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Prospectus [MERRILL LYNCH LOGO]
Merrill Lynch Latin America Fund, Inc.
[Merrill Lynch Artwork] April 1, 1999
This Prospectus contains information you should know before
investing, including information about risks. Please read
it before you invest and keep it for future reference.
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of
this Prospectus. Any representation to the contrary is a
criminal offense.
LOGO
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Table of Contents PAGE
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[KEY FACTS ICON]
KEY FACTS
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The Merrill Lynch Latin America Fund at a Glance............ 3
Risk/Return Bar Chart....................................... 5
Fees and Expenses........................................... 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
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How the Fund Invests........................................ 8
Investment Risks............................................ 9
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
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Merrill Lynch Select Pricing(SM) System..................... 20
How to Buy, Sell, Transfer and Exchange Shares.............. 25
Participation in Merrill Lynch Fee-Based Programs........... 29
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
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Merrill Lynch Asset Management.............................. 32
Financial Highlights........................................ 33
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
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Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
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MERRILL LYNCH LATIN AMERICA FUND, INC.
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THE MERRILL LYNCH LATIN AMERICA FUND AT A GLANCE
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WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek long term capital appreciation by
investing primarily in Latin American equity and debt securities.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund tries to achieve its goals by investing in a portfolio of equity
securities of companies located in Latin American countries. The Fund also buys
debt securities issued by governmental entities, corporations, and financial
institutions of these countries and supranational organizations. Fund management
chooses securities using a combination of "top down" and "bottom up" investment
styles. "Top down" means that the Fund seeks to allocate its investments to
markets that Fund management believes have the potential to outperform other
markets due to economic factors such as government fiscal policies and the
direction of interest rates and currency movements. "Bottom up" means that the
Fund also selects investments based on Fund management's assessment of the
earnings prospects of individual companies. When choosing debt securities, Fund
management considers various factors including the credit quality of issuers and
yield analysis. The Fund may invest in high yield or "JUNK" BONDS.
When assessing individual companies, Fund management seeks to identify companies
engaged in businesses with attractive earnings prospects, sound management and a
record of maximizing returns on shareholder equity. Fund management then further
considers which of the companies meeting its criteria would be most likely to
benefit from the economic circumstances anticipated by Fund management. Because
of the difficulty of investing substantial sums in many Latin American markets,
however, in certain markets that Fund management believes to be attractive on a
"top down" basis, the Fund may limit its investments to a relatively small
number of large, actively traded companies. The Fund will not seek to invest in
a large number of countries in Latin America. The Fund can invest in securities
denominated in the currencies of Latin American countries or in other
currencies. Under most circumstances the Fund's investments will be denominated
primarily in foreign currencies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any fund, the value of the Fund's investments -- and therefore the value
of the Fund's shares -- may go up or down. These changes may occur because
particular stock or bond markets in general are rising or falling, or
[KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.
JUNK BONDS -- fixed income securities rated below INVESTMENT GRADE by recognized
rating agencies, including Moody's Investors Service, Inc. and Standard & Poor's
or unrated securities of comparable quality.
INVESTMENT GRADE SECURITIES -- fixed income securities rated in the four highest
categories by recognized rating agencies, including Moody's Investors Service,
Inc. and Standard & Poor's.
MERRILL LYNCH LATIN AMERICA FUND, INC.
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[KEY FACTS ICON]
in response to interest rate changes. Generally, when interest rates go up, the
value of debt instruments goes down. If the value of the Fund's investments goes
down, you may lose money. At other times, there are specific factors that may
affect the value of particular investments.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks -- including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets such as Latin America.
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
High yield or "junk" bonds may be volatile and subject to liquidity, leverage,
credit and other types of risks.
The Fund should be considered as a means of diversifying your investment
portfolio and not in itself a balanced investment program.
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you if you:
- Are looking for capital appreciation for long term goals such as
retirement.
- Want a professionally managed portfolio.
- Are looking for exposure to the Latin American markets.
- Are willing to accept the risks of foreign investing in order to
seek long term capital appreciation.
- Are not looking for a significant amount of current income.
4 MERRILL LYNCH LATIN AMERICA FUND, INC.
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RISK/RETURN BAR CHART
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The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class B shares for each complete calendar year since the Fund's inception. Sales
charges are not reflected in the bar chart. If these amounts were reflected,
returns would be less than those shown. The table compares the average annual
total returns for each class of the Fund's shares for the periods shown with
those of the Morgan Stanley Capital International (MSCI) Emerging Markets Free
Latin America Index. How the Fund performed in the past is not necessarily an
indication of how the Fund will perform in the future.
[MERRILL LYNCH LATIN AMERICA FUND RISK/RETURN BAR CHART]
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'1992' '1993' '1994' '1995' '1996' '1997' '1998'
1.34 63.05 -15.86 -24.65 24.29 24.05 -39.26
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During the period shown in the bar chart, the highest return for a quarter was
32.56% (quarter ended December 31, 1993) and the lowest return for a quarter was
- -30.92% (quarter ended September 30, 1998).
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AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST PAST
CALENDAR YEAR ENDED ONE FIVE SINCE
DECEMBER 31, 1998) YEAR YEARS INCEPTION
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Merrill Lynch Latin America* - Class A -41.88% N/A -13.69%+
MSCI Emerging Markets Free Latin America
Index** -35.11% N/A -6.61%+++
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Merrill Lynch Latin America* - Class B -41.60% -9.90% 0.31%++
MSCI Emerging Markets Free Latin America
Index** -35.11% -1.74% 8.82%##
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Merrill Lynch Latin America* - Class C -39.89% N/A -13.49%+
MSCI Emerging Markets Free Latin America
Index** -35.11% N/A -6.61%+++
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Merrill Lynch Latin America* - Class D# -42.00% -10.15% 0.35%++
MSCI Emerging Markets Free Latin America
Index** -35.11% -1.74% 8.82%##
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* Includes sales charge.
** This unmanaged market capitalization-weighted Morgan Stanley
Capital International Index is comprised of a representative
sampling of stocks of large-, medium-, and
small-capitalization companies in Argentina, Brazil, Chile
and Mexico which are freely purchasable by foreign
investors. Past performance is not predictive of future
performance.
+ Inception date is October 21, 1994.
++ Inception date is September 27, 1991.
+++ Since October 31, 1994.
# As a result of the implementation of the Merrill Lynch
Select Pricing(SM) System, Class A shares outstanding prior
to October 21, 1994 were redesignated Class D shares.
Historical performance information pertaining to these
shares is included here.
## Since September 30, 1991.
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MERRILL LYNCH LATIN AMERICA FUND, INC.
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[KEY FACTS ICON]
FEES AND EXPENSES
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The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of the Fund. Future expenses may be greater
or less than those indicated below.
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SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT) CLASS A CLASS B(A) CLASS C CLASS D
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Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering
price) 5.25%(b) None None 5.25%(b)
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Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(c) 4.0%(b) 1.0%(b) None(c)
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Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
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Redemption Fee None None None None
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Exchange Fee None None None None
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Maximum Account Fee None None None None
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ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND ASSETS)
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MANAGEMENT FEE 1.00% 1.00% 1.00% 1.00%
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DISTRIBUTION AND/OR SERVICE (12B-1) FEES(D) None 1.00% 1.00% 0.25%
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Other Expenses (including transfer agency
fees)(e) 0.53%.... 0.57% 0.57% 0.53%
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Total Annual Fund Operating Expenses(f) 1.53% 2.57% 2.57% 1.78%
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(a) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares for a long time,
it may cost you more in distribution (12b-1) fees than the maximum sales
charge that you would have paid if you had bought one of the other classes.
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the Merrill Lynch
Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
year. This fee begins the month following the month the account is closed
and ends at the end of the calendar year. For the fiscal year ended November
30, 1998, the Fund paid the Transfer Agent fees totaling $1,311,559. The
Manager provides accounting services to the Fund at its cost. For the fiscal
year ended November 30, 1998, the Fund reimbursed the Manager $140,598 for
these services.
(f) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
UNDERSTANDING EXPENSES Fund investors pay various fees and expenses, either
directly or indirectly. Listed below are some of the main types of expenses,
which all mutual funds may charge: EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund. EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER: ANNUAL
FUND OPERATING EXPENSES -- expenses that cover the costs of operating the Fund.
MANAGEMENT FEE -- a fee paid to the Manager for managing the Fund. DISTRIBUTION
FEES -- fees used to support the Fund's marketing and distribution efforts, such
as compensating Financial Consultants, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities dealers
for account maintenance activities.
6 MERRILL LYNCH LATIN AMERICA FUND, INC.
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EXAMPLES:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Class A $672 $ 983 $1,315 $2,253
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Class B $660 $ 999 $1,365 $2,722*
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Class C $360 $ 799 $1,365 $2,905
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Class D $696 $1,056 $1,439 $2,510
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EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
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<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Class A $672 $ 983 $1,315 $2,253
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Class B $260 $ 799 $1,365 $2,722*
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Class C $260 $ 799 $1,365 $2,905
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Class D $696 $1,056 $1,439 $2,510
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* Assumes conversion to Class D shares approximately eight years after purchase.
See note (a) to the Fees and Expenses table above.
MERRILL LYNCH LATIN AMERICA FUND, INC. 7
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HOW THE FUND INVESTS
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The Fund will invest in a portfolio primarily consisting of equity and debt
securities of companies in Latin American markets. Except for short term cash
positions, the Fund will generally invest at least 65% of its assets in Latin
American equity and debt securities under normal market conditions. Equity
securities consist of:
- common stock
- preferred stock
- securities convertible into common stock
The Fund will focus on investments in common stock.
The Fund's investments in nonconvertible debt securities will generally be
longer term securities with the potential for capital appreciation through
changes in interest rates, exchange rates or the general perception of the
creditworthiness of issuers in certain countries. The Fund may also invest in
nonconvertible debt securities for income, but this will not be a focus of the
Fund's investments. The Fund has established no rating criteria for debt
securities in which it may invest. Some securities may not be rated at all for
creditworthiness. The Fund may invest in debt securities that are rated below
investment grade, which are commonly known as "junk" bonds.
The Fund considers Latin American markets to include 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 the company or country issuing the security is organized in Latin
America or its primary trading market is in Latin America. Other securities may
be considered Latin American securities if they are denominated in a Latin
American currency or if the issuer meets certain financial criteria. There are
no limits on the geographic allocation of the Fund's investments within Latin
America. Fund management, however, anticipates that a substantial portion of the
Fund's investments will be in companies and governments in Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela.
The Fund will normally invest a portion of its assets in short term debt
securities and cash or cash equivalents (including repurchase agreements)
denominated in U.S. dollars or foreign currencies when Fund management is unable
to find attractive equity or long term debt securities. In addition, when Fund
management believes it is advisable to reduce exposure to equity markets, the
Fund may invest without percentage limitation in short term securities or cash
as a temporary defensive measure. Investment in these
[DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Grace Pineda is a Senior Vice President and the portfolio manager of the Fund
since it commenced operations. Ms. Pineda has been a First Vice President of
Merrill Lynch Asset Management since 1997 and has been a Senior Portfolio
Manager with Merrill Lynch Asset Management since 1989.
ABOUT THE MANAGER
The Fund is managed by Merrill Lynch Asset Management.
8 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 9
securities may also be used to meet redemptions. Short term investments and
temporary defensive positions may limit the potential for an increase in the
value of your shares or for the Fund to achieve its investment objective.
The Fund may use derivatives including futures, options, indexed securities and
inverse floating rate securities to hedge its portfolio against interest rate
and currency risks. Derivatives are financial instruments whose value is derived
from another security or an index such as the Standard & Poor's 500 Index.
The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund.
The Fund may use different investment strategies which involve various types of
risks.
INVESTMENT RISKS
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This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period of
time.
MARKET AND SELECTION RISK -- Market risk is the risk that the stock or bond
markets in one or more countries in which the Fund invests will go down in
value, including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the stock or bond markets or other funds
with similar investment objectives and investment strategies.
FOREIGN MARKET RISK -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because securities traded on foreign markets have often
(although not always) performed differently than securities in the United
States. However, such investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money. In
particular, the Fund is subject to the risk that because there are generally
fewer investors on foreign exchanges and a smaller number of shares traded each
day, it may make it difficult for the Fund to buy and sell securities on
MERRILL LYNCH LATIN AMERICA FUND, INC. 9
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[DETAILS ABOUT THE FUND ICON]
those exchanges. In addition, prices of foreign securities may go up and down
more than prices of securities traded in the United States.
FOREIGN ECONOMY RISK -- The economies of certain Latin American markets often do
not compare favorably with that of the United States with respect to such issues
as growth of gross national product, reinvestment of capital, resources and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in such markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other Latin American market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
CURRENCY RISK -- Securities in which the Fund invests are usually denominated or
quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated in
that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a strong U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries do not
10 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 11
have laws to protect investors the way that the United States securities laws
do. For example, some countries may have no laws or rules against insider
trading. Insider trading occurs when a person buys or sells a company's
securities based on non-public information about that company. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for Fund management to
completely and accurately determine a company's financial condition. Also,
brokerage commissions and other costs of buying or selling securities often are
higher in foreign countries than they are in the United States. This reduces the
amount the Fund can earn on its investments.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES -- The Fund
generally holds its foreign securities in which it invests outside the United
States in foreign banks and securities depositories. Some foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. In addition, there may be limited or no regulatory oversight over
their operations. Also, the laws of certain countries may put limits on the
Fund's ability to recover its assets if a foreign bank, depository or issuer of
a security, or any of their agents, goes bankrupt. In addition, it is often more
expensive for the Fund to buy, sell and hold securities in certain foreign
markets than in the U.S. The increased expense of investing in foreign markets
reduces the amount the Fund can earn on its investments and typically results in
a higher operating expense ratio for the Fund than investment companies invested
only in the U.S.
SETTLEMENT RISK -- Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign settlement
and clearance procedures and trade regulations also may involve certain risks
(such as delays in payment for or delivery of securities) not typically involved
with the settlement of U.S. investments. Communications between the United
States and emerging market countries may be unreliable, increasing the risk of
delayed settlements or losses of security certificates. Settlements in certain
foreign countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines
MERRILL LYNCH LATIN AMERICA FUND, INC. 11
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[DETAILS ABOUT THE FUND ICON]
or, if it has contracted to sell the security to another party, the Fund could
be liable to that party for any losses incurred.
EMERGING MARKETS RISK -- The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, investments in them may be more likely to suffer sharp and
frequent price changes or long term price depression because of adverse
publicity, investor perceptions or the actions of a few large investors. In
addition, traditional measures of investment value used in the United States,
such as price to earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt changes
in policies. As a result, their governments are more likely to take actions that
are hostile or detrimental to private enterprise or foreign investment than
those of more developed countries. Certain emerging markets may also face other
significant internal or external risks, including the risk of war, and ethnic,
religious, and racial conflicts. In addition, governments in many emerging
market countries participate to a significant degree in their economies and
securities markets, which may impair investment and economic growth.
RISKS OF INVESTING IN LATIN AMERICA -- The economies of Latin American countries
have experienced considerable difficulties in the past decade, 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 that has been lacking at times in the past, as well as stable
political and social conditions. International economic conditions, particularly
those in the United States, as well as world prices for oil and other
commodities may also influence the recovery of the Latin American economies.
Some Latin American currencies have experienced steady devaluations relative to
the U.S. dollar and certain Latin American countries have had to
12 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 13
make major adjustments in their currencies from time to time. In addition,
governments of many Latin American countries have exercised and continue to
exercise substantial influence over many aspects of the private sector.
Government actions in the future could have a significant effect on economic
conditions in Latin American countries, which could affect the companies in
which the Fund invests and therefore the value of Fund shares.
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.
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.
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. The Fund will not invest more
than 15% of its net assets in illiquid securities including securities that are
subject to material legal restrictions on repatriation.
Certain Latin American countries have entered into regional trade agreements
that would, among other things, reduce barriers between countries, increase
competition among companies and reduce government subsidies in certain
industries. No assurance can be given that the changes planned will be
successfully implemented, or that these changes will result in the economic
stability intended. There is a possibility that these trade arrangements will
not be implemented, will be implemented but not completed, or will be completed
but then partially or completely unwound. It is also possible that a significant
participant could choose to abandon a trade agreement, which could diminish its
credibility and influence. Any of these occurrences could
MERRILL LYNCH LATIN AMERICA FUND, INC. 13
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[DETAILS ABOUT THE FUND ICON]
have adverse effects on the markets of both participating and non-participating
countries, including sharp appreciation or depreciation of participants'
national currencies and a significant increase in exchange rate volatility, a
resurgence in economic protectionism, an undermining of confidence in the Latin
American markets, an undermining of Latin American economic stability, the
collapse or slowdown of the drive towards Latin American economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of such trade agreements. Such developments could
have an adverse impact on the Fund's investments in Latin America generally or
in specific countries participating in such trade agreements.
CONCENTRATION RISK -- The Fund is a non-diversified fund. By concentrating in a
smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
BORROWING AND LEVERAGE -- Borrowings by the Fund create an opportunity for
greater total return but, at the same time, increase exposure to capital risk.
For example, leveraging may exaggerate changes in the net asset value of Fund
shares and in the yield on the Fund's portfolio. Although the principal of such
borrowings will be fixed, the Fund's assets may change in value during the time
the borrowings are outstanding. Borrowing will create interest expenses for the
Fund which can exceed the income from the assets retained. To the extent the
income derived from securities purchased with borrowed funds exceeds the
interest the Fund will have to pay, the Fund's net income will be greater than
if borrowing were not used. Conversely, if the income from the assets retained
with borrowed funds is not sufficient to cover the cost of borrowing, the net
income of the Fund will be less than if borrowing were not used, and therefore
the amount available for distribution to shareholders as dividends will be
reduced. The Fund may also borrow for emergency purposes, for the payment of
dividends, for share repurchases or for the clearance of transactions.
SECURITIES LENDING -- The Fund may lend securities to financial institutions
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events could
trigger adverse tax consequences to the Fund.
14 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 15
Risks associated with certain types of securities in which the Fund may invest
include:
DEBT SECURITIES -- Debt securities, such as bonds, involve credit risk. This is
the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. These securities are also subject to interest
rate risk. This is the risk that the value of a security may fall when interest
rates rise. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than
the market price of shorter term securities.
SOVEREIGN DEBT -- The Fund may invest in sovereign debt securities issued or
guaranteed by Latin American government entities. Certain Latin American
countries are among the largest debtors to banks and foreign governments.
Investments in sovereign debt subjects the Fund to a high degree of risk that a
government entity may delay or refuse payment of interest or repayment of
principal on its sovereign debt. A government may fail to make repayment for
many reasons including cash flow problems, lack of foreign exchange, political
constraints, the relative size of its debt position to its economy or its
failure to put in place economic reforms required by the International Monetary
Fund or other multilateral agencies as a condition to their contributions to the
government entity. If a government entity fails to make its payments, the Fund
may be requested to extend the period in which the government entity must pay
and to make further loans to the government entity. There is no bankruptcy
proceeding by which all or part of sovereign debt that a government entity has
not repaid may be collected.
JUNK BONDS -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally pay
higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. Junk bonds
generally are less liquid and experience more price volatility than higher rated
debt securities. The issuers of junk bonds may have a larger amount of
outstanding debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, the claims of other creditors may
have priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.
MERRILL LYNCH LATIN AMERICA FUND, INC. 15
<PAGE> 16
[DETAILS ABOUT THE FUND ICON]
DERIVATIVES -- The Fund may use derivative instruments including futures,
forwards, options, indexed securities and inverse securities. Derivatives are
financial instruments whose value is derived from another security, a commodity
(such as oil or gold) or an index, such as the Standard and Poor's 500 Index.
Derivatives allow the Fund to increase or decrease its risk exposure more
quickly and efficiently than other types of instruments. Derivatives are
volatile and involve significant risks, including:
CREDIT RISK -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.
CURRENCY RISK -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
LEVERAGE RISK -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large
changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly exceed
the amount originally invested.
LIQUIDITY RISK -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price
that the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a different
manner than anticipated by the Fund or if the cost of the derivative outweighs
the benefit of the hedge. Hedging also involves the risk that changes in the
value of the derivative will not match those of the holdings being hedged as
expected by the Fund, in which case any losses on the holdings being hedged may
not be reduced. There can be no assurance that the Fund's hedging strategy will
reduce risk or that hedging transactions will be either available or cost
effective. The Fund is not required to use hedging and may not choose to do so.
16 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 17
INDEXED AND INVERSE FLOATING RATE SECURITIES -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an index or interest
rate (inverse floaters). In general, income on inverse floaters will decrease
when interest rates increase and increase when interest rates decrease.
Investments in inverse floaters may subject the Fund to the risks of reduced or
eliminated interest payments and losses of principal. In addition, certain
indexed securities and inverse floaters may increase or decrease in value at a
greater rate than the underlying interest rate, which effectively leverages the
Fund's investment. Indexed securities and inverse floaters are derivative
securities and can be considered speculative. Indexed and inverse securities
involve credit risk and certain indexed and inverse securities may involve
currency risk, leverage risk and liquidity risk.
Investments in inverse floaters may subject the Fund to the risks of reduced or
eliminated interest payments and losses of principal. In addition, certain
indexed securities and inverse floaters may increase or decrease in value at a
greater rate than the underlying interest rate, which effectively leverages the
Fund's investment. As a result, the market value of such securities will
generally be more volatile than that of fixed rate securities. Both indexed
securities and inverse floaters are derivative securities and can be considered
speculative.
WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When issued and delayed delivery securities and forward
commitments involve the risk that the security the Fund buys will lose value
prior to its delivery. There also is the risk that the security will not be
issued or that the other party will not meet its obligation. If this occurs, the
Fund both loses the investment opportunity for the assets it has set aside to
pay for the security and any gain in the security's price.
INVESTMENT IN OTHER INVESTMENT COMPANIES AND VENTURE CAPITAL FUNDS -- The Fund
may invest in other investment companies and venture capital funds whose
investment objectives and policies are consistent with those of the Fund. In
accordance with the Investment Company Act, the Fund may invest up to 10% of its
total assets in securities of other investment
MERRILL LYNCH LATIN AMERICA FUND, INC. 17
<PAGE> 18
[DETAILS ABOUT THE FUND ICON]
companies. In addition, under the Investment Company Act the Fund may not own
more than 3% of the total outstanding voting stock of any investment company and
not more than 5% of the value of the Fund's total assets may be invested in the
securities of any investment company. If the Fund acquires shares of investment
companies or of venture capital funds, shareholders bear both their
proportionate share of expenses in the Fund (including management and advisory
fees) and, indirectly, the expenses of these investment companies or venture
capital funds. Investment in venture capital funds involves substantial risk of
loss to the Fund of its entire investment.
STANDBY COMMITMENT AGREEMENTS -- Standby commitment agreements involve the risk
that the security the Fund buys will lose value prior to its delivery to the
Fund. There is also the risk that if the security goes up in value, the
counterparty will decide not to issue the security. If this occurs, the Fund
will lose the investment opportunity for the assets it has set aside to pay for
the security and any gain in the security's price.
REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS -- The Fund may enter into
certain types of repurchase agreements or purchase and sale contracts. Under a
repurchase agreement, the seller agrees to repurchase a security (typically a
security issued or guaranteed by the U.S. Government) at a mutually agreed upon
time and price. This insulates the Fund from changes in the market value of the
security during the period, except for currency fluctuations. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts provide that the purchaser receives any interest on the security paid
during the period. If the seller fails to repurchase the security in either
situation and the market value declines, the Fund may lose money.
ILLIQUID SECURITIES -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that the
Fund
18 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 19
buys directly from the issuer. Private placement and other restricted securities
may not be listed on an exchange and may have no active trading market.
Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
RULE 144A SECURITIES -- Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market, but carry the risk that the
active trading market may not continue.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH LATIN AMERICA FUND, INC. 19
<PAGE> 20
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge
waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
[YOUR ACCOUNT ICON]
20 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 21
The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
- Current Class A Limited availability Limited availability Limited availability
shareholders through other securities through other securities through other securities
- Certain Retirement dealers. dealers. dealers.
Plans
- Participants in
certain Merrill Lynch
sponsored programs
- Certain affiliates of
Merrill Lynch.
- ----------------------------------------------------------------------------------------------------------------------------------
Initial Sales Charge? Yes. Payable at time of No. Entire purchase No. Entire purchase Yes. Payable at time of
purchase. Lower sales price is invested in price is invested in purchase. Lower sales
charges available for shares of the Fund. shares of the Fund. charges available for
larger investments. larger investments.
- ----------------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged for Yes. Payable if you Yes. Payable if you No. (May be charged for
Charge? purchases over $1 redeem within four years redeem within one year purchases over $1
million that are of purchase. of purchase. million that are
redeemed within one redeemed within one
year.) year.)
- ----------------------------------------------------------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account 0.25% Account 0.25% Account
and Distribution Maintenance Fee 0.75% Maintenance Fee 0.75% Maintenance Fee No
Fees? Distribution Fee. Distribution Fee. Distribution Fee.
- ----------------------------------------------------------------------------------------------------------------------------------
Conversion to Class D No. Yes, automatically after No. No.
shares? approximately eight
years.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH LATIN AMERICA FUND, INC. 21
<PAGE> 22
[YOUR ACCOUNT ICON]
CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.
<TABLE>
<CAPTION>
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* 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.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain employer sponsored
retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
- Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.
- TMA(SM) Managed Trusts.
- Certain Merrill Lynch investment or central asset accounts.
- Certain employer-sponsored retirement or savings plans.
- Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.
- Certain investors, including directors or trustees of Merrill
Lynch mutual funds and Merrill Lynch employees.
- Certain Merrill Lynch fee-based programs.
RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.
22 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 23
Only certain investors are eligible to buy Class A shares. Your Financial
Consultant can help you determine whether you are eligible to buy Class A shares
or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to an account maintenance fee, while Class A
shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
As a result of the implementation of the Merrill Lynch Select Pricing(SM)
System, Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated as Class D shares. The Class A shares offered here differ from the
Class A shares offered prior to October 21, 1994 in many respects, including
eligible investors, sales charges and exchange privileges.
CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase, or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.75% and account maintenance fees of 0.25% each year under distribution
plans that the Fund has adopted under Rule 12b-1. Because these fees are paid
out of the Fund's assets on an ongoing basis, over time these fees increase the
cost of your investment and may cost you more than paying an initial sales
charge. The Distributor uses the money that it receives from the deferred sales
charges and the distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial Consultant or other securities
dealer who assists you in purchasing Fund shares.
CLASS B SHARES
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually
MERRILL LYNCH LATIN AMERICA FUND, INC. 23
<PAGE> 24
[YOUR ACCOUNT ICON]
decreases as you hold your shares over time, according to the following
schedule:
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE SALES 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>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales charge.
Not all Merrill Lynch funds have identical deferred sales charge schedules. If
you exchange your shares for shares of another fund, the higher charge will
apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old.
- Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts and certain retirement plan rollovers.
- Redemption in connection with participation in certain Merrill
Lynch fee-based programs.
- Withdrawals resulting from shareholder death or disability as
long as the waiver request is made within one year of death or
disability or, if later, reasonably promptly following
completion of probate, or in connection with involuntary
termination of an account in which Fund shares are held.
- Withdrawal through the Merrill Lynch Systematic Withdrawal Plan
of up to 10% per year of your Class B account value at the time
the plan is established.
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B
24 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 25
shares. The conversion of Class B to Class D shares is not a taxable event for
Federal income tax purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, the Fund's eight year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class B
shares of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. The length of time that you hold both the original and
exchanged Class B shares in both funds will count toward the conversion
schedule. The conversion schedule may be modified in certain other cases as
well.
CLASS C SHARES
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH LATIN AMERICA FUND, INC. 25
<PAGE> 26
[YOUR ACCOUNT ICON]
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 21.
appropriate for you Be sure to read this prospectus carefully.
-------------------------------------------------------------------------------------------------------
Next, determine the amount of your The minimum initial investment for the Fund is $1,000 for
investment all accounts except:
- $250 for certain Merrill Lynch fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------------
Have your Merrill Lynch Financial The price of your shares is based on the next calculation of
Consultant or securities dealer net asset value after your order is placed. Any purchase
submit your purchase order orders placed within fifteen minutes after the close of
business on the New York Stock Exchange will be priced at
the net asset value determined that day.
Purchase orders placed after that time will be priced at the
net asset value determined on the next business day. The
Fund may reject any order to buy shares and may suspend the
sale of shares at any time. Merrill Lynch may charge a
processing fee to confirm a purchase. This fee is currently
$5.35.
-------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this Prospectus.
- --------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for
Investment all accounts except $1 for retirement plans. (The minimums
for additional purchases may be waived under certain
circumstances.)
-------------------------------------------------------------------------------------------------------
Acquire additional shares through the All dividends are automatically reinvested without a sales
automatic dividend reinvestment plan charge.
-------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan certain Merrill Lynch investment or central asset accounts.
- --------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your Fund shares only to another securities
Another Securities securities dealer dealer that has entered into an agreement with Merrill
Dealer Lynch. All shareholder services will be available for the
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these assets must be coordinated by the receiving
firm.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 27
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares to Transfer to a non-participating You must either:
Another Securities securities dealer - Transfer your shares to an account with the Transfer
Dealer (continued) Agent; or
- Sell your shares.
- --------------------------------------------------------------------------------------------------------------------------------
Sell Your Shares Have your Merrill Lynch Financial The price of your shares is based on the next calculation of
Consultant or securities dealer net asset value after your order is placed. For your
submit your sales order redemption request to be priced at the net asset value on
the day of your request, you must submit your request to
your dealer within fifteen minutes after that day's close of
business on the New York Stock Exchange (generally 4:00 p.m.
Eastern time). Any redemption request placed after that time
will be priced at the net asset value at the close of
business on the next business day. Dealers must submit
redemption requests to the Fund not more than thirty minutes
after the close of business on the New York Stock Exchange
on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a
fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares directly through the Transfer
Agent.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter and signatures must be guaranteed. If you
hold stock certificates, return the certificates with the
letter. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to
the Transfer Agent before they can be converted. Check with
the Transfer Agent or your Merrill Lynch Financial
Consultant for details.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH LATIN AMERICA FUND, INC. 27
<PAGE> 28
[YOUR ACCOUNT ICON]
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Shares Participate in the Fund's Systematic You can choose to receive systematic payments from your Fund
Systematically Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. If you have a
Merrill Lynch CMA(R), CBA(R) or Retirement Account you can
arrange for systematic redemptions of a fixed dollar amount
on a monthly, bi-monthly, quarterly, semi-annual or annual
basis, subject to certain conditions. Under either method
you must have dividends and other distributions
automatically reinvested. For Class B and C shares your
total annual withdrawals cannot be more than 10% per year of
the value of your shares at the time your plan is
established. The deferred sales charge is waived for
systematic redemptions. Ask your Merrill Lynch Financial
Consultant for details.
- --------------------------------------------------------------------------------------------------------------------------------
Exchange Your Select the fund into which you want You can exchange your shares of the Fund for shares of many
Shares to exchange. Be sure to read that other Merrill Lynch mutual funds. You must have held the
fund's prospectus shares used in the exchange for at least 15 calendar days
before you can exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another fund. If you own Class A
shares and wish to exchange into a fund in which you have no
Class A shares, you will exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different
initial or deferred sales charge schedule. If you exchange
Class A or D shares for shares of a fund with a higher
initial sales charge than you originally paid, you will be
charged the difference at the time of exchange. If you
exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. If you exchange Class A or D shares for money
market fund shares, you will receive Class A shares of
Summit Cash Reserves Fund. Class B or C shares of the Fund
will be exchanged for Class B shares of Summit.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 29
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
MERRILL LYNCH LATIN AMERICA FUND, INC. 29
<PAGE> 30
[YOUR ACCOUNT ICON]
you participate in the program for less than a specified period, you may be
charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute any net investment income and any net realized long or
short term capital gains annually. The Fund may also pay a special distribution
at or about the end of the calendar year to comply with Federal tax
requirements. If your account is with Merrill Lynch and you would like to
receive DIVIDENDS in cash, contact your Merrill Lynch Financial Consultant. If
your account is with the Transfer Agent and you would like to receive dividends
in cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. The Fund
intends to make distributions that will either be taxed as ordinary income or
capital gains. Capital gains dividends are generally taxed at different rates
than ordinary income dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
30 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 31
You may be able to claim a credit or take a deduction for foreign taxes paid by
the Fund if certain requirements are met.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
"BUYING A DIVIDEND"
Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital gains,
you will pay the full price for the shares and then receive a portion of the
price back in the form of a taxable dividend. Before investing you may want to
consult your tax adviser.
MERRILL LYNCH LATIN AMERICA FUND, INC. 31
<PAGE> 32
[MANAGEMENT OF THE FUND ICON]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Manager, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Manager has the responsibility for making all
investment decisions for the Fund. The Manager has a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the
Manager pays a fee for services it receives in an amount to be determined from
time to time by the Manager and the affiliate. The Fund pays the Manager a fee
at the annual rate of 1.00% of the average daily net assets of the Fund.
Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which had approximately $507 billion in investment company and other portfolio
assets under management as of February 1999. This amount includes assets managed
for Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the companies in which the
Fund invests, and this could hurt the Fund's investment returns.
32 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 33
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects the
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends). This information has been audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial statements,
are included in the Fund's annual report to shareholders, which is available
upon request.
<TABLE>
<CAPTION>
CLASS A++
------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED NOVEMBER 30, OCT. 21, 1994+
INCREASE (DECREASE) IN ----------------------------------------- TO NOV. 30,
NET ASSET VALUE: 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- --------------------------------------------------------------------------------------
Net asset value,
beginning of period $15.10 $12.83 $10.50 $17.37 $18.22
- --------------------------------------------------------------------------------------
Investment income
(loss) -- net .38 .17 .46 .16 --
- --------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net (4.87) 2.54 1.87 (6.52) (.85)
- --------------------------------------------------------------------------------------
Total from investment
operations (4.49) 2.71 2.33 (6.36) (.85)
- --------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment
income -- net -- (.44) -- -- --
Realized gain on
investments -- net -- -- -- (.50) --
In excess of realized
gain
on investments -- net -- -- -- (.01) --
- --------------------------------------------------------------------------------------
Total dividends and
distributions -- (.44) -- (.51) --
- --------------------------------------------------------------------------------------
Net asset value, end of
period $10.61 $15.10 $12.83 $10.50 $17.37
- --------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:**
- --------------------------------------------------------------------------------------
Based on net asset
value per share (29.74)% 21.79% 22.19% (37.66)% (4.67)%#
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
- --------------------------------------------------------------------------------------
Expenses 1.53% 1.46% 1.48% 1.66% 1.85 %*
- --------------------------------------------------------------------------------------
Investment income
(loss) -- net 2.12% 1.03% 3.74% 1.40% (.20)%*
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------
Net assets, end of
period
(in thousands) $ 26,249 $ 77,086 $ 46,369 $ 26,034 $ 10,350
- --------------------------------------------------------------------------------------
Portfolio turnover 31.92% 84.91% 66.14% 54.86% 30.15 %
- --------------------------------------------------------------------------------------
<CAPTION>
CLASS B++
---------------------------------------------------------
FOR THE YEAR ENDED NOVEMBER 30,
INCREASE (DECREASE) IN ---------------------------------------------------------
NET ASSET VALUE: 1998 1997 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERF
- --------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.66 $12.46 $10.31 $17.24 $14.39
- --------------------------------------------------------------------------------------
Investment income
(loss) -- net .23 --+++ .32 .05 (.09)
- --------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net (4.69) 2.50 1.83 (6.47) 2.99
- --------------------------------------------------------------------------------------
Total from investment
operations (4.46) 2.50 2.15 (6.42) 2.90
- --------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment
income -- net -- (.30) -- -- (.05)
Realized gain on
investments -- net -- -- -- (.50) --
In excess of realized
gain
on investments -- net -- -- -- (.01) --
- --------------------------------------------------------------------------------------
Total dividends and
distributions -- (.30) -- (.51) (.05)
- --------------------------------------------------------------------------------------
Net asset value, end of
period $10.20 $14.66 $12.46 $10.31 $17.24
- --------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:**
- --------------------------------------------------------------------------------------
Based on net asset
value per share (30.42)% 20.51% 20.85% (38.32)% 20.19%
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
- --------------------------------------------------------------------------------------
Expenses 2.57% 2.50% 2.54% 2.71% 2.51%
- --------------------------------------------------------------------------------------
Investment income
(loss) -- net 1.76% (.03)% 2.69% .43% (.54)%
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------
Net assets, end of
period
(in thousands) $ 190,670 $ 527,520 $ 518,865 $ 505,038 $ 937,221
- --------------------------------------------------------------------------------------
Portfolio turnover 31.92% 84.91% 66.14% 54.86% 30.15%
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
</TABLE>
MERRILL LYNCH LATIN AMERICA FUND, INC. 33
<PAGE> 34
[MANAGEMENT OF THE FUND ICON]
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C++ CLASS D++
------------------------------------------------------------- ---------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED
NOVEMBER 30, OCT. 21, 1994+ NOVEMBER 30,
INCREASE (DECREASE) IN ----------------------------------------- TO NOV. 30, ---------------------------------
NET ASSET VALUE: 1998 1997 1996 1995 1994 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.64 $12.46 $10.31 $17.24 $18.10 $15.02 $12.77 $10.47
- ----------------------------------------------------------------------------------------------------------------------------
Investment income
(loss) -- net .23 (.02) .32 .03 (.02) .34 .11 .42
- ----------------------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net (4.69) 2.52 1.83 (6.45) (.84) (4.83) 2.54 1.88
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (4.46) 2.50 2.15 (6.42) (.86) (4.49) 2.65 2.30
- ----------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment
income -- net -- (.32) -- -- -- -- (.40) --
Realized gain on
investments -- net -- -- -- (.50) -- -- -- --
In excess of realized
gain on
investments -- net -- -- -- (.01) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions -- (.32) -- (.51) -- -- (.40) --
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $10.18 $14.64 $12.46 $10.31 $17.24 $10.53 $15.02 $12.77
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:**
- ----------------------------------------------------------------------------------------------------------------------------
Based on net asset value
per share (30.46)% 20.52% 20.85% (38.32)% (4.75)%# (29.89)% 21.40% 21.97%
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
- ----------------------------------------------------------------------------------------------------------------------------
Expenses 2.57% 2.50% 2.54% 2.72% 2.93 %* 1.78% 1.71% 1.74%
- ----------------------------------------------------------------------------------------------------------------------------
Investment income
(loss) -- net 1.77% (.11)% 2.68% .30% (1.22)%* 2.54% .72% 3.47%
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $ 12,196 $ 37,027 $ 23,183 $ 14,659 $ 5,069 $ 50,093 $ 128,433 $ 112,833
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 31.92% 84.91% 66.14% 54.86% 30.15 % 31.92% 84.91% 66.14%
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS D++
---------------------
FOR THE YEAR ENDED
NOVEMBER 30,
INCREASE (DECREASE) IN ---------------------
NET ASSET VALUE: 1995 1994
- --------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFO
- --------------------------------------------------------
Net asset value,
beginning of period $17.37 $14.45
- --------------------------------------------------------
Investment income
(loss) -- net .14 .03
- --------------------------------------------------------
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net (6.53) 3.00
- --------------------------------------------------------
Total from investment
operations (6.39) 3.03
- --------------------------------------------------------
Less dividends and
distributions:
Investment
income -- net -- (.11)
Realized gain on
investments -- net (.50) --
In excess of realized
gain on
investments -- net (.01) --
- --------------------------------------------------------
Total dividends and
distributions (.51) (.11)
- --------------------------------------------------------
Net asset value, end of
period $10.47 $17.37
- --------------------------------------------------------
TOTAL INVESTMENT
RETURN:**
- --------------------------------------------------------
Based on net asset value
per share (37.84)% 21.07%
- --------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
- --------------------------------------------------------
Expenses 1.91% 1.73%
- --------------------------------------------------------
Investment income
(loss) -- net 1.18% .23%
- --------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------
Net assets, end of
period (in thousands) $ 105,830 $ 204,907
- --------------------------------------------------------
Portfolio turnover 54.86% 30.15%
- --------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding.
# Aggregate total investment returns.
</TABLE>
34 MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 35
<TABLE>
<S> <C>
POTENTIAL
INVESTORS
Open an account (two options).
1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
OR SECURITIES DEALER FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
Advises shareholders on their Fund investments. Jacksonville, Florida 32232-5289
Performs recordkeeping and reporting services.
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
COUNSEL THE FUND CUSTODIAN
BROWN & WOOD LLP The Board of Directors BROWN BROTHERS HARRIMAN & CO.
One World Trade Center oversees the Fund. 40 Water Street
New York, New York 10048-0557 Boston, Massachusetts 02109
Provides legal advice to the Fund. Holds the Fund's assets for safekeeping.
INDEPENDENT AUDITORS MANAGER
DELOITTE & TOUCHE LLP MERRILL LYNCH
117 Campus Drive ASSET MANAGEMENT, L.P.
Princeton, New Jersey 08540-6400
ADMINISTRATIVE OFFICES
Audits the financial 800 Scudders Mill Road
statements of the Fund on behalf of Plainsboro, New Jersey 08536
the shareholders.
MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.
</TABLE>
MERRILL LYNCH LATIN AMERICA FUND, INC.
<PAGE> 36
[MORE INFORMATION ICON]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling
1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM INFORMATION
CONTAINED IN THIS PROSPECTUS.
Investment Company Act file #811-6349
Code #13989-04-99
(C) Merrill Lynch Asset Management, L.P. Prospectus
[Merrill Lynch LOGO]
Merrill Lynch Latin
America Fund, Inc.
[Merrill Lynch Artwork]
April 1, 1999
<PAGE> 37
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 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. 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. The Fund expects that
under normal market conditions at least 65% of the Fund's total assets will be
invested in Latin American equity and debt securities including common stocks,
preferred stocks, debt securities convertible into common stocks and
non-convertible debt securities. For more information on the Fund's investment
objectives and policies, see "Investment Objective and Policies." There can be
no assurance that the Fund's investment objectives can be achieved.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated April
1, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is April 1, 1999.
<PAGE> 38
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies........................... 2
Certain Risks of Debt Securities.......................... 4
Derivatives............................................... 4
Other Investment Policies, Practices and Risk Factors..... 9
Investment Restrictions................................... 12
Portfolio Turnover........................................ 15
Management of the Fund...................................... 15
Directors and Officers.................................... 15
Compensation of Directors................................. 16
Management and Advisory Arrangements...................... 17
Code of Ethics............................................ 18
Purchase of Shares.......................................... 19
Initial Sales Charge Alternatives -- Class A and Class D
Shares................................................. 20
Deferred Sales Charge Alternatives -- Class B and Class C
Shares................................................. 24
Distribution Plans........................................ 27
Limitations on the Payment of Deferred Sales Charges...... 28
Redemption of Shares........................................ 29
Redemption................................................ 30
Repurchase................................................ 30
Reinstatement Privilege -- Class A and Class D Shares..... 31
Pricing of Shares........................................... 31
Determination of Net Asset Value.......................... 31
Computation of Offering Price Per Share................... 32
Portfolio Transactions and Brokerage........................ 32
Shareholder Services........................................ 34
Investment Account........................................ 34
Exchange Privilege........................................ 35
Fee-Based Programs........................................ 37
Retirement Plans.......................................... 37
Automatic Investment Plans................................ 37
Automatic Dividend Reinvestment Plan...................... 37
Systematic Withdrawal Plan................................ 38
Dividends and Taxes......................................... 39
Dividends................................................. 39
Taxes..................................................... 39
Tax Treatment of Options, Futures and Forward Foreign
Exchange Transactions.................................. 42
Special Rules for Certain Foreign Currency Transactions... 42
Performance Data............................................ 43
General Information......................................... 46
Description of Shares..................................... 46
Independent Auditors...................................... 46
Custodian................................................. 46
Transfer Agent............................................ 46
Legal Counsel............................................. 47
Reports to Shareholders................................... 47
Shareholder Inquiries..................................... 47
Additional Information.................................... 47
Financial Statements........................................ 47
</TABLE>
<PAGE> 39
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 of 1940 as amended
(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.
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 Merrill Lynch
Asset Management, L.P., the Fund's manager (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.
2
<PAGE> 40
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 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. Investment in debt securities rated in the medium to lower
rating categories of nationally recognized statistical rating organizations such
as Standard & Poor's ("S&P") and Moody's Investors Service, Inc. ("Moody's") or
in unrated securities of comparable quality involve special risks which are
described more fully below under "Certain Risks of Debt Securities." 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 does not intend to purchase debt securities that are in
default or which the Manager believes will be in default, except sovereign debt.
The Fund may not invest more than 5% of its total assets in sovereign debt
securities that are in default.
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 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 ("ADR"), European Depositary Receipts ("EDR"),
Global Depositary Receipts ("GDR") 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 United States, and therefore, there may not be a correlation
between such information and the market value of such ADRs.
The Manager is responsible for the management of the Fund's portfolio and
makes portfolio decisions based on its own research information supplemented by
research information provided by other sources. The basic orientation of the
Fund's investment policies is such that at times a large portion of its common
stock holdings may carry less than favorable research ratings from research
analysts. The Manager makes extensive use of investment research information
provided by unaffiliated brokers and dealers and of the securities research,
economic research and computer applications facilities provided by Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
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CERTAIN RISKS OF DEBT SECURITIES
Sovereign Debt. 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 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. 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 junk bonds 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.
Junk Bonds. Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally pay
higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. The major
risks in junk bond investments include the following:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their interest
or principal payment obligations because of an economic downturn, specific
issuer developments or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations. The
issuer's ability to pay its debt obligations also may be lessened by specific
issuer developments, or the unavailability of additional financing.
Junk bonds are frequently ranked junior to claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If an issuer redeems
the junk bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds than
on other higher rated fixed income securities.
Junk bonds may be less liquid than higher rated fixed income securities
even under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid, judgment may play a greater
role in valuing certain of the Fund's portfolio securities than in the case of
securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
DERIVATIVES
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of
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value or rates, such as the Standard & Poor's 500 Index or the prime lending
rate). Derivatives allow the Fund to increase or decrease the level of risk to
which the Fund is exposed more quickly and efficiently than transactions in
other types of instruments.
Hedging. The Fund may use Derivatives for hedging purposes. Hedging is a
strategy in which a Derivative is used to offset the risk that other Fund
holdings may decrease in value. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite manner
to market movements. While hedging can reduce losses, it can also reduce or
eliminate gains if the market moves in a different manner than anticipated by
the Fund or if the cost of the Derivative outweighs the benefit of the hedge.
Hedging also involves the risk that changes in the value of the Derivative will
not match those of the holdings being hedged as expected by the Fund, in which
case any losses on the holdings being hedged may not be reduced.
The Fund may use the following types of Derivative instruments and trading
strategies:
Indexed and Inverse Floating Rate Securities. The Fund may invest in
securities the potential return of which is based on an index. As an
illustration, the Fund may invest in a debt security that pays interest based on
the current value of an interest rate index, such as the prime rate. The Fund
may also invest in a debt security which returns principal at a maturity based
on the level of a securities index or a basket of securities, or based on the
relative changes of two indices. In addition, the Fund may invest in securities
the potential return of which is based inversely on the change in an index (that
is, a security the value of which will move in the opposite direction to changes
in an index). For example, the Fund may invest in securities that pay a higher
rate of interest when a particular index decreases and pay a lower rate of
interest (or do not fully return principal) when the value of the index
increases. If the Fund invests in such securities, it may be subject to reduced
or eliminated interest payments or loss of principal in the event of an adverse
movement in the relevant index or indices. Indexed and inverse floating rate
securities involve credit risk, and certain indexed and inverse floating rate
securities may involve leverage risk, liquidity risk, and currency risk. The
Fund may invest in indexed and inverse floating rate securities for hedging
purposes only. When used for hedging purposes, indexed and inverse floating rate
securities involve correlation risk.
Options on Securities and Securities Indices
Purchasing Put Options. The Fund may purchase put options on securities
held in its portfolio or securities or interest rate indices which are
correlated with securities held in its portfolio. When the Fund purchases a put
option, in consideration for an upfront payment (the "option premium") the Fund
acquires a right to sell to another party specified securities owned by the Fund
at a specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put. Purchasing a put
option may involve correlation risk, and may also involve liquidity and credit
risk.
Purchasing Call Options. The Fund may also purchase call options on
securities it intends to purchase or securities or interest rate indices, which
are correlated with the types of securities it intends to purchase. When the
Fund purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities
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in which to invest in a market the Fund believes to be attractive, in the case
of an option on an index (an "anticipatory hedge"). In the event the Fund
determines not to purchase a security underlying a call option, however, the
Fund may lose the entire option premium. Purchasing a call option involves
correlation risk, and may also involve liquidity and credit risk.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold. However, the Fund
will not purchase options on securities if, as a result of such a purchase, the
aggregate cost (option plus premiums paid) of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Writing Call Options. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates with securities held in its portfolio. When the Fund writes a call
option, in return for an option premium the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or before
the expiration date, in the case of an option on securities, or agrees to pay to
another party an amount based on any gain in a specified securities index beyond
a specified level on or before the expiration date, in the case of an option on
a securities index. The Fund may write call options to earn income, through the
receipt of option premiums. In the event the party to which the Fund has written
an option fails to exercise its rights under the option because the value of the
underlying securities is less than the exercise price, the Fund will partially
offset any decline in the value of the underlying securities through the receipt
of the option premium. By writing a call option, however, the Fund limits its
ability to sell the underlying securities, and gives up the opportunity to
profit from any increase in the value of the underlying securities beyond the
exercise price, while the option remains outstanding. Writing a call option may
involve correlation risk.
Writing Put Options. The Fund may also write put options on securities or
securities indices. When the Fund writes a put option, in return for an option
premium the Fund gives another party the right to sell to the Fund a specified
security at the exercise price on or before the expiration date, in the case of
an option on a security, or agrees to pay to another party an amount based on
any decline in a specified securities index below a specified level on or before
the expiration date, in the case of an option on a securities index. The Fund
may write put options to earn income, through the receipt of option premiums. In
the event the party to which the Fund has written an option fails to exercise
its rights under the option because the value of the underlying securities is
greater than the exercise price, the Fund will profit by the amount of the
option premium. By writing a put option, however, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of the security at the time of exercise as long as the put option is
outstanding, in the case of an option on a security, or make a cash payment
reflecting any decline in the index, in the case of an option on an index.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. The Fund will write a
put option on a security or a securities index only if the Fund would be willing
to purchase the security at the exercise price for investment purposes (in the
case of an option on a security) or is writing the put in connection with
trading strategies involving combinations of options -- for example, the sale
and purchase of options with identical expiration dates on the same security or
index but different exercise prices (a technique called a "spread"). Writing a
put option may involve substantial leverage risks. 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.
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Derivatives" below. A call option will also
be considered covered if the Fund owns the securities it would be required to
deliver upon exercise of the option (or, in the case of an option on a
securities index, securities which substantially correlate with the performance
of such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.
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Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. No price is paid upon entering into
a futures contract. Rather, upon purchasing or selling a futures contract the
Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying asset is a
currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.
Forward Foreign Exchange Transactions. Forward foreign exchange
transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date set
at the time of the contract. Spot foreign exchange transactions are similar but
require current, rather than future, settlement. The Fund will enter into
foreign exchange transactions only for purposes of hedging either a specific
transaction or a portfolio position. The Fund may enter into a foreign exchange
transaction for purposes of hedging a specific transaction by, for example,
purchasing a currency needed to settle a security transaction or selling a
currency in which the Fund has received or anticipates receiving a dividend or
distribution. The Fund may enter into a foreign exchange transaction for
purposes of hedging a portfolio
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position by selling forward a currency in which a portfolio position of the Fund
is denominated or by purchasing a currency in which the Fund anticipates
acquiring a portfolio position in the near future. The Fund may also hedge
portfolio positions through currency swaps, which are transactions in which one
currency is simultaneously bought for a second currency on a spot basis and sold
for the second currency on a forward basis. Forward foreign exchange
transactions involve substantial currency risk, and also involve credit and
liquidity risk.
Currency Futures. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through use of currency futures or options
thereon. Currency futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts. See "Futures"
above. Currency futures involve substantial currency risk, and also involve
leverage risk.
Currency Options. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through the use of currency options.
Currency options are similar to options on securities, but in consideration for
an option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below. Currency options involve substantial currency risk, and may
also involve credit, leverage or liquidity risk.
Limitations on Currency Hedging. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. The Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). The Fund will
only enter into a cross-hedge if the Investment Adviser believes that (i) there
is a demonstrable high correlation between the currency in which the cross-hedge
is denominated and the currency being hedged, and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be
significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.
Risk Factors in Hedging Foreign Currency Risks. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. While the Fund's use of Currency Instruments to effect hedging strategies
is intended to reduce the volatility of the net asset value of the Fund's
shares, the net asset value of the Fund's shares will fluctuate. Moreover,
although Currency Instruments will be used with the intention of hedging against
adverse currency movements, transactions in Currency Instruments involve the
risk that anticipated currency movements will not be accurately predicted and
that the Fund's hedging strategies will be ineffective. To the extent that the
Fund hedges against anticipated currency movements which do not occur, the Fund
may realize losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the Fund will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in
currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able to
enter into a hedging transaction at an effective price, or (ii) the currency
exchange rate movement relates to a market with respect to which Currency
Instruments are not available (such as certain developing markets) and it is not
possible to engage in effective foreign currency hedging.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit risk -- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
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Currency risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time the seller would like or at the price that the
seller believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be completely
offset by movements in the value of the hedged instruments.
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives." However, there can be
no assurance that, at any specific time, either a liquid secondary market will
exist for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be possible to close a
position in a Derivative without incurring substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. When
the Fund engages in such a transaction; the Fund will deposit in a segregated
account at its custodian liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that
the Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives.
Certain Derivatives traded in OTC markets, including indexed securities and
OTC options, involve substantial liquidity risk. The absence of liquidity may
make it difficult or impossible for the Fund to sell such instruments promptly
at an acceptable price. The absence of liquidity may also make it more difficult
for the Fund to ascertain a market value for such instruments. The Fund will
therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Manager anticipates
the Fund can receive on each business day at least two independent bids or
offers, unless a quotation from only one dealer is available, in which case that
dealer's quotation may be used.
Because Derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that the Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
Derivatives traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Fund with a third-party guaranty
or other credit enhancement.
OTHER INVESTMENT POLICIES, PRACTICES AND RISK FACTORS
Securities Lending. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets (subject to investment restriction (4)
below). In return, the Fund receives collateral in an amount equal to at least
100% of the current market value of the loaned securities in cash or securities
issued or guaranteed by the U.S. Government. The Fund receives securities as
collateral for the loaned securities and the Fund and the borrower negotiate a
rate for the loan premium to be received by the Fund for the loaned securities,
which
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increases the Fund's yield. The Fund may receive a flat fee for its loans. The
loans are terminable at any time and the borrower, after notice, is required to
return borrowed securities within five business days. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with its
loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, the Fund
could experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are "restricted securities."
Restricted securities have contractual or legal restrictions on their resale and
include "private placement" securities that the Fund may buy directly from the
issuer. Restricted securities may be neither listed on an exchange nor traded in
other established markets. Privately placed securities may or may not be freely
transferable under the laws of the applicable jurisdiction or due to contractual
restrictions on resale. As a result of the absence of a public trading market,
privately placed securities may be more difficult to value than publicly traded
securities and may be less liquid, or illiquid, and therefore may be subject to
the risks associated with illiquid securities, as described in the preceding
paragraph. Some restricted securities, however, may be liquid. In addition,
issuers whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements that may be applicable if
their securities were publicly traded. If any privately placed securities held
by the Fund are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. Certain of the Fund's investments in private
placements may consist of direct investments and may include investments in
smaller, less seasoned issuers, which may involve greater risks. These issuers
may have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. In making investments in such
securities, the Fund may obtain access to material nonpublic information which
may restrict the Fund's ability to conduct portfolio transactions in such
securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board has determined to treat as liquid Rule 144A securities
that are either freely tradable in their primary markets offshore or have been
determined to be liquid in accordance with the policies and procedures adopted
by the Fund's Board. The Board has adopted guidelines and delegated to the
Manager the daily function of determining and monitoring liquidity of restricted
securities. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations. Since it is not possible to
predict with assurance exactly how this market for restricted securities sold
and offered under Rule 144A will continue to develop, the Board will carefully
monitor the Fund's investments in these securities. This investment practice
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these securities.
Borrowing and Leverage. The use of leverage by the Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest the Fund will have
to pay on the borrowings, the Fund's return will be
10
<PAGE> 48
greater than if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such borrowed funds is not
sufficient to cover the cost of borrowing, the return to the Fund will be less
than if leverage had not been used, and therefore the amount available for
distribution to shareholders as dividends and other distributions will be
reduced. In the latter case, the Manager in its best judgment nevertheless may
determine to maintain the Fund's leveraged position if it expects that the
benefits to the Fund's shareholders of maintaining the leveraged position will
outweigh the current reduced return.
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Manager from managing the Fund's
portfolio in accordance with the Fund's investment objectives and policies.
However, a breach of any such covenants not cured within the specified cure
period may result in acceleration of outstanding indebtedness and require the
Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the Manager provided that
the terms of such borrowings are no less favorable than those available from
comparable sources of funds in the marketplace.
Restrictions on Certain Investments. 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, 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 Argentina, 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.
When-Issued Securities, Delayed Delivery Securities and Forward
Commitments. The Fund may purchase or sell securities that it is entitled to
receive on a when-issued basis. The Fund may also purchase or sell securities on
a delayed delivery basis or through a forward commitment. These transactions
involve the purchase or sale of securities by the Fund at an established price
with payment and delivery taking place in the future. The Fund enters into these
transactions to obtain what is considered an advantageous price to the Fund at
the time of entering into the transaction. The Fund has not established any
limit on the percentage of its assets that may be committed in connection with
these transactions. When the Fund purchases securities in these transactions,
the Fund segregates liquid securities in an amount equal to the amount of its
purchase commitments.
There can be no assurance that a security purchased on a when-issued basis
will be issued or that a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may not
benefit from an appreciation in the value of the security during the commitment
period.
Standby Commitment Agreements. The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities which may be issued and sold to the Fund
at the option of the issuer. The price of the security is fixed at the time of
the commitment. At the time of entering into the agreement the Fund is paid a
commitment fee, regardless of whether or not the security is ultimately issued.
The Fund will enter into such agreements for the purpose of
11
<PAGE> 49
investing in the security underlying the commitment at a price that is
considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 90 days and will limit its
investment in such commitments so that the aggregate purchase price of
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its net assets taken at the time of the
commitment. The Fund segregates liquid assets in an aggregate amount equal to
the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements may be entered into only with financial institutions which
(i) have, in the opinion of the Manager, substantial capital relative to the
Fund's exposure, or (ii) have provided the Fund with a third-party guaranty or
other credit enhancement. Under a repurchase agreement or a purchase and sale
contract, the counterparty agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement or under a purchase and sale contract, instead of the contractual
fixed rate of return, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. The Fund may not
invest more than 15% of its net assets in repurchase agreements or purchase and
sale contracts maturing in more than seven days, together with all other
illiquid investments.
Suitability. The economic benefit of an investment in the Fund depends
upon many factors beyond the control of the Fund, the Manager and its
affiliates. Because of its emphasis on foreign securities, the Fund should be
considered a vehicle for diversification and not as a balanced investment
program. The suitability for any particular investor of a purchase of shares in
the Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks associated with
investing in foreign securities, including the risk of loss of principal.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
12
<PAGE> 50
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the Fund's shares present at a meeting at which
more than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the Fund's outstanding shares). 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 investment restrictions
that may be changed by the Board of Directors without a vote of the Fund's
shareholders. Under the non-fundamental investment restrictions, the Fund may
not:
(a) Purchase securities of other investment companies, except to the
extent permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment company
or registered unit investment trust, in reliance on Section 12(d)(1)(F) or
(G) (the "fund of funds" provisions) of the Investment Company Act at any
time the Fund's shares are owned by another investment company that is part
of the same group of investment companies as the Fund.
(b) Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently does
not intend to engage in short sales, except short sales "against the box."
13
<PAGE> 51
(c) Invest in securities that cannot be readily resold because of
legal or contractual restrictions or that 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 that mature
within seven days or securities, that 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 net 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 Merrill Lynch with the Manager, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order the Fund would be
prohibited from engaging in portfolio transactions with Merrill Lynch or any of
its affiliates acting as principal.
Non-Diversified Status
The Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act in
the proportion of its assets that it may invest in securities of a single
issuer. The Fund's investments are limited, however, in order to allow the Fund
to qualify as a "regulated investment company" under the Internal Revenue Code
of 1986, as amended (the "Code"). See "Dividends and Taxes -- Taxes." To
qualify, the Fund complies with certain requirements, including limiting its
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the market value of the Fund's total assets will be invested in
the securities of a single issuer and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer. 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
14
<PAGE> 52
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 TURNOVER
The rate of portfolio turnover is not a limiting factor and, given the
Fund's investment policies, it is anticipated that there may be periods when
high portfolio turnover will exist. High portfolio turnover may also result in
negative tax consequences, such as an increase in capital gains dividends or in
ordinary income dividends of accrued market discount. See "Dividends and
Taxes -- Taxes." 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 all securities with maturities at the time
of acquisition of one year or less) by the monthly average value of the
securities in the portfolio during the year. The Fund's turnover rate may vary
greatly from year to year or during periods within a year. A high rate of
portfolio turnover results in correspondingly greater brokerage commission
expenses.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors of the Fund consists of eight individuals, six of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Directors"). The Trustees are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act.
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for at
least the last five years, is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
TERRY K. GLENN (58) -- President and Director(1)(2) -- Executive Vice
President of the Manager and Fund Asset Management, L.P. ("FAM") (which terms as
used herein include their corporate predecessors) since 1983; Executive Vice
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; President of Princeton Funds Distributor, Inc. ("PFD") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
DONALD CECIL (72) -- Director(2)(3) -- 1114 Avenue of the Americas, New
York, New York 10036. Special Limited Partner of Cumberland Associates (an
investment partnership) since 1982; Member of Institute of Chartered Financial
Analysts; Member and Chairman of Westchester County (N.Y.) Board of
Transportation.
ROLAND M. MACHOLD (62) -- Director(2)(3) -- 1091 Princeton-Kingston Road,
Princeton, New Jersey 08540. Director of the State of New Jersey Division of
Investment from 1977 to 1988; Trustee of Bryn Mawr College since 1990 and of
Teacher's College, Columbia University since 1985; Co-Chair Emeritus and
Founding Director of the Council of Institutional Investors; Member of the
Capital Formation and Regulatory Processes Advisory Committee of the Securities
and Exchange Commission from 1995 to 1996; Member of the Institutional Investor
Advisory Committee of the New York Stock Exchange from 1992 to 1995.
EDWARD H. MEYER (72) -- Director(2)(3) -- 777 Third Avenue, New York, New
York 10017. President of Grey Advertising Inc. since 1968, Chief Executive
Officer since 1970 and Chairman of the Board of Directors since 1972; Director
of The May Department Stores Company, Bowne & Co., Inc. (financial printers),
Ethan Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (67) -- Director(2)(3) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct
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<PAGE> 53
Professor, Wharton School, University of Pennsylvania from 1989 to 1990;
Partner, Small Cities Cable Television from 1986 to 1997.
RICHARD R. WEST (61) -- Director(2)(3) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993, and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding company) and Alexander's, Inc. (real
estate company).
ARTHUR ZEIKEL (66) -- Director(1)(2) -- Chairman of the Manager and FAM
from 1997 to 1999 and President thereof from 1977 to 1997; Chairman of Princeton
Services from 1997 to 1999, Director thereof from 1993 to 1999 and President
thereof from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc.
("ML & Co.") from 1990 to 1999.
EDWARD D. ZINBARG (64) -- Director(2)(3) -- 5 Hardwell Road, Short Hills,
New Jersey 07078-2117. Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; Former Director of Prudential Reinsurance
Company and former Trustee of The Prudential Foundation.
A. GRACE PINEDA (41) -- Senior Vice President and Portfolio
Manager(1)(2) -- First Vice President of the Manager since 1997; Senior
Portfolio Manager of the Manager since 1987; Vice President of the Manager from
1989 to 1997.
DONALD C. BURKE (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Manager and FAM since 1999; Senior Vice President
and Treasurer of Princeton Services since 1999; First Vice President of the
Manager from 1997 to 1999; Vice President of the Manager from 1990 to 1997;
Director of Taxation of the Manager since 1990.
BARBARA G. FRASER (54) -- Secretary(1)(2) -- First Vice President of the
Manager since 1996; Vice President of the Manager from 1994 to 1996; attorney in
private practice from 1991 to 1994.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Manager or FAM acts as the investment
adviser.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Directors.
As of March 1, 1999, the Directors and officers of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, an officer
and a Director of the Fund, and the other officers of the Fund owned an
aggregate of less than 1% of the outstanding shares of common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates members of its Audit
and Nominating Committee (the "Committee"), which consists of all the
non-interested Directors, a fee of $500 per meeting attended. The Fund pays the
Chairman of the Committee an additional fee of $250 per meeting attended. The
Fund reimburses each non-interested Director for his out-of-pocket expenses
relating to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended November 30, 1998 and the aggregate
compensation paid to them from all registered investment companies advised by
the Manager and its affiliate, FAM ("MLAM/FAM-advised funds"), for the calendar
year ended December 31, 1998.
16
<PAGE> 54
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR ESTIMATED COMPENSATION FROM
RETIREMENT BENEFITS ANNUAL FUND AND OTHER
POSITION WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME FUND FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
---- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Donald Cecil............ Director $8,500 None None $277,808
Roland M. Machold....... Director $ 792 None None $ 39,208(2)
Edward H. Meyer......... Director $5,500 None None $214,558
Charles C. Reilly....... Director $7,500 None None $362,858
Richard R. West......... Director $7,500 None None $334,125
Edward D. Zinbarg....... Director $7,500 None None $133,959
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Cecil (34 registered investment companies consisting of 34 portfolios); Mr.
Machold (19 registered investment companies consisting of 19 portfolios);
Mr. Meyer (34 registered investment companies consisting of 34 portfolios);
Mr. Reilly (57 registered investment companies consisting of 70 portfolios);
Mr. West (58 registered investment companies consisting of 79 portfolios);
and Mr. Zinbarg (19 registered investment companies consisting of 19
portfolios).
(2) Mr. Machold was elected a Director of the Fund and a director or trustee of
certain other MLAM/FAM-advised funds on October 20, 1998.
Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares -- Reduced Initial Sales Charges -- Purchase Privilege of
Certain Persons."
MANAGEMENT AND ADVISORY ARRANGEMENTS
Management Services. The Manager provides the Fund with investment
advisory and management services. Subject to the supervision of the Board of
Directors, the Manager is responsible for the actual management of the Fund's
portfolio and constantly reviews the Fund's holdings in light of its own
research analysis and that from other relevant sources. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Manager. The Manager performs certain of the other administrative services and
provides all the office space, facilities, equipment and necessary personnel for
management of the Fund.
Management Fee. The Fund has entered into a management agreement with the
Manager (the "Management Agreement"), pursuant to which the Manager receives for
its services to the Fund monthly compensation at the annual rate of 1.00% of the
average daily net assets of the Fund. The table below sets forth information
about the total investment advisory fees paid by the Fund to the Manager for the
periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, MANAGEMENT FEE
------------------------------ --------------
<S> <C>
1998.............................. $5,326,441
1997.............................. $8,578,935
1996.............................. $7,092,959
</TABLE>
The Manager has entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K.") pursuant to which MLAM U.K. provides
investment advisory services to the Manager with respect to the Fund. The
Manager paid no fees to MLAM U.K. in the fiscal years ended November 30, 1996,
1997 or 1998.
Payment of Fund Expenses. The Management Agreement obligates the Manager
to provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the Fund,
as well as the fees of all Trustees of the Fund who are affiliated persons of ML
& Co. or any of its affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including among other things: taxes, expenses for legal
and auditing services, costs of printing proxies, stock certificates,
shareholder reports, prospectuses and statements of additional information,
except to the extent paid by Merrill Lynch Funds Distributor, a division of PFD
(the "Distributor"); charges of the custodian and the transfer agent; expenses
of redemption of shares; Commission fees; expenses of registering the shares
under Federal, state or foreign
17
<PAGE> 55
securities laws; fees and expenses of unaffiliated Directors; accounting and
pricing costs (including the daily calculations of net asset value); insurance;
interest; brokerage costs; litigation and other extraordinary or non-recurring
expenses; and other expenses properly payable by the Fund. Accounting services
are provided for the Fund by the Manager and the Fund reimburses the Manager for
its costs in connection with such services. See "Purchase of
Shares -- Distribution Plans."
Organization of the Manager. The Manager is a limited partnership, the
partners of which are ML & Co., a financial services holding company and the
parent of Merrill Lynch, and Princeton Services. ML & Co. and Princeton Services
are "controlling persons" of the Manager as defined under the Investment Company
Act because of their ownership of its voting securities or their power to
exercise a controlling influence over its management or policies.
The following entities may be considered "controlling persons" of MLAM
U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill
Lynch International Holdings, Inc., a subsidiary of Merrill Lynch International,
Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
$11.00 per Class A or Class D account and $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts which close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
Distribution Expenses. The Fund has entered into four separate
distribution agreements with the Distributor in connection with the continuous
offering of each class of shares of the Fund (the "Distribution Agreements").
The Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays for
the printing and distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
18
<PAGE> 56
The Codes require that all employees of the Manager pre-clear any personal
securities investment (with limited exceptions, such as government securities).
The pre-clearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C or Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees (also known as service fees) and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The contingent deferred sales charges ("CDSCs"), distribution fees
and account maintenance fees that are imposed on Class B and Class C shares, as
well as the account maintenance fees that are imposed on Class D shares, are
imposed directly against those classes and not against all assets of the Fund
and, accordingly, such charges do not affect the net asset value of any other
class or have any impact on investors choosing another sales charge option.
Dividends paid by the Fund for each class of shares are calculated in the same
manner at the same time and differ only to the extent that account maintenance
and distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Each class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or FAM. Funds advised by MLAM or
FAM that utilize the Merrill Lynch Select Pricing(SM) System are referred to
herein as "Select Pricing Funds."
As a result of the implementation of the Merrill Lynch Select Pricing(SM)
System, Class A shares of the Fund outstanding prior to October 21, 1994 were
redesignated Class D shares. The Class A shares currently being offered differ
from the Class A shares offered prior to October 21, 1994 in many respects
including sales charges, exchange privileges and the classes of persons to whom
shares are offered. 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. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change. Merrill Lynch
may charge its customers a processing fee (presently $5.35) to confirm a sale of
shares to such customers. Purchases made directly through the Transfer Agent are
not subject to the processing fee.
19
<PAGE> 57
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase Class
A shares should purchase Class A shares rather than Class D shares because there
is an account maintenance fee imposed on Class D shares. Investors qualifying
for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A or
Class D shares, because over time the accumulated ongoing account maintenance
and distribution fees on Class B or Class C shares may exceed the initial sales
charge and, in the case of Class D shares, the account maintenance fee. Although
some investors who previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other Select Pricing Funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for a reduced initial sales charge on new initial sales charge
purchases. In addition, the ongoing Class B and Class C account maintenance and
distribution fees will cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than the initial sales
charge shares. The ongoing Class D account maintenance fees will cause Class D
shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class A shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his, her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Eligible Class A Investors
Class A shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares. Investors
who currently own Class A shares, including participants in the Merrill Lynch
Blueprint(SM) Program, 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 Select Pricing Funds. Also eligible to purchase Class A shares at
net asset value are participants in certain investment programs including
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and certain purchases made in connection
with certain fee-based programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM/FAM-advised investment companies. Certain
persons who acquired shares of certain MLAM/FAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions are met. In addition,
Class A shares of the Fund and certain other Select Pricing Funds are offered at
net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and, if certain conditions are met, to
20
<PAGE> 58
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other Select Pricing
Funds.
Class A and Class D Sales Charge Information
CLASS A SHARES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
November 30, Collected Distributor Merrill Lynch Load-Waived Shares
- ---------------------- ------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
1998 $ 353 $ 27 $ 326 $ 0
1997 $ 2,253 $ 163 $ 2,090 $ 0
1996 $ 2,523 $ 189 $ 2,334 $ 0
</TABLE>
CLASS D SHARES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
November 30, Collected Distributor Merrill Lynch Load-Waived Shares
- ---------------------- ------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
1998 $ 30,085 $ 1,955 $ 28,130 $ 0
1997 $351,814 $23,410 $328,404 $ 0
1996 $199,218 $15,673 $183,545 $ 0
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Reinvested Dividends and Capital Gains. No initial sales charges are
imposed upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends.
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of any other Select Pricing Funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent is not a binding obligation to purchase any amount of Class A
or Class D shares; however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intent may be included under a
subsequent Letter of Intent executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within
21
<PAGE> 59
such 90-day period. The value of Class A and Class D shares of the Fund and of
other Select Pricing Funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, may be included as a credit toward the completion of such Letter, but
the reduced sales charge applicable to the amount covered by such Letter will be
applied only to new purchases. If the total amount of shares does not equal the
amount stated in the Letter of Intent (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to at least 5.0%
of the intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intent must be at least 5.0% of the dollar amount
of such Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of accumulation,
the purchaser will be entitled on that purchase and subsequent purchases to the
further reduced percentage sales charge that would be applicable to a single
purchase equal to the total dollar value of the Class A or Class D shares then
being purchased under such Letter, but there will be no retroactive reduction of
the sales charge on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
TMA(SM) Managed Trusts. Class A shares are offered at net asset value to
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the plan.
Additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements is available toll-free from Merrill
Lynch Business Financial Services at (800) 237-7777.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM/FAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.) and their directors and employees, and any
trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund's suitability
standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and, second, the investor must establish that such
redemption had been made within 60 days prior to the investment in the Fund and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
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<PAGE> 60
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and, second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and, second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select Pricing(SM) System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing dividends
from shares of common stock acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or 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
23
<PAGE> 61
adverse tax consequences to the Fund that might result from an acquisition of
assets having net unrealized appreciation that is disproportionately higher at
the time of acquisition than the realized or unrealized appreciation of the
Fund. The issuance of Class D shares for consideration other than cash is
limited to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities that (i) meet the investment objectives and policies of the
Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the value
of which is readily ascertainable, 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.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Select Pricing Funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.
Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class D shares of the Fund after a conversion period of approximately eight
years, and thereafter investors will be subject to lower ongoing fees.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions. 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. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- --------------------
<S> <C>
0-1............................................... 4.0%
1-2............................................... 3.0%
2-3............................................... 2.0%
3-4............................................... 1.0%
4 and thereafter.................................. None
</TABLE>
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<PAGE> 62
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability or, if later, reasonably promptly following
completion of probate. The Class B CDSC also may be waived on redemptions of
shares by certain eligible 401(a) and eligible 401(k) plans. The CDSC may also
be waived for any Class B shares that are purchased by eligible 401(k) or
eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and held in such account at the time of redemption.
The Class B CDSC may also be waived for any Class B shares that are purchased by
a Merrill Lynch rollover IRA that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group and held in such account
at the time of redemption. The Class B CDSC may be waived for any Class B shares
that were acquired and held at the time of the redemption in an Employee
Access(SM) Account available through employers providing eligible 401(k) plans.
The Class B CDSC may be waived or its terms may be modified in connection with
certain fee-based programs. The Class B CDSC may also be waived in connection
with involuntary termination of an account in which Fund shares are held or for
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee-Based Programs" and "-- Systematic Withdrawal
Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the CDSC
upon redemption, based on the number of employees or number of employees
eligible to participate in the plan, the aggregate amount invested by the plan
in specified investments and/or the services provided by Merrill Lynch to the
plan. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing Fund.
Minimum purchase requirements may be waived or varied for such plans. Additional
information regarding purchases by employer-sponsored retirement or savings
plans and certain other arrangements is available toll-free from Merrill Lynch
Business Financial Services at (800) 237-7777.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of the average daily net assets but are not
subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once each
month (on the "Conversion Date") on the basis of the relative net asset value of
the shares of the two classes on the Conversion Date, without the imposition of
any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of shares for Federal income tax
purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
25
<PAGE> 63
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately ten
years after initial purchase. If, during the Conversion Period, a shareholder
exchanges Class B shares with an eight-year Conversion Period for Class B shares
with a ten-year Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange will apply and the
holding period for the shares exchanged will be tacked on to the holding period
for the shares acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services -- Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. In
determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no Class C CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no Class C CDSC will be assessed
on shares derived from reinvestment of dividends or capital gains distributions.
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.
The Class C CDSC may be waived in connection with involuntary termination of an
account in which Fund shares are held and withdrawals through the Merrill Lynch
Systematic Withdrawal Plan. See "Shareholder Services -- Fee-Based Programs" and
" -- Systematic Withdrawal Plans."
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
CLASS B SHARES*
- -----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended November 30, by Distributor Merrill Lynch
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
1998 $ 928,428 $ 928,428
1997 $1,403,724 $1,403,724
1996 $1,554,900 $1,554,900
</TABLE>
* Additional Class B CDSCs payable to the Distributor
with respect to the fiscal years ended November 30,
1997 and 1998 may have been waived or converted to a
contingent obligation in connection with a
shareholder's participation in certain fee-based
programs.
<TABLE>
<CAPTION>
CLASS C SHARES
- -----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended November 30, by Distributor Merrill Lynch
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
1998 $ 24,434 $ 24,434
1997 $ 31,593 $ 31,593
1996 $ 17,371 $ 17,371
</TABLE>
26
<PAGE> 64
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in whole
or in part by the Distributor to defray the expenses of dealers (including
Merrill Lynch) related to providing distribution-related services to the Fund in
connection with the sale of the Class B and Class C shares, such as the payment
of compensation to financial consultants for selling Class B and Class C shares
from the dealer's own funds. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time of purchase.
See "Distribution Plans" below. Imposition of the CDSC and the distribution fee
on Class B and Class C shares is limited by the NASD asset-based sales charge
rule. See "Limitations on the Payment of Deferred Sales Charges" below.
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each
a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund 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 with respect to Class B, Class C and Class D shares. Each of those
classes has exclusive voting rights with respect to the Distribution Plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides that
the Fund also 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
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 reasonable
likelihood that each Distribution Plan will benefit the Fund and its related
class of shareholders. Each Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the Independent Directors or by
the vote of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in an easily
accessible place.
27
<PAGE> 65
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans annually, as of December 31 of each year, on a "fully allocated accrual"
basis and quarterly on a "direct expense and revenue/cash" basis. On the fully
allocated accrual basis, revenues consist of the account maintenance fees,
distribution fees, the CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses, advertising, sales
promotion and marketing expenses, corporate overhead and interest expense. On
the direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs and the expenses consist of
financial consultant compensation.
As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual expenses of the Distributor and
Merrill Lynch for the period since the commencement of operations of Class B
shares exceeded the fully allocated accrual revenues by approximately $5,447,000
(1.01% of Class B net assets at that date). As of November 30, 1998, direct cash
revenues for the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $23,349,610 (12.25% of Class B net assets at
that date). As of December 31, 1997, the fully allocated accrual expenses
incurred by the Distributor and Merrill Lynch for the period since the
commencement of operations of Class C shares exceeded the fully allocated
accrual revenues by approximately $271,000 (.69% of Class C net assets at that
date). As of November 30, 1998, direct cash revenues for the period since the
commencement of operations of Class C shares exceeded direct cash expenses by
$659,834 (5.41% of Class C net assets at that date).
For the fiscal year ended November 30, 1998, the Fund paid the Distributor
$3,621,027 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $360.1
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended November 30, 1998, the Fund paid the
Distributor $250,447 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$24.9 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended November 30, 1998, the Fund paid the
Distributor $226,121 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$90.0 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges), plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any CDSCs will be paid
to the
28
<PAGE> 66
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,
1998 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1998
----------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGE(2) BALANCE(3) PAYABLE DISTRIBUTOR(4) BALANCE LEVEL(5)
---------- ------------ ----------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES FOR THE PERIOD
SEPTEMBER 27, 1991
(COMMENCEMENT
OF OPERATIONS) TO NOVEMBER 30,
1998
Under NASD Rule as Adopted....... $1,037,807 $64,692 $23,328 $88,020 $ 32,602 $ 55,418 $1,430
Under Distributor's Voluntary
Waiver......................... $1,037,807 $64,692 $ 5,326 $70,018 $ 32,602 $ 37,416 $1,430
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT
OF OPERATIONS) TO NOVEMBER 30,
1998
Under NASD Rule as Adopted....... $ 55,057 $ 3,332 $ 797 $ 4,129 $ 788 $ 3,341 $ 91
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund").
Upon such an exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund
into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(4) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to July
6, 1993 under the distribution plan in effect at that time, at a 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 "What are the
Fund's fees and expenses?" in the Prospectus. This figure may include CDSCs
that were deferred when a shareholder redeemed shares prior to the
expiration of the applicable CDSC period and invested the proceeds, without
the imposition of a sales charge, in Class A shares in conjunction with the
shareholder's participation in the Merrill Lynch Mutual Fund Advisor
(Merrill Lynch MFA(SM)) Program (the "MFA Program"). The CDSC is booked as a
contingent obligation that may be payable if the shareholder terminates
participation in the MFA Program.
(5) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum (with respect to Class B shares) or
the NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the New York Stock Exchange (the
29
<PAGE> 67
"NYSE") is restricted as determined by the Commission or the NYSE is closed
(other than customary weekend and holiday closings), for any period during which
an emergency exists as defined by the Commission as a result of which disposal
of portfolio securities or determination of the net asset value of the Fund is
not reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities held
by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests should not be
sent to the Fund. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption requests must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), 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, payments will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to fifteen minutes after
the regular close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time), and such request is received by the Fund from such dealer
not later than 30 minutes after the close of business on the NYSE on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE, in
order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent on
accounts held at the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect
30
<PAGE> 68
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem Fund
shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of 15 minutes after the close of business on
the NYSE on each day the NYSE is open for trading. The NYSE generally closes at
4:00 p.m., Eastern time. Any assets or liabilities initially expressed in terms
of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Manager and Distributor, are accrued
daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of Class D shares reflecting the daily expense accruals of
the distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Directors as the primary market.
Long positions in securities traded in the over-the-counter ("OTC") market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Short positions in securities traded in the OTC market are valued at the
last available ask price in the OTC market prior to the time of valuation. 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-
31
<PAGE> 69
traded options or, in the case of options traded in the OTC market, the last
asked price. Options purchased by the Fund are valued at their last sale price
in the case of exchange-traded options or, in the case of options traded in the
OTC market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Directors of the
Fund. Such valuations and procedures will be reviewed periodically by the
Directors.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that may not be reflected in the computation of the Fund's net asset value.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on November 30, 1998 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets............................... $26,249,064 $190,670,116 $12,196,478 $50,092,679
=========== ============ =========== ===========
Number of Shares Outstanding............. 2,473,271 18,693,317 1,197,805 4,755,061
=========== ============ =========== ===========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................... $ 10.61 $ 10.20 $ 10.18 $ 10.53
Sales Charge (for Class A and Class D
shares: 5.25% of offering price; 5.54%
of net asset value per share)*......... .59 ** ** .58
----------- ------------ ----------- -----------
Offering Price........................... $ 11.20 $ 10.20 $ 10.18 $ 11.11
=========== ============ =========== ===========
</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 -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares" herein.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors the Manager is
primarily responsible for the execution of the Fund's portfolio transactions and
the allocation of brokerage. The Fund has no obligation to deal with any dealer
or group of dealers in the execution of transactions in portfolio securities of
the Fund. Where possible, the Fund deals directly with the dealers who make a
market in the securities involved except in those circumstances where better
prices and execution are available elsewhere. It is the policy of the Fund to
obtain the best results in conducting portfolio transactions for the Fund,
taking into account such factors as price (including the applicable dealer
spread or commission), the size, type and difficulty of the transaction
involved, the firm's general execution and operations facilities and the firm's
risk in positioning the securities involved. The portfolio securities of the
Fund generally are traded on a principal basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
While reasonable competitive spreads or commissions are sought, the Fund will
not necessarily be paying the lowest spread or commission available.
Transactions with respect to the securities of small and emerging growth
companies in which the Fund may invest may involve specialized services on the
part of the broker or dealer and thereby entail higher commissions or spreads
than would be the case with transactions involving more widely traded
securities.
32
<PAGE> 70
Subject to obtaining the best net results, dealers who provide supplemental
investment research (such as information concerning tax-exempt securities,
economic data and market forecasts) 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 its
Management Agreement and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information.
Supplemental investment research obtained from such dealers might be used by the
Manager in servicing all of its accounts and all such research might not be used
by the Manager in connection with the Fund. 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.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
AGGREGATE BROKERAGE COMMISSIONS PAID
FISCAL YEAR ENDED NOVEMBER 30, COMMISSIONS PAID TO MERRILL LYNCH
- -------------------------------------------- ------------------- ----------------
<S> <C> <C>
1998........................................ $1,139,504 $111,089
1997........................................ $3,466,172 $ 75,219
1996........................................ $2,285,881 $173,055
</TABLE>
For the fiscal year ended November 30, 1998, the brokerage commissions paid
to Merrill Lynch represented 9.75% of the aggregate brokerage commissions paid
and involved 9.84% of the Fund's dollar amount of transactions involving payment
of commissions during the year.
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such 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 over-the-counter 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 over-the-counter transactions conducted on an
agency basis provided that, among other things, the fee or commission received
by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. In addition, the Fund may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the Board of Directors
of the Fund that either comply with rules adopted by the Commission or with
interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Directors have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Directors will
reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i) has
obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth 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. Securities may be held by, or be appropriate investments for, the Fund
as well as other funds or investment advisory clients of the Manager or FAM.
33
<PAGE> 71
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Manager or an affiliate when one or
more clients of the Manager or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for which the Manager
or an affiliate act as manager, transactions in such securities will be made,
insofar as feasible, for the respective funds and clients in a manner deemed
equitable to all. To the extent that transactions on behalf of more than one
client of the Manager or an affiliate during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to U.S.
investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gain distributions. The statements will also show any other activity
in the account since the preceding statement. Shareholders will also receive
separate confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gains distributions. A shareholder with an account held at the
Transfer Agent may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with Merrill
Lynch. All shareholder services will be available for the transferred shares.
After the transfer, the shareholder may purchase additional shares of funds
owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or her
shares, paying any applicable CDSC or (ii) continue to maintain an Investment
Account at the Transfer Agent for those shares. The shareholder may also request
the new securities dealer to maintain the shares in an account at the Transfer
Agent registered in the name of the securities dealer for the benefit of the
shareholder whether the securities dealer has entered into a selected dealer
agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares, paying any applicable CDSC, so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
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<PAGE> 72
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in 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 Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at any time as long
as, at the time of the exchange, the shareholder holds Class A shares of the
second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
Class A shares of Summit ("new Class A or Class D shares"), are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of certain other Select Pricing Funds or for Class B shares of
Summit ("new Class B or Class C shares") on the basis of relative net asset
value per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of the Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the Class B or Class C shares of the fund
from which the exchange has been made. For purposes of computing the CDSC that
may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B shares. For example, an investor may exchange
Class B or Class C shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund's Class B shares
for two and a half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two and a half year
35
<PAGE> 73
holding period of Fund Class B shares to the three-year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
Special Value Fund Class B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other money market funds and subsequently
wish to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if any. The holding
period for the money market fund shares will not count toward satisfaction of
the holding period requirement for reduction of the CDSC imposed on such shares,
if any, and, with respect to Class B shares, toward satisfaction of the
Conversion Period. However, the holding period for Class B or Class C shares
received in exchange for such money market fund shares will be aggregated with
the holding period for the original shares for purposes of reducing the CDSC or
satisfying the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA Program, i.e., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA Program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA Program. First, the initial
allocation of assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA Program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and shareholders
of the other 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 to the general
public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be
36
<PAGE> 74
made. It is contemplated that the exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(1-800-MER-FUND) or 1-(800)-637-3863.
RETIREMENT PLANS
Individual retirement accounts and other retirement plans are available
from Merrill Lynch. Under these plans, investments may be made in the Fund and
certain of the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these plans is
available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100, and the minimum subsequent purchase is $1.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities dealer,
or by mail directly to the Transfer Agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
For investors who buy shares of the Fund through Blueprint, no minimum charge to
the investor's bank account is required. Alternatively, an investor that
maintains a CMA(R) or CBA(R) account may arrange to have periodic investments
made in the Fund of amounts of $100 or more ($1 or more for retirement accounts)
or more through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in additional
full and fractional shares of the Fund. Such reinvestment will be at the net
asset value of shares of the Fund as of the close of business on the NYSE on the
monthly payment date for such dividends. No CDSC will be imposed upon redemption
of shares issued as a result of the automatic reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if
37
<PAGE> 75
their account is maintained with the Transfer Agent elect to have subsequent
dividends, paid in cash, rather than reinvested in shares of the Fund or vice
versa (provided that, in the event that a payment on an account maintained at
the Transfer Agent would amount to $10.00 or less, a shareholder will not
receive such payment in cash and such payment will automatically be reinvested
in additional shares). Commencing ten days after the receipt by the Transfer
Agent of such notice, those instructions will be effected. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed dividend checks.
Cash payments can also be directly deposited to the shareholder's bank account.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
the class of shares to be redeemed. With respect to shareholders who hold
accounts directly at the Transfer Agent, redemptions will be made at net asset
value as determined 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. With respect to
shareholders who hold accounts with their broker-dealer, redemptions will be
made at net asset value as determined 15 minutes after the close of business on
the NYSE (generally, 4:00 p.m., New York time) on the first, second, third, or
fourth Monday of each month or the first, second, third, or fourth Monday of the
last month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the close of business on
the following business day. The check for the withdrawal payment will be made,
on the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all shares in the
Investment Account are reinvested automatically in Fund shares. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will be applied thereafter to Class D shares if the
shareholder so elects. If an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should contact his or her
Financial Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
Purchases of additional shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of the Fund from
investors that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Automatic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
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<PAGE> 76
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
Account or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the shareholder's
account three business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month, in the case of
bimonthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automated Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
DIVIDENDS AND TAXES
DIVIDENDS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such investment income are paid annually. All net
realized capital gains, if any, are distributed to the Fund's shareholders at
least annually. Premiums from expired call options written by the Fund and net
gains from closing purchase transactions are treated as short-term capital gains
for Federal income tax purposes. Shareholders may elect in writing to receive
any such dividends in cash. See "Shareholder Services -- Automatic Dividend
Reinvestment Plan" for information concerning the manner in which dividends may
be reinvested automatically in shares of the Fund. Dividends are taxable to
shareholders, as described below, whether they are invested in shares of the
Fund or received in cash. The per share dividends on Class B and Class C shares
will be lower than the per share dividends on Class A and Class D shares as a
result of the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares; similarly, the per
share dividends on Class D shares will be lower than the per share dividends on
Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Pricing of Shares -- Determination of Net
Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as the Fund so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the part
of its net ordinary income and net realized capital gains that it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
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.
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
39
<PAGE> 77
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 gains, regardless of the length of time the shareholder has owned
Fund shares. Any loss upon the sale or exchange of Fund shares held for six
months or less will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Certain categories of capital gains are taxable at different
rates. Generally not later than 60 days after the close of its taxable year, the
Fund will provide its shareholders with a written notice designating the amount
of any capital gain dividends, as well as any amount of capital gain dividends
in the different categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
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 reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States 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 applicability of the United States 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 United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend paid by the Fund only if the shareholder meets
certain holding period requirements. The Fund also must meet these holding
period requirements, and if the Fund fails to do so, it will not be able to
"pass through" to shareholders the ability to claim a credit or deduction for
the related foreign taxes paid by the Fund. If the Fund satisfies the holding
period requirements and more than 50% in value of its total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible, and intends, to file an election with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to include
their proportionate shares of such withholding taxes in their United States
income tax returns as gross income, treat such proportionate shares as taxes
paid by them, and deduct such proportionate shares computing in their taxable
incomes or, alternatively, use them as foreign tax credits against their United
States income taxes. No deductions for foreign taxes, moreover, may be claimed
by noncorporate shareholders who do not itemize
40
<PAGE> 78
deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to United States withholding taxes on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such United States tax for the
foreign taxes treated as having been paid by such shareholder. The Fund will
report annually to its shareholders the amount per share of such withholding
taxes and other information needed to claim the foreign tax credit. For this
purpose, the Fund will allocate foreign taxes and foreign source income among
the Class A, Class B, Class C and Class D shareholders according to a method
(which it believes is consistent with the Commission rule permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to the 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.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield 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 securities may be treated as dividends for Federal income tax
purposes; in such case, if the issuer of such high yield securities is a
domestic corporation, dividend payments by the Fund will be eligible for the
dividends received deduction to the extent of the deemed dividend portion of
such interest payments.
Due to investment laws in certain Latin American countries, it is
anticipated that a portion of the Fund's investments in equity securities in
such countries will consist of shares in 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 closed-end investment companies. If the Fund
purchases shares of an investment company (or similar investment entity)
organized under foreign law, the Fund will be treated as owning shares in a
passive foreign investment company ("PFIC") for U.S. Federal income tax
purposes. The Fund may be subject to U.S. Federal income tax, and an additional
tax in the nature of interest (the "interest charge"), on a portion of the
distributions from such a company and on gain from the disposition of the shares
of such a company (collectively referred to as "excess distributions"), even if
such excess distributions are paid by the Fund as a dividend to its
shareholders. The Fund may be eligible to make an election with respect to
certain PFICs in which it owns shares that will allow it to avoid the taxes on
excess distributions. However, such election may cause the Fund to recognize
income in a particular year in excess of the distributions received from such
PFICs. Alternatively, under recent legislation, the Fund could elect to "mark to
market" at the end of each taxable year all shares that it holds in PFICs. If it
made this election, the Fund would recognize as ordinary income any increase in
the value of such shares over their adjusted basis and as ordinary loss any
decrease in such value to the extent it did not exceed prior increases. By
making the mark-to-market election, the Fund could avoid imposition of the
interest charge with respect to its distributions from PFICs, but in any
particular year might be required to recognize income in excess of the
distributions it received from PFICs and its proceeds from dispositions of PFIC
stock.
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.
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<PAGE> 79
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest or currency exchange rates with respect
to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from certain debt instruments, from certain
forward contracts, from future contracts that are not "regulated futures
contracts" and from unlisted options will be treated as ordinary income or loss
under Code Section 988. In certain circumstances, the Fund may elect capital
gain or loss treatment for such transactions. Regulated futures contracts, as
described above, will be taxed under Code Section 1256, unless application of
Section 988 is elected by the Fund. In general, however, Code Section 988 gains
or losses will increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's basis in Fund shares
(assuming the shares were held as a capital asset). These rules and the
mark-to-market rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
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
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<PAGE> 80
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 United States Government obligations. State
law varies as to whether dividend income attributable to United States
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 investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period 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 for various periods other than those
noted below. Such data will be computed as described above, except that (1) as
required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted and (2) the
maximum applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. In order to reflect the
reduced sales charges in the case of Class A or Class D shares or the waiver of
the CDSC in the case of Class B or Class C shares applicable to certain
investors, as described under "Purchase of Shares" the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may take into account the
waiver of the CDSC and therefore may reflect greater total return since, due to
the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted. The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
43
<PAGE> 81
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select Pricing(SM) System,
Class A shares of the Fund outstanding prior to October 21, 1994 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 SHARES CLASS B SHARES
------------------------------------- -------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended November 30, 1998.. (33.42)% $665.80 (33.21)% $ 667.90
Five Years Ended November 30,
1998............................ -- -- (5.56)% $ 751.30
Inception (October 21, 1994) to
November 30, 1998............... (12.09)% $588.80 -- --
Inception (September 27, 1991) to
November 30, 1998............... -- -- 1.56 % $1,117.20
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1998.............................. (29.74)% $ 702.60 (30.42)% $ 695.80
1997.............................. 21.79 % $1,217.90 20.51 % $1,205.10
1996.............................. 22.19 % $1,221.90 20.85 % $1,208.50
1995.............................. (37.66)% $ 623.40 (38.32)% $ 616.80
1994.............................. -- -- 20.19 % $1,201.90
Inception (October 21, 1994) to
November 30, 1994............... (4.67)% $ 953.30 -- --
1993.............................. -- -- 49.80 % $1,498.00
1992.............................. -- -- 1.30 % $1,013.00
Inception (September 27, 1991 to
November 30, 1991).............. -- -- (2.00)% $ 980.00
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to
November 30, 1998............... (41.12)% $588.80 -- --
Inception (September 27, 1991) to
November 30, 1998............... -- -- 11.72 % $1,117.20
</TABLE>
44
<PAGE> 82
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- -------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended November 30 1998... (31.16)% $ 688.40 (33.57)% $ 664.30
Five Years Ended November 30,
1998............................ -- -- (5.84)% $ 740.20
Inception (October 21, 1994) to
November 30, 1998............... (11.87)% $ 595.10 -- --
Inception (September 27, 1991) to
November 30, 1998............... -- -- 1.58 % $1,119.40
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1998.............................. (30.46)% $ 695.40 (29.89)% $ 701.10
1997.............................. 20.52 % $1,205.20 21.40 % $1,214.00
1996.............................. 20.85 % $1,208.50 21.97 % $1,219.70
1995.............................. (38.32)% $ 616.80 (37.84)% $ 621.60
1994.............................. -- $ -- 21.07 % $1,210.70
Inception (October 21, 1994) to
November 30, 1994............... (4.75)% $ 952.50 -- --
1993.............................. -- -- 50.86 % $1,508.60
1992.............................. -- -- 2.19 % $1,021.90
Inception (September 27, 1991) to
November 30, 1991............... -- -- (1.90)% $ 981.00
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to
November 30, 1998............... (40.49)% $ 595.10 -- --
Inception (September 27, 1991) to
November 30, 1998............... -- -- 11.94 % $1,119.40
</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"
the total return data quoted by the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales charge
or may not take into account the CDSC, and, therefore, may reflect greater total
return since, due to the reduced sales charges or the waiver of CDSCs, a lower
amount of expenses may be deducted.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to various indices
including the MSCI Emerging Markets Free Latin America Index, Standard & Poor's
500 Index, the Dow Jones Industrial Average, or to performance data published by
Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), CDA Investment Technology, Inc., Money Magazine, U.S. News &
World Report, Business Week, Forbes Magazine, Fortune Magazine or other industry
publications. When comparing its performance to a market index, the Fund may
refer to various statistical measures derived from historic performance of the
Fund and the index such as standard deviation and beta. In addition, from time
to time the Fund may include
45
<PAGE> 83
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
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 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.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as custodian of the Fund's assets. 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
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "How to Buy, Sell,
Transfer and Exchange Shares -- Through the Transfer Agent" in the Prospectus.
46
<PAGE> 84
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.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name to
any other company, and the Fund has granted ML & Co., under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.
To the knowledge of the Fund, the following persons or entities own
beneficially 5% or more of any class of the Fund's shares as of March 1, 1999:
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
- ---- ------- ----------------
<S> <C> <C>
Merrill Lynch Trust Company, 265 Davidson Avenue, #4 34.2% of Class A
Trustee FBO Chrysler Salaried Somerset, N.J. 08873
Employees' Savings Plan
Merrill Lynch Trust Company, 265 Davidson Avenue, #4 13.9% of Class A
Trustee FBO Chrysler Hourly Somerset, N.J. 08873
Employees' Deferred Pay Plan
95 Defcom Hedge FBO 265 Davidson Avenue 6.5% of Class A
ML&Co/PFS Somerset, N.J. 08873
</TABLE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
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CODE #10475-04-99
