financiero Inbursa, S.A. de
C.V. 'B' (ADR)(1) 106,089 94,659 0.0
------------ ------------ ------
11,541,172 3,574,008 0.5
Health & Personal 1,765,450 Kimberly-Clark de Mexico, S.A. de
Care C.V. 'A' 17,975,852 34,262,344 4.9
Merchandising 11,565,950 ++Cifra, S.A. de C.V. 'C' 14,127,154 15,911,606 2.3
250,000 ++Cifra, S.A. de C.V. 'C' (ADR)(1) 338,325 332,500 0.0
291,160 ++Sears Roebuck de Mexico, S.A. de
C.V. 'B' (ADR)(1)++++ 7,681,175 909,875 0.1
------------ ------------ ------
22,146,654 17,153,981 2.4
Multi-Industry 88,704 Grupo Carso, S.A. de C.V. 'A' (ADR)(1) 983,267 887,040 0.1
6,123,125 Grupo Carso, S.A. de C.V. 'A1' 49,270,574 31,298,213 4.5
------------ ------------ ------
50,253,841 32,185,253 4.6
Telecommunications 4,054,625 ++Carso Global Telecom, S.A. de
C.V. 'A1' 10,684,124 9,245,408 1.3
88,704 ++Carso Global Telecom, S.A. de C.V.
(ADR)(1) 421,344 388,080 0.1
243,900 ++Grupo Televisa, S.A. de C.V. (GDS)(3) 6,819,405 6,646,275 0.9
64,200 Telefonos de Mexico, S.A. de C.V.
(ADR)(1) 1,979,289 1,950,075 0.3
------------ ------------ ------
19,904,162 18,229,838 2.6
Total Long-Term Investments in Mexico 202,933,890 208,083,412 29.7
Panama Banking 80,000 Banco Latinoamericano de Exportaciones
S.A. ('BLADEX') 'E' 1,992,245 3,910,000 0.6
Total Long-Term Investments in Panama 1,992,245 3,910,000 0.6
Peru Financial Services 377,872 Credicorp Ltd. S.A. 6,665,789 6,518,292 0.9
Food & Household 2,885,636 ++Consorcio Alimentos Fabril
Products Pacifico S.A. 5,303,100 3,965,934 0.6
Metals--Non-Ferrous 323,000 Compania de Minas Buenaventura S.A. 5,248,750 5,289,125 0.8
376,305 Minsur Sociedad Limitada S.A.
(T Shares) 2,555,655 3,175,938 0.4
------------ ------------ ------
7,804,405 8,465,063 1.2
Telecommunications 503,000 Telefonica del Peru S.A. 10,776,265 9,745,625 1.4
5,042,339 Telefonica del Peru S.A. (B Shares) 9,849,127 9,877,753 1.4
------------ ------------ ------
20,625,392 19,623,378 2.8
Total Long-Term Investments in Peru 40,398,686 38,572,667 5.5
Venezuela Building Materials 593,722 Venezolana de Cementos S.A.C.A.
(Vencemos) 830,945 1,610,688 0.2
Food & Household 15,456,370 Mavesa S.A. 2,587,936 4,812,003 0.7
Products
Metals & Steel 4,640,166 Siderurgica Venezolana Sivensa,
S.A.I.C.A.--S.A.C.A. 2,203,931 3,312,438 0.5
84,367 Siderurgica Venezolana Sivensa,
S.A.I.C.A.--S.A.C.A. (ADR)(1)++++ 22,256 269,974 0.0
------------ ------------ ------
</TABLE>
44
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
2,226,187 3,582,412 0.5
Utilities 8,194,775 C.A. La Electricidad de Caracas
S.A.I.C.A.--S.A.C.A. 9,054,040 9,288,372 1.3
Total Long-Term Investments in
Venezuela 14,699,108 19,293,475 2.7
Total Long-Term Investments in
Latin America 620,966,208 679,180,476 96.9
Face
Amount Short-Term Investments
Commercial US$ 1,472,000 General Electric Capital Corp.,
Paper* 5.70% due 12/02/1996 1,471,534 1,471,534 0.2
Total Short-Term Investments 1,471,534 1,471,534 0.2
Total Investments $622,437,742 680,652,010 97.1
============
Other Assets Less Liabilities 20,597,899 2.9
------------ ------
Net Assets $701,249,909 100.0%
============ ======
<FN>
*Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
(1)American Depositary Receipts (ADR).
(2)Global Depositary Receipts (GDR).
(3)Global Despositary Shares (GDS).
(4)The interest rate is subject to change periodically based on the
change in the LIBOR (London Interbank Offered Rate). The interest
rate shownis the rate in effect as of November 30, 1996.
(5)The risk associated with Brady Bonds is the amount of any
uncollateralized principal or interest payments since there
is a high default rate of commercial bank loans by countries
issuing these securities.
++Non-income producing security.
++++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $20,617,000,
representing 2.9% of net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Centrais Eletricas de Santa Catarina S.A.
(CELESC) (ADR) 9/25/1996 $ 6,499,552 $ 6,595,300
Companhia Energetica de Minas Gerais
S.A. (CEMIG) (ADR) 7/20/1995--8/01/1995 1,628,295 2,356,000
Distribuidora Chilectra Metropolitana
S.A. (ADR) 10/24/1995--10/26/1995 1,473,750 1,890,000
Fomento Economico Mexicano, S.A.
de C.V. (Femsa) (ADR) 8/04/1995--9/04/1996 7,091,035 8,176,220
Gran Cadena de Almacenes Colombianos
S.A. (CADENALCO) (ADR) 2/14/1995 611,250 420,000
Sears Roebuck de Mexico, S.A. de C.V.
'B' (ADR) 8/23/1994--9/03/1994 7,681,175 909,875
Siderurgica Venezolana Sivensa,
S.A.I.C.A.--S.A.C.A. (ADR) 8/05/1996 22,256 269,974
Total $25,007,313 $20,617,369
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
As of November 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$622,437,742) (Note 1a) $ 680,652,010
Foreign cash (Note 1b) 23,265,619
Receivables:
Dividends $ 620,626
Capital shares sold 372,784
Interest 226,074 1,219,484
-------------
Prepaid registration fees and other assets (Note 1f) 59,915
-------------
Total assets 705,197,028
-------------
Liabilities: Payables:
Capital shares redeemed 2,019,591
Investment adviser (Note 2) 566,859
Distributor (Note 2) 461,729 3,048,179
-------------
Accrued expenses and other liabilities 898,940
-------------
Total liabilities 3,947,119
-------------
Net Assets: Net assets $ 701,249,909
=============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 361,426
Class B Common Stock, $0.10 par value, 100,000,000 shares
authorized 4,163,353
Class C Common Stock, $0.10 par value, 100,000,000 shares
authorized 186,050
Class D Common Stock, $0.10 par value, 100,000,000 shares
authorized 883,883
Paid-in capital in excess of par 884,257,152
Undistributed investment income--net 17,612,088
Accumulated realized capital losses on investments and foreign
currency transactions--net (Note 5) (263,705,203)
Accumulated distributions in excess of realized capital gains--
net (Note 1g) (601,566)
Unrealized appreciation on investments and foreign currency
transactions--net 58,092,726
-------------
Net assets $ 701,249,909
=============
Net Asset Class A--Based on net assets of $46,369,262 and 3,614,256
Value: shares outstanding $ 12.83
=============
Class B--Based on net assets of $518,864,442 and 41,633,526
shares outstanding $ 12.46
=============
Class C--Based on net assets of $23,183,190 and 1,860,500
shares outstanding $ 12.46
=============
Class D--Based on net assets of $112,833,015 and 8,838,830
shares outstanding $ 12.77
=============
See Notes to Consolidated Financial Statements.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended November 30, 1996
<S> <S> <C> <C>
Investment Income Dividends (net of $1,861,171 foreign withholding tax) $ 32,823,997
(Notes 1d & 1e): Interest and discount earned 4,348,169
-------------
Total income 37,172,166
-------------
Expenses: Investment advisory fees (Note 2) 7,092,959
Account maintenance and distribution fees--Class B (Note 2) 5,360,673
Transfer agent fees--Class B (Note 2) 1,503,999
Custodian fees 1,334,120
Account maintenance fees--Class D (Note 2) 283,093
Transfer agent fees--Class D (Note 2) 260,412
Account maintenance and distribution fees--Class C (Note 2) 207,045
Printing and shareholder reports 143,934
Accounting services (Note 2) 128,292
Registration fees (Note 1f) 103,001
Professional fees 93,357
Transfer agent fees--Class A (Note 2) 88,172
Transfer agent fees--Class C (Note 2) 59,633
Directors' fees and expenses 37,812
Amortization of organization expenses (Note 1f) 19,390
Pricing fees 3,984
Other 36,438
-------------
Total expenses 16,756,314
-------------
Investment income--net 20,415,852
-------------
Realized & Realized loss from:
Unrealized Gain Investments--net $ (75,788,697)
(Loss) on Foreign currency transactions--net (2,146,815) (77,935,512)
Investments & -------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 189,206,722
(Notes 1b, 1c, Foreign currency transactions--net 305,030 189,511,752
1e & 3): ------------- -------------
Net realized and unrealized gain on investments and foreign
currency transactions 111,576,240
-------------
Net Increase in Net Assets Resulting from Operations $ 131,992,092
=============
See Notes to Consolidated Financial Statements.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended November 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 20,415,852 $ 4,492,110
Realized loss on investments and foreign currency transactions
--net (77,935,512) (207,424,067)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 189,511,752 (238,787,654)
------------- -------------
Net increase (decrease) in net assets resulting from operations 131,992,092 (441,719,611)
------------- -------------
Distributions to Realized gain on investments--net:
Shareholders Class A -- (313,934)
(Note 1g): Class B -- (27,341,609)
Class C -- (170,047)
Class D -- (5,914,915)
In excess of realized gain on investments--net:
Class A -- (5,597)
Class B -- (487,479)
Class C -- (3,032)
Class D -- (105,458)
------------- -------------
Net decrease in net assets resulting from distributions to
shareholders -- (34,342,071)
------------- -------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (82,303,224) (29,924,043)
(Note 4): ------------- -------------
Net Assets: Total increase (decrease) in net assets 49,688,868 (505,985,725)
Beginning of year 651,561,041 1,157,546,766
------------- -------------
End of year* $ 701,249,909 $ 651,561,041
============= =============
*Undistributed investment income--net (Note 1i) $ 17,612,088 --
============= =============
See Notes to Consolidated Financial Statements.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL HIGHLIGHTS
Class A++++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year 1994++ to
Ended November 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.50 $ 17.37 $ 18.22
Operating -------- -------- --------
Performance: Investment income--net .46 .16 --
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.87 (6.52) (.85)
-------- -------- --------
Total from investment operations 2.33 (6.36) (.85)
-------- -------- --------
Less distributions:
Realized gain on investments--net -- (.50) --
In excess of realized gain on investments--net -- (.01) --
-------- -------- --------
Total distributions -- (.51) --
-------- -------- --------
Net asset value, end of period $ 12.83 $ 10.50 $ 17.37
======== ======== ========
Total Investment Based on net asset value per share 22.19% (37.66%) (4.67%)+++
Return:** ======== ======== ========
Ratios to Average Expenses 1.48% 1.66% 1.85%*
Net Assets: ======== ======== ========
Investment income (loss)--net 3.74% 1.40% (.20%)*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 46,369 $ 26,034 $ 10,350
Data: ======== ======== ========
Portfolio turnover 66.14% 54.86% 30.15%
======== ======== ========
Average commission rate paid++++++ $ .0001 -- --
======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Commencement of Operations.
++++ Based on average shares outstanding during the period.
++++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly affect the rate
shown.
+++ Aggregate total investment return.
See Notes to Consolidated Financial Statements.
49
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL HIGHLIGHTS (concluded)
The following per share data and ratios have Class B
been derived from information provided in the
financial statements.
For the Year Ended November 30,
Increase (Decrease) in Net Asset Value: 1996++++ 1995++++ 1994++++ 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.31 $ 17.24 $ 14.39 $ 9.83 $ 9.80
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .32 .05 (.09) .10 .08
Realized and unrealized gain (loss) on
investments and foreign currency transactions
--net 1.83 (6.47) 2.99 4.68 .05
-------- -------- -------- -------- --------
Total from investment operations 2.15 (6.42) 2.90 4.78 .13
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.05) (.13) (.10)
Realized gain on investments--net -- (.50) -- (.09) --+++++
In excess of realized gain on investments
--net -- (.01) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions -- (.51) (.05) (.22) (.10)
-------- -------- -------- -------- --------
Net asset value, end of year $ 12.46 $ 10.31 $ 17.24 $ 14.39 $ 9.83
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 20.85% (38.32%) 20.19% 49.80% 1.30%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 2.54% 2.71% 2.51% 2.59% 2.65%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net 2.69% .43% (.54%) 1.09% 1.30%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $518,865 $505,038 $937,221 $305,301 $126,344
Data: ======== ======== ======== ======== ========
Portfolio turnover 66.14% 54.86% 30.15% 24.74% 36.50%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0001 -- -- -- --
======== ======== ======== ======== ========
<CAPTION>
Class C++++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year 1994++ to
Ended November 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.31 $ 17.24 $ 18.10
Operating -------- -------- --------
Performance: Investment income (loss)--net .32 .03 (.02)
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.83 (6.45) (.84)
-------- -------- --------
Total from investment operations 2.15 (6.42) (.86)
-------- -------- --------
Less distributions:
Realized gain on investments--net -- (.50) --
In excess of realized gain on investments--net -- (.01) --
Total distributions -- (.51) --
-------- -------- --------
Net asset value, end of period $ 12.46 $ 10.31 $ 17.24
======== ======== ========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total Investment Based on net asset value per share 20.85% (38.32%) (4.75%)+++
Return:** ======== ======== ========
Ratios to Average Expenses 2.54% 2.72% 2.93%*
Net Assets: ======== ======== ========
Investment income (loss)--net 2.68% .30% (1.22%)*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 23,183 $ 14,659 $ 5,069
Data: ======== ======== ========
Portfolio turnover 66.14% 54.86% 30.15%
======== ======== ========
Average commission rate paid++++++ $ .0001 -- --
======== ======== ========
<CAPTION>
The following per share data and ratios have Class D
been derived from information provided in the
financial statements.
For the Year Ended November 30,
Increase (Decrease) in Net Asset Value: 1996++++ 1995++++ 1994++++ 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.47 $ 17.37 $ 14.45 $ 9.90 $ 9.81
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .42 .14 .03 .18 .15
Realized and unrealized gain (loss) on
investments and foreign currency transactions
--net 1.88 (6.53) 3.00 4.69 .06
-------- -------- -------- -------- --------
Total from investment operations 2.30 (6.39) 3.03 4.87 .21
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.11) (.23) (.12)
Realized gain on investments--net -- (.50) -- (.09) --+++++
In excess of realized gain on investments--net -- (.01) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions -- (.51) (.11) (.32) (.12)
-------- -------- -------- -------- --------
Net asset value, end of year $ 12.77 $ 10.47 $ 17.37 $ 14.45 $ 9.90
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 21.97% (37.84%) 21.07% 50.86% 2.19%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.74% 1.91% 1.73% 1.83% 1.89%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 3.47% 1.18% .23% 1.83% 2.18%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $112,833 $105,830 $204,907 $ 75,085 $ 30,685
Data: ======== ======== ======== ======== ========
Portfolio turnover 66.14% 54.86% 30.15% 24.74% 36.50%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0001 -- -- -- --
======== ======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Commencement of Operations.
++++ Based on average shares outstanding during the period.
++++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly affect the rate
shown.
+++ Aggregate total investment return.
+++++ Amount is less than $.01 per share.
See Notes to Consolidated Financial Statements.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Latin America Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) 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 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.
* 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. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to
52
<PAGE>
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 except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates. Distributions in
excess of realized capital gains are due primarily to differing tax
treatments for post-October losses.
(h) Basis of consolidation--The accompanying consolidated financial
statements include the accounts of Merrill Lynch Latin America Fund
Chile Ltd., 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 reclassified to
reflect permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$3,138,389 has been reclassified between undistributed net
investment income and accumulated net realized capital losses and
$334,625 has been reclassified between paid-in capital in excess of
par and undistributed net investment income. 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
the limited partner. The Fund has entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 1.0%, on an annual basis,
of the average daily value of the Fund's net assets.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended November 30, 1996, 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 $ 189 $ 2,334
Class D $15,673 $183,545
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
For the year ended November 30, 1996, MLPF&S received contingent
deferred sales charges of $1,557,160 and $17,371 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $173,055 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended November 30, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended November 30, 1996 were $445,114,153 and
$482,277,663, respectively.
Net realized and unrealized gains (losses) as of November 30, 1996
were as follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $(75,788,697) $ 58,214,268
Foreign currency transactions (2,146,815) (121,542)
------------ ------------
Total $(77,935,512) $ 58,092,726
============ ============
As of November 30, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $56,003,055, of which $124,772,466
related to appreciated securities and $68,769,411 related to
depreciated securities. At November 30, 1996, the aggregate cost of
investments for Federal income tax purposes was $624,648,955.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $82,303,224 and $29,924,043 for the years ended November 30,
1996 and November 30, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for theYear Dollar
Ended November 30, 1996 Shares Amount
Shares sold 2,334,477 $ 27,998,108
Shares redeemed (1,199,157) (14,535,235)
------------ ------------
Net increase 1,135,320 $ 13,462,873
============ ============
Class A Shares for the Year Dollar
Ended November 30, 1995 Shares Amount
Shares sold 3,438,542 $ 37,843,792
Shares issued to shareholders in
reinvestment of distributions 18,463 304,264
------------ ------------
Total issued 3,457,005 38,148,056
Shares redeemed (1,573,862) (16,786,743)
------------ ------------
Net increase 1,883,143 $ 21,361,313
============ ============
Class B Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
Shares sold 10,055,825 $115,213,232
Automatic conversion of shares (137,908) (1,581,919)
Shares redeemed (17,283,572) (199,308,905)
------------ ------------
Net decrease (7,365,655) $(85,677,592)
============ ============
Class B Shares for the Year Dollar
Ended November 30, 1995 Shares Amount
Shares sold 18,702,609 $208,392,855
Shares issued to shareholders in
reinvestment of distributions 1,527,757 24,963,542
------------ ------------
Total issued 20,230,366 233,356,397
Automatic conversion of shares (381,355) (4,102,038)
Shares redeemed (25,227,391) (278,539,083)
------------ ------------
Net decrease (5,378,380) $(49,284,724)
============ ============
Class C Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
Shares sold 1,248,519 $ 14,588,140
Shares redeemed (810,190) (9,591,529)
------------ ------------
Net increase 438,329 $ 4,996,611
============ ============
Class C Shares for the Year Dollar
Ended November 30, 1995 Shares Amount
Shares sold 1,762,120 $ 19,860,125
Shares issued to shareholders in
reinvestment of distributions 9,124 149,092
------------ ------------
Total issued 1,771,244 20,009,217
Shares redeemed (643,180) (6,956,487)
------------ ------------
Net increase 1,128,064 $ 13,052,730
============ ============
54
<PAGE>
Class D Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
Shares sold 5,255,871 $ 59,496,466
Automatic conversion of shares 135,283 1,581,919
------------ ------------
Total issued 5,391,154 61,078,385
Shares redeemed (6,658,036) (76,163,501)
------------ ------------
Net decrease (1,266,882) $(15,085,116)
============ ============
Class D Shares for the Year Dollar
Ended November 30, 1995 Shares Amount
Shares sold 7,252,530 $ 81,328,489
Automatic conversion of shares 376,941 4,102,038
Shares issued to shareholders in
reinvestment of distributions 319,791 5,266,950
------------ ------------
Total issued 7,949,262 90,697,477
Shares redeemed (9,641,073) (105,750,839)
------------ ------------
Net decrease (1,691,811) $(15,053,362)
============ ============
5. Capital Loss Carryforward:
At November 30, 1996, the Fund had a net capital loss carryforward
of approximately $261,094,000, of which $145,157,000 expires in 2003
and $115,937,000 expires in 2004. This amount will be available to
offset like amounts of any future taxable gains.
6. Subsequent Event:
On December 1, 1996, the Board of Directors declared an ordinary
income dividend in the amount of $.435475 per share for Class A,
$.297372 per share for Class B, $.315761 per share for Class C and
$.401284 per share for Class D payable on December 30, 1996 to
shareholders of record as of December 19, 1996.
55
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Portfolio Strategies Involving Options and Futures....................... 2
Other Investment Policies and Practices.................................. 7
Investment Restrictions.................................................. 9
Management of the Fund.................................................... 12
Directors and Officers................................................... 12
Compensation of Directors................................................ 13
Management and Advisory Arrangements..................................... 14
Purchase of Shares........................................................ 15
Initial Sales Charge Alternatives--Class A and Class D Shares............ 15
Reduced Initial Sales Charges............................................ 17
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements........................................................... 19
Distribution Plans....................................................... 20
Limitations on the Payment of Deferred Sales Charges..................... 20
Redemption of Shares...................................................... 22
Deferred Sales Charges--Class B and Class C Shares....................... 22
Portfolio Transactions and Brokerage...................................... 22
Determination of Net Asset Value.......................................... 24
Shareholder Services...................................................... 25
Investment Account....................................................... 25
Automatic Investment Plans............................................... 26
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 26
Systematic Withdrawal Plans--Class A and Class D Shares.................. 26
Exchange Privilege....................................................... 27
Dividends, Distributions and Taxes........................................ 30
Dividends and Distributions.............................................. 30
Taxes.................................................................... 30
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions........................................................... 33
Performance Data.......................................................... 34
General Information....................................................... 36
Description of Shares.................................................... 36
Computation of Offering Price Per Share.................................. 37
Independent Auditors..................................................... 37
Custodian................................................................ 38
Transfer Agent........................................................... 38
Legal Counsel............................................................ 38
Reports to Shareholders.................................................. 38
Additional Information................................................... 38
Independent Auditors' Report.............................................. 39
Consolidated Financial Statements......................................... 41
</TABLE>
Code #13991-0397
[LOGO] MERRILL LYNCH
Merrill Lynch
Latin America Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
March 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
Contained in Part A:
Consolidated Financial Highlights for each of the years in the five-
year period ended November 30, 1996, and for the period September 27,
1991 (commencement of operations) to November 30, 1991.
Contained in Part B:
Consolidated Schedule of Investments as of November 30, 1996.
Consolidated Statement of Assets and Liabilities as of November 30,
1996.
Consolidated Statement of Operations for the year ended November 30,
1996.
Consolidated Statements of Changes in Net Assets for each of the years
in the two-year period ended November 30, 1996.
Consolidated Financial Highlights for each of the years in the five-
year period ended November 30, 1996.
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) Articles of Incorporation of the Registrant, dated June 28, 1991.(a)
(b) Articles Supplementary to the Articles of Incorporation of the
Registrant dated August 5, 1991.(b)
(c) Articles of Amendment to the Articles of Incorporation of the
Registrant, dated October 19, 1994.(a)
(d) Articles Supplementary to the Articles of Incorporation of the
Registrant dated October 21, 1994.(a)
2 By-Laws of the Registrant, as amended.(b)
3 None.
4 Copies of instruments defining the rights of shareholders, including
the relevant portions of the Articles of Incorporation, as amended,
and the By-Laws of the Registrant.(c)
5(a) Management Agreement between the Registrant and Merrill Lynch Asset
Management, Inc.(a)
(b) Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.
6(a) Class A Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(b) Form of Class B Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(a)
(c) Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund
Adviser Program.(e)
(d) Class C Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(e) Class D Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
7 None.
8 Custodian Agreement between the Registrant and Brown Brothers Harriman
& Co.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
9 Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement
between the Registrant and Merrill Lynch Financial Data Services,
Inc.(a)
10 Opinion of Brown & Wood LLP, counsel for the Registrant.
11 Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 None.
13 Certificate of Merrill Lynch Asset Management, L.P.(a)
14 None.
15(a) Amended and Restated Class B Shares Distribution Plan and Class B
Shares Distribution
Plan Sub-Agreement of the Registrant.(e)
(b) Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of
the Registrant.(d)
(c) Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of
the Registrant.(d)
16(a) Schedule of computation of each performance quotation provided in the
Registration
Statement in response to Item 22 relating to Class A shares.(a)
(b) Schedule of computation of each performance quotation provided in the
Registration
Statement in response to Item 22 relating to Class B shares.(a)
(c) Schedule of computation of each performance quotation provided in the
Registration
Statement in response to Item 22 relating to Class C shares.(a)
(d) Schedule of computation of each performance quotation provided in the
Registration
Statement in response to Item 22 relating to Class D shares.(a)
17(a) Financial Data Schedule for Class A Shares.
(b) Financial Data Schedule for Class B Shares.
(c) Financial Data Schedule for Class C Shares.
(d) Financial Data Schedule for Class D Shares.
18 Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-3.(f)
</TABLE>
- --------
(a) Filed on March 27, 1995 as an Exhibit to Post-Effective Amendment No. 5 to
the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended (File No. 33-41622) (the "Registration Statement").
(b) Filed on March 28, 1996 as an Exhibit to Post-Effective Amendment No. 6 to
the Registration Statement.
(c) Reference is made to Article III (Section 3 and 4), Article V, Article VI
(Sections 2, 3, 4, 5 and 6), 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) and 1(d) to the Registration Statement; and
Article II, Article III (Sections 1, 2, 3, 5, 6 and 17), Article V (Section
7), 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.
(d) Filed on October 17, 1994 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement.
(e) Filed on March 29, 1994 as an Exhibit to Post-Effective Amendment No. 3 to
the Registration Statement.
(f) 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).
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person. The Registrant owns all of the stock of ML Latin America Fund Chile
Ltd., a corporation formed under the laws of Delaware specifically to
facilitate investment in accordance with restrictions limiting investment in
Chile. Such subsidiary is included in the Registrant's consolidated financial
statements.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS FEBRUARY 28, 1997
-------------- -----------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share..... 16,682
Class B Shares of Common Stock, par value $0.10 per share..... 77,632
Class C Shares of Common Stock, par value $0.10 per share..... 4,795
Class D Shares of Common Stock, par value $0.10 per share..... 13,861
</TABLE>
- --------
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the 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.
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.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended, may be concerned,
Article VI of the Registrant's By-Laws provides that such payments will be made
only on the following conditions: (i) the advances must be limited to amounts
used, or to be used, for the preparation or presentation of a defense to the
action, including costs connected with the preparation of a settlement; (ii)
advances may be made only on receipt of a written promise by, or on behalf of,
the recipient to repay that amount of the advance which exceeds the amount
which it is ultimately determined he is entitled to receive from the Registrant
by reason of indemnification; and (iii) (a)
C-3
<PAGE>
such promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested non-party Directors, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"1933 Act"), against certain types of civil liabilities arising in connection
with the Registration Statement or Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager") acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch 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 Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc. and Merrill Lynch Variable Series Funds, Inc., and for the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund,
C-4
<PAGE>
Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World
Income Fund, Inc., and The Municipal Fund Accumulation Program, Inc.; and for
the following closed-end investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest 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., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of MLAM, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 1, 1994 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the first two
paragraphs of this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are directors, trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services...... General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President and Director
of Princeton Services; Director of
MLFD; Executive Vice President of ML &
Co.
Terry K. Glenn.......... Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<S> <C> <C>
Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of FAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller of
and Controller FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989 to
1995
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as a sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, 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 Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch 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
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
C-6
<PAGE>
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World Income
Fund, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-90011. The
address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since December 1, 1994, for
his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Harvey, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel........... Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services; Director of MLFD; Executive
Vice President of ML & Co.
Alan J. Albert.......... Senior Managing Director Vice President of the Manager
Terry K. Glenn.......... Director Executive Vice President of the Manager
and FAM; Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Adrian Holmes........... Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand..... Director Director of Merrill Lynch Global Asset
Management
Edward Gobora........... Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride........ Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan.......... Director Vice President, Institutional Marketing,
Debt and Equity Group, Merrill Lynch
Capital Markets from 1989 to 1994
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and Treasurer
of MLFD
Stephen J. Yardley...... Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
C-7
<PAGE>
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. the principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Crook,
Aldrich, Breen Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 0211-2665.
<TABLE>
<CAPTION>
POSITION(S) ANDOFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- ------------------------ -------------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Arthur Zeikel........... Director President and Director
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Kevin P. Boman.......... Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Michelle T. Lau......... Vice President None
Debra W. Landsman-Yaros. Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30, LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and the State of New Jersey, on the 21st day of
March 1997.
Merrill Lynch Latin America Fund,
Inc.
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to Registrant's Registration Statement has been signed
below by the following persons in the capacities and on the date(s) indicated.
SIGNATURES TITLE DATE(S)
President and
Arthur Zeikel* Director
(Principal Executive Officer)
- -------------------------------------
(ARTHUR ZEIKEL)
Treasurer (Principal Financial
Gerald M. Richard* and Accounting
Officer)
- -------------------------------------
(GERALD M. RICHARD)
Donald Cecil* Director
- -------------------------------------
(DONALD CECIL)
Edward H. Meyer* Director
- -------------------------------------
(EDWARD H. MEYER)
Charles C. Reilly* Director
- -------------------------------------
(CHARLES C. REILLY)
Richard R. West* Director
- -------------------------------------
(RICHARD R. WEST)
Edward D. Zinbarg* Director
- -------------------------------------
(EDWARD D. ZINBARG)
/s/ Gerald M. Richard March 21, 1997
*By: ________________________________
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
5(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited
8 --Custodian Agreement between the Registrant and Brown Brothers
Harriman & Co.
10 --Opinion of Brown & Wood LLP, counsel for the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Merrill Lynch Latin America Fund, Inc. - Class A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 622437742
<INVESTMENTS-AT-VALUE> 680652010
<RECEIVABLES> 1219484
<ASSETS-OTHER> 23325534
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 705197028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3947119
<TOTAL-LIABILITIES> 3947119
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 889851864
<SHARES-COMMON-STOCK> 3614256
<SHARES-COMMON-PRIOR> 2478936
<ACCUMULATED-NII-CURRENT> 17612088
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (263705203)
<OVERDISTRIBUTION-GAINS> (601566)
<ACCUM-APPREC-OR-DEPREC> 58092726
<NET-ASSETS> 46369262
<DIVIDEND-INCOME> 32823997
<INTEREST-INCOME> 4348169
<OTHER-INCOME> 0
<EXPENSES-NET> (16756314)
<NET-INVESTMENT-INCOME> 20415852
<REALIZED-GAINS-CURRENT> (77935512)
<APPREC-INCREASE-CURRENT> 189511752
<NET-CHANGE-FROM-OPS> 131992092
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2334477
<NUMBER-OF-SHARES-REDEEMED> (1199157)
<SHARES-REINVESTED> 0
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<ACCUMULATED-GAINS-PRIOR> (188908080)
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<OVERDIST-NET-GAINS-PRIOR> (601566)
<GROSS-ADVISORY-FEES> 7092959
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16756314
<AVERAGE-NET-ASSETS> 39394562
<PER-SHARE-NAV-BEGIN> 10.50
<PER-SHARE-NII> .46
<PER-SHARE-GAIN-APPREC> 1.87
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.83
<EXPENSE-RATIO> 1.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Merrill Lynch Latin America Fund, Inc. - Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 622437742
<INVESTMENTS-AT-VALUE> 680652010
<RECEIVABLES> 1219484
<ASSETS-OTHER> 23325534
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 705197028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3947119
<TOTAL-LIABILITIES> 3947119
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 889851864
<SHARES-COMMON-STOCK> 41633526
<SHARES-COMMON-PRIOR> 48999181
<ACCUMULATED-NII-CURRENT> 17612088
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (263705203)
<OVERDISTRIBUTION-GAINS> (601566)
<ACCUM-APPREC-OR-DEPREC> 58092726
<NET-ASSETS> 518864442
<DIVIDEND-INCOME> 32823997
<INTEREST-INCOME> 4348169
<OTHER-INCOME> 0
<EXPENSES-NET> (16756314)
<NET-INVESTMENT-INCOME> 20415852
<REALIZED-GAINS-CURRENT> (77935512)
<APPREC-INCREASE-CURRENT> 189511752
<NET-CHANGE-FROM-OPS> 131992092
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10055825
<NUMBER-OF-SHARES-REDEEMED> (17421480)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 49688868
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (188908080)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (601566)
<GROSS-ADVISORY-FEES> 7092959
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16756314
<AVERAGE-NET-ASSETS> 537535943
<PER-SHARE-NAV-BEGIN> 10.31
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> 1.83
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.46
<EXPENSE-RATIO> 2.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> Merrill Lynch Latin America Fund, Inc. - Class C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 622437742
<INVESTMENTS-AT-VALUE> 680652010
<RECEIVABLES> 1219484
<ASSETS-OTHER> 23325534
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 705197028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3947119
<TOTAL-LIABILITIES> 3947119
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 889851864
<SHARES-COMMON-STOCK> 1860500
<SHARES-COMMON-PRIOR> 1422171
<ACCUMULATED-NII-CURRENT> 17612088
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (263705203)
<OVERDISTRIBUTION-GAINS> (601566)
<ACCUM-APPREC-OR-DEPREC> 58092726
<NET-ASSETS> 23183190
<DIVIDEND-INCOME> 32823997
<INTEREST-INCOME> 4348169
<OTHER-INCOME> 0
<EXPENSES-NET> (16756314)
<NET-INVESTMENT-INCOME> 20415852
<REALIZED-GAINS-CURRENT> (77935512)
<APPREC-INCREASE-CURRENT> 189511752
<NET-CHANGE-FROM-OPS> 131992092
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1248519
<NUMBER-OF-SHARES-REDEEMED> (810190)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 49688868
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (188908080)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (601566)
<GROSS-ADVISORY-FEES> 7092959
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16756314
<AVERAGE-NET-ASSETS> 20761196
<PER-SHARE-NAV-BEGIN> 10.31
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> 1.83
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.46
<EXPENSE-RATIO> 2.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> Merrill Lynch Latin America Fund, Inc. - Class D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 622437742
<INVESTMENTS-AT-VALUE> 680652010
<RECEIVABLES> 1219484
<ASSETS-OTHER> 23325534
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 705197028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3947119
<TOTAL-LIABILITIES> 3947119
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 889851864
<SHARES-COMMON-STOCK> 8838830
<SHARES-COMMON-PRIOR> 10105712
<ACCUMULATED-NII-CURRENT> 17612088
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (263705203)
<OVERDISTRIBUTION-GAINS> (601566)
<ACCUM-APPREC-OR-DEPREC> 58092726
<NET-ASSETS> 112833015
<DIVIDEND-INCOME> 32823997
<INTEREST-INCOME> 4348169
<OTHER-INCOME> 0
<EXPENSES-NET> (16756314)
<NET-INVESTMENT-INCOME> 20415852
<REALIZED-GAINS-CURRENT> (77935512)
<APPREC-INCREASE-CURRENT> 189511752
<NET-CHANGE-FROM-OPS> 131992092
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5391154
<NUMBER-OF-SHARES-REDEEMED> (6658036)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 49688868
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (188908080)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (601566)
<GROSS-ADVISORY-FEES> 7092959
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16756314
<AVERAGE-NET-ASSETS> 113547515
<PER-SHARE-NAV-BEGIN> 10.47
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> 1.88
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.77
<EXPENSE-RATIO> 1.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.5(b)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 4th day of November, 1996, by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH LATIN AMERICA FUND, INC. (the "Fund") is a Maryland
corporation engaged in business as a non-diversified, open-end investment
company registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into a management agreement (the "Management
Agreement") dated August 15, 1991, pursuant to which MLAM provides management
and investment and advisory services to the Fund; and
<PAGE>
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
---------
Duties of MLAM U.K.
-------------------
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of MLAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for or represent the
Fund in any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and shall
provide MLAM with such investment research, advice
2
<PAGE>
and supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of the Fund; shall furnish continuously an
investment program for the Fund and shall make recommendations from time to time
as to which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Articles of Incorporation and By-Laws
of the Fund, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
3
<PAGE>
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will MLAM
U.K. be the registered holder of the registered investments of MLAM or the Fund
or be the custodian of documents or other evidence of title.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
-----------
Compensation of MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by MLAM and MLAM U.K. but in no event in excess of the amount that
MLAM actually receives for providing services to the Fund pursuant to the
Management Agreement.
ARTICLE IV
----------
Limitation of Liability of MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
performance of sub-advisory
4
<PAGE>
services rendered with respect to the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, MLAM U.K. shall include any affiliates of MLAM U.K. performing
services for MLAM contemplated hereby and directors, officers and employees of
MLAM U.K. and such affiliates.
ARTICLE V
---------
Activities of MLAM U.K.
-----------------------
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM U.K.
(for purposes of this Article V referred to as "affiliates") being free to
render services to others. It is understood that Directors, officers, employees
and shareholders of the Fund are or may become interested in MLAM U.K. and its
affiliates, as directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of MLAM U.K. and its
affiliates are or may become similarly interested in the Fund, and that MLAM
U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
MLAM U.K. Statements Pursuant to IMRO Rules
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K.
5
<PAGE>
MLAM has the right to obtain from MLAM U.K. a copy of the IMRO complaints
procedure and to approach IMRO directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures or contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
ARTICLE VII
-----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until the date of termination of the Management
Agreement (but not later than two years after the date hereof) and thereafter,
but only so long as such continuance is specifically approved at least annually
by (i) the Directors of the Fund or by the vote of a majority of the
6
<PAGE>
outstanding voting securities of the Fund and (ii) a majority of those Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by MLAM or by vote of a majority of the outstanding voting securities
of the Fund, or by MLAM U.K., on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment or
in the event of the termination of the Management Agreement. Any termination
shall be without prejudice to the completion of transactions already initiated.
ARTICLE VIII
------------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
----------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective
7
<PAGE>
meanings specified in the Investment Company Act and the rules and regulations
thereunder, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
ARTICLE X
---------
Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By /s/ Terry K. Glenn
----------------------------------------
Title: Executive Vice President
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By /s/ Arthur Zeikel
----------------------------------------
Title: Director and Chairman
9
<PAGE>
EXHIBIT 99.8
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made this 23rd day of July , 1996, between MERRILL
---- ------------
LYNCH LATIN AMERICA FUND, INC.(the "Fund") and Brown Brothers Harriman & Co.
(the "Custodian").
WITNESSETH: That in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. The Fund hereby employs and appoints the Custodian as a custodian for
the term and subject to the provisions of this Agreement. The Custodian shall
not be under any duty or obligation to require the Fund to deliver to it any
securities or funds owned by the Fund and shall have no responsibility or
liability for or on account of securities or funds not so delivered. The Fund
will deposit with the Custodian copies of the Certificate of Incorporation and
By-Laws (or comparable documents) of the Fund and all amendments thereto, and
copies of such votes and other proceedings of the Fund as may be necessary for
or convenient to the Custodian in the performance of its duties.
2. Except for securities and funds held by subcustodians appointed
pursuant to the provisions of Section 3 hereof, the Custodian shall have and
perform the following powers and duties:
A. Safekeeping - To keep safely the securities of the Fund that have been
-----------
delivered to the Custodian and from time to time to receive delivery of
securities for safekeeping.
<PAGE>
B. Manner of Holding Securities - To hold securities of the Fund (1) by
----------------------------
physical possession of the share certificates or other instruments representing
such securities in registered or bearer form, or (2) in book-entry form by a
Securities System (as said term is defined in Section 2S).
C. Registered Name; Nominee - To hold registered securities of the Fund
------------------------
(1) in the name or any nominee name of the Custodian or the Fund, or in the name
or any nominee name of any agent appointed pursuant to Section 5E, or (2) in
street certificate form, so-called, and in any case with or without any
indication of fiduciary capacity.
D. Purchases - Upon receipt of Proper Instructions, as defined in Section
---------
V on Page 14, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities (1) by the Custodian, or (2) by a clearing
corporation of a national securities exchange of which the Custodian is a
member, or (3) by a Securities System. However, (i) in the case of repurchase
agreements entered into by the Fund, the Custodian may release funds to a
Securities System or to a Subcustodian prior to the receipt of advice from the
Securities System or Subcustodian that the securities underlying such repurchase
agreement have been transferred by book entry into the Account (as defined in
Section 2S) of the Custodian maintained with such Securities System or
Subcustodian, so long
2
<PAGE>
as such payment instructions to Securities System or Subcustodian include a
requirement that delivery is only against payment of securities, and (ii) in the
case of time deposits, call account, deposits, currency deposits, and other
deposits, contracts or options pursuant to Sections 2K, 2L and 2M, the Custodian
may make payment therefor without receiving an instrument evidencing said
deposit so long as such payment instructions detail specific securities to be
acquired.
E. Exchanges - Upon receipt of proper instructions, to exchange securities
---------
held by it for the account of the Fund for other securities in connection with
any reorganization, recapitalization, split-up of shares, change of par value,
conversion or other event, and to deposit any such securities in accordance with
the terms of any reorganization or protective plan. Without such instructions,
the Custodian may surrender securities in temporary form for definitive
securities, may surrender securities for transfer into a name or nominee name as
permitted in Section 2C, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided the securities to be issued are to be
delivered to the Custodian and further provided the Custodian shall at the time
of surrendering securities or instruments receive a receipt or other evidence of
ownership thereof.
F. Sales of Securities - Upon receipt of proper
-------------------
3
<PAGE>
instructions, to make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor (1) in cash, by a
certified check, bank cashier's check, bank credit, or bank wire transfer, or
(2) by credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member, or (3) by
credit to the account of the Custodian or an Agent of the Custodian with a
Securities System.
G. Depositary Receipts - Upon receipt of proper instructions, to instruct
-------------------
a subcustodian appointed pursuant to Section 3 hereof (a "Subcustodian") or an
agent of the Custodian appointed pursuant to Section 5E hereof (an "Agent") to
surrender securities to the depositary used by an issuer of American Depositary
Receipts or International Depositary Receipts (hereinafter collectively referred
to as "ADRs") for such securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to the Subcustodian
or Agent that the depositary has acknowledged receipt of instructions to issue
with respect to such securities ADRs in the name of the Custodian, or a nominee
of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at
such other place as the Custodian may from time to time designate.
Upon receipt of proper instructions, to surrender ADRs to the issuer thereof
against a written receipt therefor
4
<PAGE>
adequately describing the ADRs surrendered and written evidence satisfactory to
the Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depositary to deliver the securities underlying such
ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of proper
---------------------------------
instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants, puts, calls, rights or similar securities for the purpose of
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and, upon receipt
of proper instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
----------------------------
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Borrowings - Upon receipt of proper instructions, to deliver securities
----------
of the Fund to lenders or their agents as collateral for borrowings effected by
the Fund, provided that such borrowed money is payable to or upon the
Custodian's order as Custodian for the Fund.
K. Demand Deposit Bank Accounts - To open and operate an
----------------------------
5
<PAGE>
account or accounts in the name of the Fund on the Custodian's books subject
only to draft or order by the Custodian. All funds received by the Custodian
from or for the account of the Fund shall be deposited in said account(s). The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
If and when authorized by proper instructions, the Custodian may open and
operate an additional account(s) in such other banks or trust companies as may
be designated by the Fund in such instructions (any such bank or trust company
so designated by the Fund being referred to hereafter as a "Banking
Institution"), provided that such account(s) shall be in the name of the
Custodian for account of the Fund and subject only to the Custodian's draft or
order. Such accounts may be opened with Banking Institutions in the United
States and in other countries and may be denominated in either U.S. Dollars or
other currencies as the Fund may determine. All such deposits shall be deemed
to be portfolio securities of the Fund and accordingly the responsibility of the
Custodian therefor shall be the same as and neither lesser nor greater than the
Custodian's responsibility in respect of other portfolio securities of the Fund.
L. Interest Bearing Call or Time Deposits - To place interest bearing
--------------------------------------
fixed term and call deposits with such banks and
6
<PAGE>
in such amounts as the Fund may authorize pursuant to proper instructions. Such
deposits may be placed with the Custodian or with Subcustodians or other Banking
Institutions as the Fund may determine. Deposits may be denominated in U. S.
Dollars or other currencies and need not be evidenced by the issuance or
delivery of a certificate to the Custodian, provided that the Custodian shall
include in its records with respect to the assets of the Fund, appropriate
notation as to the amount and currency of each such deposit, the accepting
Banking Institution, and other appropriate details. Such deposits, other than
those placed with the Custodian, shall be deemed portfolio securities of the
Fund and the responsibilities of the Custodian therefor shall be the same as
those for demand deposit bank accounts placed with other banks, as described in
Section K of this agreement. The responsibility of the Custodian for such
deposits accepted on the Custodian's books shall be that of a U.S. bank for a
similar deposit.
M. Foreign Exchange Transactions and Futures Contracts - Pursuant to
---------------------------------------------------
proper instructions, to enter into foreign exchange contracts or options to
purchase and sell foreign currencies for spot and future delivery on behalf and
for the account of the Fund. Such transactions may be undertaken by the
Custodian with such Banking Institutions, including the Custodian and
Subcustodian(s) as principals, as approved and authorized by the Fund. Foreign
exchange contracts and options other than those
7
<PAGE>
executed with the Custodian, shall be deemed to be portfolio securities of the
Fund and the responsibilities of the Custodian therefor shall be the same as
those for demand deposit bank accounts placed with other banks as described in
Section 2-K of this agreement. Upon receipt of proper instructions, to receive
and retain confirmations evidencing the purchase or sale of a futures contract
or an option on a futures contract by the Fund; to deposit and maintain in a
segregated account, for the benefit of any futures commission merchant or to pay
to such futures commission merchant, assets designated by the Fund as initial,
maintenance or variation "margin" deposits intended to secure the Fund's
performance of its obligations under any futures contracts purchased or sold or
any options on futures contracts written by the Fund, in accordance with the
provisions of any agreement or agreements among any of the Fund, the Custodian
and such futures commission merchant, designated to comply with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding such margin deposits; and to release
and/or transfer assets in such margin accounts only in accordance with any such
agreements or rules.
N. Stock Loans - Upon receipt of proper instructions to deliver securities
-----------
of the Fund, in connection with loans of securities by the Fund, to the borrower
thereof upon the receipt of the cash collateral, if any, for such borrowing. In
the event
8
<PAGE>
U.S. Government securities are to be used as collateral, the Custodian will not
release the securities to be loaned until it has received confirmation that such
collateral has been delivered to the Custodian. The Custodian and Fund
understand that the timing of receipt of such confirmation will normally require
that the delivery of securities to be loaned will be made one day after receipt
of the U.S. Government collateral.
O. Collections - To collect, receive and deposit in said account or
-----------
accounts all income and other payments with respect to the securities held
hereunder, and to execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of income or other
payments with respect to securities of the Fund or in connection with transfer
of securities, and pursuant to proper instructions to take such other actions
with respect to collection or receipt of funds or transfer of securities which
involve an investment decision.
P. Dividends, Distributions and Redemptions - Upon receipt of proper
----------------------------------------
instructions from the Fund, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities to the Shareholder Servicing Agent
or otherwise apply funds or
9
<PAGE>
securities, insofar as available, for the payment of dividends or other
distributions to Fund shareholders. Upon receipt of proper instructions from
the Fund, or upon receipt of instructions from the Shareholder Servicing Agent
(given by such person or persons and in such manner on behalf of the Shareholder
Servicing Agent as the Fund shall have authorized), the Custodian shall release
funds or securities, insofar as available, to the Shareholder Servicing Agent or
as such Agent shall otherwise instruct for payment to Fund shareholders who have
delivered to such Agent a request for repurchase or redemption of their shares
of capital stock of the Fund.
Q. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund all
---------------------
forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, and upon receipt of proper instructions, to execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominee shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper instructions.
R. Bills - Upon receipt of proper instructions from the Administrator, to
-----
pay or cause to be paid, insofar as funds are available for the purpose, bills,
statements, or other obligations of the Fund.
10
<PAGE>
S. Deposit of Fund Assets in Securities Systems - The Custodian may
--------------------------------------------
deposit and/or maintain securities owned by the Fund in (i) The Depository Trust
Company, (ii) any book-entry system as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry
regulations of federal agencies substantially in the form of Subpart O, or (iii)
any other domestic clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 which acts
as a securities depository and whose use the Fund has previously approved in
writing (each of the foregoing being referred to in this Agreement as a
"Securities System"). Utilization of a Securities System shall be in accordance
with applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:
1) The Custodian may deposit and/or maintain Fund securities, either
directly or through one or more Agents appointed by the Custodian (provided that
any such agent shall be qualified to act as a custodian of the Fund pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder), in
a Securities System provided that such securities are represented in an account
("Account") of the Custodian or such Agent in the Securities System which shall
not include any assets of the Custodian or Agent other than assets held as a
fiduciary, custodian, or otherwise for customers;
11
<PAGE>
2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-entry those
securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the account of the
Fund upon (i) receipt of advice from the Securities System that such securities
have been transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the account of
the Fund. The Custodian shall transfer securities sold for the account of the
Fund upon (i) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the Securities System of
transfers of securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian or an Agent as referred to above, and
be provided to the Fund at its request. The Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund in the form of
a written advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the Securities System
for the account of the Fund on the next business day;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian or any Agent as referred to above on
12
<PAGE>
the Securities System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the Securities System; and
the Custodian and such Agents shall send to the Fund such reports on their own
systems of internal accounting control as the Fund may reasonably request from
time to time.
5) At the written request of the Fund, the Custodian will terminate the
use of any such Securities System on behalf of the Fund as promptly as
practicable.
T. Other Transfers - Upon receipt of Proper Instructions, to deliver
---------------
securities, funds and other property of the Fund to a Subcustodian or another
custodian of the Fund; and, upon receipt of proper instructions, to make such
other disposition of securities, funds or other property of the Fund in a manner
other than or for purposes other than as enumerated elsewhere in this Agreement,
provided that the instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
securities to be delivered and the name of the person or persons to whom
delivery is to be made.
U. Investment Limitations - In performing its duties generally, and more
----------------------
particularly in connection with the purchase, sale and exchange of securities
made by or for the Fund, the Custodian may assume unless and until notified in
writing to the contrary that proper instructions received by it are not in
13
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conflict with or in any way contrary to any provisions of the Fund's Certificate
of Incorporation or By-Laws (or comparable documents) or votes or proceedings of
the shareholders or Directors of the Fund. The Custodian shall in no event be
liable to the Fund and shall be indemnified by the Fund for any violation which
occurs in the course of carrying out instructions given by the Fund of any
investment limitations to which the Fund is subject or other limitations with
respect to the Fund's powers to make expenditures, encumber securities, borrow
or take similar actions affecting its portfolio.
V. Proper Instructions - Proper instructions shall mean a tested telex
-------------------
from the Fund or a written request, direction, instruction or certification
signed or initialled on behalf of the Fund by two or more persons as the Board
of Directors of the Fund shall have from time to time authorized, provided,
however, that no such instructions directing the delivery of securities or the
payment of funds to an authorized signatory of the Fund shall be signed by such
person. Those persons authorized to give proper instructions may be identified
by the Board of Directors by name, title or position and will include at least
one officer empowered by the Board to name other individuals who are authorized
to give proper instructions on behalf of the Fund. Telephonic or other oral
instructions given by any one of the above persons will be considered proper
instructions if the Custodian reasonably believes them to have been given by a
person
14
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authorized to give such instructions with respect to the transaction involved.
Oral instructions will be confirmed by tested telex or in writing in the manner
set forth above but the lack of such confirmation shall in no way affect any
action taken by the Custodian in reliance upon such oral instructions. The Fund
authorizes the Custodian to tape record any and all telephonic or other oral
instructions given to the Custodian by or on behalf of the Fund (including any
of its officers, Directors, employees or agents) and will deliver to the
Custodian a similar authorization from any investment manager or adviser or
person or entity with similar reponsibilities which is authorized to give proper
instructions on behalf of the Fund to the Custodian. Proper instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
Proper instructions may include communications effected directly between
electro-mechanical or electronic devices or systems, in addition to tested
telex, provided that the Fund and the Custodian agree to the use of such device
or system.
3. Securities, funds and other property of the Fund may be held by
subcustodians appointed pursuant to the provisions of this Section 3 (a
"Subcustodian"). The Custodian may, at any time and from time to time, appoint
any bank or trust company (meeting the requirements of a custodian or a foreign
custodian under the Investment Company Act of 1940 and the rules and
15
<PAGE>
regulations thereunder) to act as a Subcustodian for the Fund, provided that the
Fund shall have approved in writing (1) any such bank or trust company and the
subcustodian agreement to be entered into between such bank or trust company and
the Custodian, and (2) if the subcustodian is a bank organized under the laws of
a country other than the United States, the holding of securities, cash and
other property of the Fund in the country in which it is proposed to utilize the
services of such subcustodian. Upon such approval by the Fund, the Custodian is
authorized on behalf of the Fund to notify each Subcustodian of its appointment
as such. The Custodian may, at any time in its discretion, remove any bank or
trust company that has been appointed as a Subcustodian but will promptly notify
the Fund of any such action.
Those Subcustodians, their offices or branches which the Fund has approved
to date are set forth on Appendix A hereto. Such Appendix shall be amended
from time to time as Subcustodians, branches or offices are changed, added or
deleted. The Fund shall be responsible for informing the Custodian sufficiently
in advance of a proposed investment which is to be held at a location not listed
on Appendix A, in order that there shall be sufficient time for the Fund to give
the approval required by the preceding paragraph and for the Custodian to put
the appropriate arrangements in place with such Subcustodian pursuant to such
subcustodian agreement.
16
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Although the Fund does not intend to invest in a country before the
foregoing procedures have been completed, in the event that an investment is
made prior to approval, if practical, such security shall be removed to an
approved location or if not practical such security shall be held by such agent
as the Custodian may appoint. In such event, the Custodian shall be liable to
the Fund for the actions of such agent if and only to the extent the Custodian
shall have recovered from such agent for any damages caused the Fund by such
agent and provided that the Custodian shall pursue its rights against such
agent.
In the event that any Subcustodian appointed pursuant to the provisions of
this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to perform fully
its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian and, if necessary or desirable, appoint
another subcustodian in accordance with the provisions of this Section 3. At
the election of the Fund, it shall have the right to enforce, to the extent
permitted by the subcustodian agreement and applicable law, the Custodian's
rights against any such Subcustodian for loss or damage caused the Fund by such
Subcustodian.
At the written request of the Fund, the Custodian will
17
<PAGE>
terminate any Subcustodian appointed pursuant to the provisions of this Section
3 in accordance with the termination provisions under the applicable
subcustodian agreement. The Custodian will not amend any subcustodian agreement
or agree to change or permit any changes thereunder except upon the prior
written approval of the Fund.
In the event the Custodian receives a claim from a Subcustodian under the
indemnification provisions of any subcustodian agreement, the Custodian shall
promptly give written notice to the Fund of such claim. No more than thirty
days after written notice to the Fund of the Custodian's intention to make such
payment, the Fund will reimburse the Custodian the amount of such payment except
in respect of any negligence or misconduct of the Custodian.
4. The Custodian may assist generally in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature.
5. A. The Custodian shall not be liable for any action taken or omitted
in reliance upon proper instructions believed by it to be genuine or upon any
other written notice, request, direction, instruction, certificate or other
instrument believed by it to be genuine and signed by the proper party or
parties.
The Chairman of the Board of the Fund shall certify to the Custodian the
names, signatures and scope of authority of all persons authorized to give
proper instructions or any other such
18
<PAGE>
notice, request, direction, instruction, certificate or instrument on behalf of
the Fund, the names and signatures of the officers of the Fund, the name and
address of the Shareholder Servicing Agent, and any resolutions, votes,
instructions or directions of the Fund's Board of Directors or shareholders.
Such certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and may be considered in full force and
effect until receipt of a similar certificate to the contrary.
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement.
The Custodian shall be entitled, at the expense of the Fund, (but only to
the extent such expenses are reasonable) to receive and act upon advice of
counsel (who may be counsel for the Fund) on all matters, and the Custodian
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
B. With respect to the portfolio securities, cash and other property of
the Fund held by a Securities System, the Custodian shall be liable to the Fund
only for any loss or damage to the Fund resulting from use of the Securities
System if caused by any negligence, misfeasance or misconduct of the Custodian
or any of its agents or of any of its or their employees or from any
19
<PAGE>
failure of the Custodian or any such agent to enforce effectively such rights as
it may have against the Securities System.
C. The Custodian shall be liable to the Fund for any loss or damage to the
Fund caused by or resulting from the acts or omissions of any Subcustodian if
such acts or omissions would be deemed to be negligence, gross negligence or
willful misconduct hereunder if such acts or omissions were those of the
Custodian taken or omitted by the Custodian in the country in which the
Subcustodian is operating. The Custodian shall also be liable to the Fund for
its own negligence in transmitting any instructions received by it from the Fund
and for its own negligence in connection with the delivery of any securities or
funds held by it to any Subcustodian.
D. Except as may otherwise be set forth in this Agreement with respect to
particular matters, the Custodian shall be held only to the exercise of
reasonable care and diligence in carrying out the provisions of this Agreement,
provided that the Custodian shall not thereby be required to take any action
which is in contravention of any applicable law. However, nothing herein shall
exempt the Custodian from liability due to its own negligence or willful
misconduct. The Fund agrees to indemnify and hold harmless the Custodian and
its nominees from all claims and liabilities (including reasonable counsel fees)
incurred or assessed against it or its nominees in connection with the
performance of this Agreement, except such as may arise from its
20
<PAGE>
or its nominee's breach of the relevant standard of conduct set forth in this
Agreement. Without limiting the foregoing indemnification obligation of the
Fund, the Fund agrees to indemnify the Custodian and its nominees against any
liability the Custodian or such nominee may incur by reason of taxes assessed to
the Custodian or such nominee or other costs, liability or expense incurred by
the Custodian or such nominee resulting directly or indirectly from the fact
that portfolio securities or other property of the Fund is registered in the
name of the Custodian or such nominee.
In order that the indemnification provisions contained in this Paragrapgh
5-C shall apply, however, it is understood that if in any case the Fund may be
asked to indemnify or hold the Custodian harmless, the Fund shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the Custodian will use all reasonable care to
identify and notify the Fund promptly concerning any situation which presents or
appears likely to present the probability of such a claim for indemnification
against the Fund. The Fund shall have the option to defend the Custodian
against any claim which may be the subject of this indemnification, and in the
event that the Fund so elects it will so notify the Custodian, and thereupon the
Fund shall take over complete defense of the claim, and the Custodian shall in
such situation initiate no further legal or other expenses for which
21
<PAGE>
it shall seek indemnification under this Paragraph 5-C. The Custodian shall in
no case confess any claim or make any compromise in any case in which the Fund
will be asked to indemnify the Custodian except with the Fund's prior written
consent.
It is also understood that the Custodian shall not be liable for any loss
involving any securities, currencies, deposits or other property of the Fund,
whether maintained by it, a Subcustodian, an agent of the Custodian or a
Subcustodian, a Securities System, or a Banking Institution, or a loss arising
from a foreign currency transaction or contract, resulting from a Sovereign
Risk. A "Sovereign Risk" shall mean nationalizaton, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution; or any
other similar act or event beyond the Custodian's control.
E. The Custodian shall be entitled to receive reimbursement from the Fund
on demand, in the manner provided in Section 6, for its cash disbursements,
expenses and charges (including the fees and expenses of any Subcustodian or any
Agent) in connection with this Agreement, but excluding salaries and usual
overhead expenses.
22
<PAGE>
F. The Custodian may at any time or times in its discretion appoint (and
may at any time remove) any other bank or trust company as its agent (an
"Agent") to carry out such of the provisions of this Agreement as the Custodian
may from time to time direct, provided, however, that the appointment of such
Agent (other than an Agent appointed pursuant to the third paragraph of Section
3) shall not relieve the Custodian of any of its responsibilities under this
agreement.
G. Upon request, the Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
6. The Fund shall pay the Custodian a custody fee based on such fee
schedule as may from time to time be agreed upon in writing by the Custodian and
the Fund. Such fee, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 5D, shall be billed to the Fund in such a
manner as to permit payment by a direct cash payment to the Custodian.
7. This Agreement shall continue in full force and effect until terminated
by either party by an instrument in writing delivered or mailed, postage
prepaid, to the other party, such termination to take effect not sooner than
seventy-five (75) days
23
<PAGE>
after the date of such delivery or mailing. In the event of termination the
Custodian shall be entitled to receive prior to delivery of the securities,
funds and other property held by it all accrued fees and unreimbursed expenses
the payment of which is contemplated by Sections 5D and 6, upon receipt by the
Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed that
the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
8. This Agreement constitutes the entire understanding and agreement of
the parties hereto with respect to the subject matter hereof. No provision of
this Agreement may be amended or terminated except by a statement in writing
signed by the party against which enforcement of the amendment or termination is
sought.
In connection with the operation of this Agreement, the Custodian and the
Fund may agree in writing from time to time on such provisions interpretative of
or in addition to the provisions of this Agreement as may in their joint opinion
be consistent with the general tenor of this Agreement. No interpretative or
additional provisions made as provided in the
24
<PAGE>
preceding sentence shall be deemed to be an amendment of this Agreement.
9. This instrument is executed and delivered in the Commonwealth of
Massachusetts and shall be governed by and construed according to the laws of
said Commonwealth.
10. Notices and other writings delivered or mailed postage prepaid to the
Fund addressed to the Fund in care of Merrill Lynch Asset Management, Inc., 800
Scudders Mill Road, Plainsboro, New Jersey 08536, Mailing address: Post Office
Box 9011, Princeton, New Jersey 08543, Attention: Mr. Gerald M. Richard, Senior
Vice President/Treasurer, or to such other address as the Fund may have
designated to the Custodian in writing, or to the Custodian at 40 Water Street,
Boston, Massachusetts 02109, Attention: Manager, Securities Department, or to
such other address as the Custodian may have designated to the Fund in writing,
shall be deemed to have been properly delivered or given hereunder to the
respective addressee.
11. This Agreement shall be binding on and shall inure to the benefit of
the Fund and the Custodian and their respective successors and assigns, provided
that neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
12. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original. This Agreement shall become effective when
one or more counterparts have been signed and delivered by each of the parties.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
MERRILL LYNCH BROWN BROTHERS HARRIMAN & CO.
LATIN AMERICA FUND, INC.
By /s/ Gerald M. Richard By: /s/ Stokley P. Towles
--------------------------- ---------------------------
Title: Treasurer Title: Partner
26
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EXHIBIT 99.10
BROWN & WOOD LLP
One World Trade Center
New York, New York 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5599
March 24, 1997
Merrill Lynch Latin America Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch Latin America Fund, Inc., a Maryland corporation (the "Fund"), of shares
of common stock, par value $0.10 per share, of the Fund (the "Shares"), under
the Securities Act of 1933, as amended, pursuant to the Fund's registration
statement on Form N-1A (File No. 33-41622), as amended (the "Registration
Statement"), in the amount set forth under "Amount Being Registered" on the
facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund and such other documents as we
have deemed relevant to the matters referred to in this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
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EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Latin America Fund, Inc.
We consent to the use in Post-Effective Amendment No. 7 to Registration
Statement No. 33-41622 of our report dated January 6, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Consolidated Financial
Highlights" appearing in the Prospectus, which also is a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
March 21, 1997
