<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1994
SECURITIES ACT FILE NO. 33-51701
INVESTMENT COMPANY ACT FILE NO. 811-7135
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [_]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 2 [X]
----------------
EMERGING TIGERS FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
----------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ARTHUR ZEIKEL
EMERGING TIGERS FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS, BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
MICHAEL J. THOMAS R. SMITH, JR.
HENNEWINKEL BROWN & WOOD
FUND ASSET MANAGEMENT ONE WORLD TRADE CENTER
BOX 9011 NEW YORK, NEW YORK
PRINCETON, NEW JERSEY 10048-0557
08543
APPROXIMATE DATE OF PROPOSED OFFERING: AS SOON AS PRACTICABLE AFTER THE
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A
DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR
INTEREST REINVESTMENT PLANS, CHECK THE FOLLOWING. [_]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING AMOUNT BEING OFFERING OFFERING REGISTRATION
REGISTERED REGISTERED(1) PRICE PER UNIT PRICE(1) FEE(2)
- ------------------------------------------------------------------------------------
- -
<S> <C> <C> <C> <C>
Common Stock (par value
$.10 per share)........ 7,500,000 $15.00 $112,500,000 $38,449.17
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Does not include $344.83 previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EMERGING TIGERS FUND, INC.
----------------
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
--------------------- ---------------------
PART A--INFORMATION REQUIRED IN A PROSPECTUS
<TABLE>
<S> <C> <C>
1. Outside Front Cover Page................ Cover Page
Inside Front and Outside Back Cover
2. Pages................................... Cover Page, Underwriting
3. Fee Table and Synopsis.................. Fee Table
4. Financial Highlights.................... Not Applicable
5. Plan of Distribution.................... Underwriting
6. Selling Shareholders.................... Not Applicable
7. Use of Proceeds......................... Use of Proceeds
8. General Description of the Registrant... The Fund; Investment Objective and Policies;
Other Investment Policies and Practices
9. Management.............................. Directors and Officers; Investment Advisory
and Management Arrangements; Description of
Shares
10. Capital Stock, Long-Term Debt and Other
Securities.............................. Not Applicable
Defaults and Arrears on Senior
11. Securities.............................. Not Applicable
12. Legal Proceedings....................... Not Applicable
13. Table of Contents of the Statement of
Additional Information................. Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page.............................. Not Applicable
15. Table of Contents....................... Not Applicable
16. General Information and History......... Not Applicable
17 Investment Objective and Policies....... Investment Objective and Policies; Other
Investment Policies and Practices;
Investment Restrictions
18. Management.............................. Directors and Officers; Investment Advisory
and Management Arrangements
19. Control Persons and Principal Holders of Investment Advisory and Management
Securities............................. Arrangements
20. Investment Advisory and Other Services.. Investment Advisory and Management
Arrangements; Underwriting; Transfer Agent,
Dividend Disbursing Agent and Registrar,
Custodian; Experts
Brokerage Allocation and Other
21. Practices.............................. Portfolio Transactions
22. Tax Status.............................. Taxes
23. Financial Statements.................... Statement of Assets, Liabilities and Capital
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PROSPECTUS PRELIMINARY PROSPECTUS DATED JANUARY 27, 1994
- ----------
7,500,000 SHARES
EMERGING TIGERS FUND, INC.
COMMON STOCK
-------------
Emerging Tigers Fund, Inc. is a non-diversified, closed-end management
investment company seeking long-term capital appreciation by investing
primarily in equity securities of companies in designated emerging market
countries located in Asia and the Pacific Basin ("Asia-Pacific countries"). For
purposes of its investment objective, the Fund may invest in the securities of
companies in all countries in Asia and the Pacific Basin other than Japan,
Taiwan, Australia, New Zealand and Hong Kong. Under current market conditions,
the Fund intends to emphasize investments in companies in Malaysia, India,
Thailand, Singapore, China, the Philippines, Indonesia, Pakistan and Sri Lanka.
The investment objective of the Fund reflects the belief that the securities
markets of the emerging market Asia-Pacific countries present attractive
investment opportunities as a result of the economic development in such
region. Under normal market conditions at least 65% of the Fund's total assets
will be invested in equity securities of companies in emerging market Asia-
Pacific countries. The Fund may also invest up to 35% of its total assets in
debt securities of companies or governments in emerging market Asia-Pacific
countries. There can be no assurance that the Fund's investment objective will
be achieved.
INVESTMENTS IN SECURITIES OF COMPANIES IN EMERGING MARKET ASIA-PACIFIC
COUNTRIES INVOLVE SPECIAL CONSIDERATIONS AND RISKS WHICH ARE NOT TYPICALLY
PRESENT IN INVESTMENTS IN THE SECURITIES OF U.S. COMPANIES. THE FUND MAY INVEST
UP TO 35% OF ITS ASSETS IN DEBT SECURITIES THAT ARE IN THE LOWER RATING
CATEGORIES OR UNRATED AND MAY BE IN DEFAULT AS TO PAYMENT OF PRINCIPAL AND/OR
INTEREST AT THE TIME OF ACQUISITION BY THE FUND. SUCH SECURITIES GENERALLY
INVOLVE GREATER VOLATILITY OF PRICE AND RISKS TO PRINCIPAL AND INCOME THAN
SECURITIES IN THE HIGHER RATING CATEGORIES. THE FUND MAY INVEST WITHOUT
LIMITATION IN SECURITIES THAT ARE NOT READILY MARKETABLE. SHARES OF CLOSED-END
INVESTMENT COMPANIES FREQUENTLY TRADE AT A DISCOUNT FROM THEIR NET ASSET VALUE.
THIS RISK MAY BE GREATER FOR INVESTORS EXPECTING TO SELL THEIR SHARES IN A
RELATIVELY SHORT PERIOD AFTER COMPLETION OF THE PUBLIC OFFERING. SEE "RISK
FACTORS AND SPECIAL CONSIDERATIONS."
Prior to this offering, there has been no public market for the Fund's
shares. The Fund's shares have been approved for listing on the New York Stock
Exchange under the symbol "TGF", subject to official notice of issuance.
However, during an initial period which is not expected to exceed four weeks
from the date of this Prospectus, the Fund's shares will not be listed on any
securities exchange. During such period, Merrill Lynch, Pierce, Fenner & Smith
Incorporated does not intend to make a market in the Fund's shares.
Consequently, it is anticipated that an investment in the Fund will be illiquid
during such period. The investment adviser of the Fund is Fund Asset
Management, an affiliate of Merrill Lynch Asset Management. This Prospectus
sets forth concisely information about the Fund that a prospective investor
ought to know before investing and should be read and retained for future
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAXIMUM PRICE MAXIMUM PROCEEDS TO
TO PUBLIC SALES LOAD (1)(2) THE FUND (3)
- --------------------------------------------------------------------------------
- -
<S> <C> <C> <C>
Per Share......................... $15.00 $ $
- --------------------------------------------------------------------------------
- -
Total (4)......................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(footnotes on next page)
-------------
The shares are offered by Merrill Lynch, subject to prior sale, when, as and
if issued by the Fund and accepted by Merrill Lynch, subject to approval of
certain legal matters by counsel for Merrill Lynch and certain other
conditions. Merrill Lynch reserves the right to withdraw, cancel or modify such
offer and to reject orders in whole or in part. It is expected that delivery of
the shares will be made in New York, New York on or about February , 1994.
-------------
MERRILL LYNCH & CO.
-------------
The date of this Prospectus is , 1994.
<PAGE>
(Continued from cover page)
(1) The "Maximum Price to Public" and "Maximum Sales Load" per share will be
reduced to $14.85 for purchases in single transactions of between 6,668 and
16,835 shares and to $14.70 for purchases in single transactions of 16,836
or more shares. See "Underwriting."
(2) The Fund and the Investment Adviser have agreed to indemnify Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(3) Before deducting organizational and offering costs payable by the Fund
estimated at $ .
(4) The Fund has granted Merrill Lynch an option, exercisable for 45 days
after the date hereof, to purchase up to an additional shares to cover
over-allotments. If all such shares are purchased, the total Maximum Price
to Public, Maximum Sales Load and Proceeds to the Fund will be $ , $
and $ , respectively. See "Underwriting."
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FUND'S COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with the more detailed
information appearing elsewhere in this Prospectus.
The Fund.................. Emerging Tigers Fund, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management
investment company investing primarily in equity
securities of companies in designated emerging
market Asia-Pacific countries. See "The Fund."
Conversion to Open-End
Status.................... The Fund's Articles of Incorporation require
the Board of Directors to submit a proposal to
convert the Fund to an open-end investment
company to shareholders during the first
quarter of 1996. However, if in the Board's
discretion, conversion at that time would not
be in the best interest of the shareholders of
the Fund, the Board retains the right to
withhold the proposal until such time as the
Board deems conversion to be in the best
interest of the shareholders. Conversion to an
open-end investment company would make the
Common Stock redeemable in cash upon demand by
shareholders at the next determined net asset
value. So as not to force the Fund to liquidate
portfolio securities at a disadvantageous time,
in order to meet requests for redemption, the
Fund is authorized to borrow up to 20% of its
total asset value for the purpose of redeeming
its shares. If shareholder approval of
conversion to an open-end investment company is
not obtained, the Fund will continue as a
closed-end investment company. See "The 1996
Vote to Convert to Open-End Status."
The Offering..............
The Fund is offering shares of Common Stock at
a maximum initial offering price of $15.00 per
share, except that the price will be reduced to
$14.85 for purchases in single transactions of
between 6,668 and 16,835 shares and to $14.70 for
purchases in single transactions of 16,836 or more
shares. The shares are being offered by Merrill
Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). Merrill Lynch has been granted
an option, exercisable for 45 days from the date of
this Prospectus, to purchase up to additional
shares of Common Stock to cover over-allotments.
See "Underwriting."
Investment Objective and The investment objective of the Fund is to seek
Policies.................. long-term capital appreciation by investing
primarily in equity securities of companies in
designated emerging market countries located in
Asia and the Pacific Basin ("Asia-Pacific
countries"). For purposes of its
3
<PAGE>
investment objective, the Fund may invest in
the securities of companies in all countries in
Asia and the Pacific Basin other than Japan,
Taiwan, Australia, New Zealand and Hong Kong.
Under current market conditions, the Fund
intends to emphasize investments in companies
in Malaysia, India, Thailand, Singapore, China,
the Philippines, Indonesia, Pakistan and Sri
Lanka. The objective of the Fund reflects the
belief that the securities markets of the
emerging market Asia-Pacific countries present
attractive investment opportunities as a result
of the economic development in such region.
The economies of a number of the emerging
market Asia-Pacific countries have been among
the most rapidly growing economies in the world
in recent years. The economies of certain Asia-
Pacific countries such as Malaysia, India,
Thailand, Singapore, China, the Philippines,
Indonesia, Pakistan and Sri Lanka began to make
significant economic progress during such time.
This regional growth has often resulted from
government policies directed towards market-
oriented economic reform and, in particular,
seeking to encourage the development of labor-
intensive, export-oriented industries. There
also has been growth resulting from an increase
in domestic demand. In addition, certain Asia-
Pacific countries have been introducing
deregulatory reforms to encourage development
of their securities markets and, in varying
degrees, permit foreign investment. A number of
these securities markets have been undergoing
rapid growth. While investments in the emerging
market Asia-Pacific countries are subject to
considerable risks (see "Risk Factors and
Special Considerations"), the Fund believes
that the developments in the region referred to
above present attractive investment
opportunities.
The Fund may also seek capital appreciation through
investment of up to 35% of its total assets in debt
securities of companies or governments in emerging
market Asia-Pacific countries. Such debt securities
may be lower rated or unrated obligations of
corporate or sovereign issuers. In addition, the
Fund may invest in debt securities that are in
default as to payments of principal and/or interest
at the time of acquisition by the Fund ("Distressed
Securities"). The Fund will invest in Distressed
Securities only when the Investment Adviser
believes it is reasonably likely that the issuer of
the securities will make an exchange offer or will
be the subject of a plan of reorganization. Capital
appreciation in debt securities may arise as a
result of a favorable change in relative foreign
exchange rates, in
4
<PAGE>
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.
Investment in shares of Common Stock of the Fund
offers several benefits. Many investors,
particularly individuals, lack the information or
capability to invest in emerging market Asia-
Pacific countries. The Fund offers investors the
possibility of obtaining capital appreciation
through a professionally managed, diversified
portfolio comprised of securities of emerging
market Asia-Pacific issuers.
The Fund is authorized to employ a variety of
investment techniques to hedge against market and
currency risk, although at the present time
suitable hedging instruments may not be available
with respect to securities of companies or
governments in emerging market Asia-Pacific
countries on a timely basis and on acceptable
terms. Furthermore, even if hedging techniques are
available, the Fund will only engage in hedging
activities from time to time and may not
necessarily be engaging in hedging activities when
market or currency movements occur.
Listing...................
Prior to this offering, there has been no public
market for the shares of the Fund. The Fund's
shares have been approved for listing on the New
York Stock Exchange under the symbol "TGF", subject
to official notice of issuance. However, during an
initial period which is not expected to exceed four
weeks from the date of this Prospectus, the Fund's
shares will not be listed on any securities
exchange. During such period, Merrill Lynch does
not intend to make a market in the Fund's shares.
Consequently, it is anticipated that an investment
in the Fund will be illiquid during such period.
See "Underwriting."
Investment Adviser........
Fund Asset Management, L.P., is the Fund's
investment adviser (the "Investment Adviser")
and is responsible for the management of the
Fund's investment portfolio and for providing
administrative services to the Fund. For its
services, the Fund pays the Investment Adviser
a monthly fee at the annual rate of 1.00% of
the Fund's average weekly net assets. The
Investment Adviser is an affiliate of Merrill
Lynch Asset Management ("MLAM"), which is owned
and controlled by Merrill Lynch & Co., Inc.
("ML & Co."). The Investment Adviser, or MLAM,
acts as the investment adviser for over 90
other registered management investment
companies. The Investment Adviser also offers
portfolio management and portfolio
5
<PAGE>
analysis services to individuals and
institutions. As of December 31, 1993, the
Investment Adviser and MLAM had a total of
approximately $160 billion in investment
company and other portfolio assets under
management, including accounts of certain
affiliates of the Investment Adviser. See
"Investment Advisory and Management
Arrangements."
Dividends and It is the Fund's intention to distribute all of
Distributions............ its net investment income. Dividends from such
net investment income are paid at least
annually. All net realized long-term and short-
term capital gains, if any, will be distributed
to the Fund's shareholders at least annually.
See "Dividends and Distributions."
Automatic Dividend
Reinvestment Plan........
All dividends and capital gains distributions
automatically will be reinvested in additional
shares of the Fund unless a shareholder elects
to receive cash. Shareholders whose shares are
held in the name of a broker or nominee should
contact such broker or nominee to confirm that
they may participate in the Fund's dividend
reinvestment plan. See "Automatic Dividend
Reinvestment Plan."
Mutual Fund Investment Purchasers of shares of the Fund in this
Option................... offering will have an investment option
consisting of the right to reinvest the net
proceeds from a sale of such shares (the
"Original Shares") in Class A initial sales
charge shares of certain Merrill Lynch-
sponsored open-end mutual funds ("Eligible
Class A Shares") at their net asset value,
without the imposition of the initial sales
charge, if the conditions set forth below are
satisfied. First, the sale of the Original
Shares must be made through Merrill Lynch, and
the net proceeds therefrom must be reinvested
immediately in Eligible Class A Shares. Second,
the Original Shares must have either been
acquired in this offering or be shares
representing reinvested dividends from shares
acquired in this offering. Third, the Original
Shares must have been maintained continuously
in a Merrill Lynch securities account. Fourth,
there must be a minimum purchase of $250 to be
eligible for the investment option. Class A
shares of certain of the mutual funds may be
subject to an account maintenance fee at an
annual rate of up to 0.25% of the average daily
net asset value of such mutual fund. See
"Mutual Fund Investment Option."
Custodian.................
Brown Brothers Harriman & Co. will act as
custodian for the Fund's assets and will employ
foreign sub-custodians approved by the Fund's
Board of Directors in accordance with
regulations of the Securities and Exchange
Commission. See "Custodian."
6
<PAGE>
Transfer Agent, Dividend
Disbursing Agent and
Registrar................
State Street Bank and Trust Company will act as
transfer agent, dividend disbursing agent and
registrar for the Fund. See "Transfer Agent,
Dividend Disbursing Agent and Registrar."
Risk Factors and Special
Considerations...........
The Fund is a newly organized, non-diversified,
closed-end management investment company and
has no operating history. As described under
"Listing" above, it is anticipated that an
investment in the Fund will be illiquid prior
to the listing of the Fund's shares on the New
York Stock Exchange. See "Underwriting." Shares
of closed-end investment companies frequently
trade at a discount from their net asset value.
This risk may be greater for investors
expecting to sell their shares in a relatively
short period after completion of the public
offering. Accordingly, the Common Stock of the
Fund is designed primarily for long-term
investors and should not be considered a
vehicle for trading purposes.
International Investing. Investing on an
international basis and in countries with
smaller capital markets involves certain risks
not involved in domestic investments, including
a significant risk of fluctuations in foreign
exchange rates, future political and economic
developments, and the possible imposition of
exchange controls or other foreign governmental
laws or restrictions. In addition, with respect
to certain foreign countries, there is the
possibility of expropriation of assets,
confiscatory taxation, political or social
instability or diplomatic developments which
could affect investments in those countries.
Individual foreign economies may differ
favorably or unfavorably from the U.S. economy
in such respects as growth of gross national
product, rates of inflation, capital
reinvestment, resources, self-sufficiency and
balance of payments position. These risks are
often heightened for investments in smaller
capital markets such as emerging market Asia-
Pacific countries. Moreover, most of the
securities held by the Fund will not be
registered with the Securities and Exchange
Commission, nor will the issuers thereof be
subject to the reporting requirements of such
agency. Accordingly, there may be less publicly
available information about a foreign company
than about a U.S. company and such foreign
companies may not be subject to accounting,
auditing and financial reporting standards and
requirements comparable to those of U.S.
companies. As a result, certain investment
measurements, such as price/earning ratios, as
used in the U.S., may not be applicable to
certain smaller capital markets. An investment
in the Fund should not be considered a balanced
investment program.
7
<PAGE>
Foreign markets have different clearance and
settlement procedures, and in certain markets
there have been times when settlements have
failed to keep pace with the volume of
securities transactions, making it difficult to
conduct such transactions. Delays in settlement
could result in temporary periods when assets
of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to
make intended security purchases due to
settlement problems could cause the Fund to
miss attractive investment opportunities. The
inability of the Fund to dispose of a portfolio
security due to settlement problems could
result either in losses to the Fund or possible
liability to a purchaser to whom the Fund is
unable to make timely delivery of securities.
Investing in Securities Markets of Emerging
Market Asia-Pacific Countries. The securities
markets of emerging market Asia-Pacific
countries are not as large as the U.S.
securities markets and have substantially less
liquidity with high price volatility. Such
markets are in the early stages of development
and there is a high concentration of market
capitalization and trading volume in a small
number of issuers representing a limited number
of industries. Many of the emerging market
Asia-Pacific countries may be subject to a
greater degree of economic, political and
social instability than is the case in the
United States and Western European countries.
Such instability may result from, among other
things: (i) authoritarian governments or
military involvement in political and economic
decision-making, including changes in
government through extra-constitutional means;
(ii) popular unrest associated with demands for
improved political, economic and social
conditions; (iii) internal insurgencies; (iv)
hostile relations with neighboring countries;
and (v) ethnic, religious and racial
disaffection. These factors along with certain
U.S. and foreign regulations may have an
adverse impact on the investment performance of
the Fund. Further, the legal systems in certain
emerging market Asia-Pacific countries have
caused issues of shareholders rights and
liabilities to be less clear than in the U.S.
Such uncertainty may have an adverse impact on
the Fund.
Restrictions on Foreign Investments. Some
emerging market Asia-Pacific countries prohibit
or impose substantial restrictions on
investments in their capital markets,
particularly their equity markets, by foreign
entities such as the Fund. Certain countries
may restrict investment opportunities in
issuers or industries deemed important to
national interests. Substantial limitations may
exist in certain countries with respect to the
Fund's ability to repatriate investment income,
capital or proceeds of sales of securities by
8
<PAGE>
foreign investors. The Fund could be adversely
affected by delays in, or a refusal to grant,
any required governmental approval for
repatriation of capital as well as by the
application to the Fund of any restrictions on
investments.
No Rating Criteria for Debt Securities;
Investment in Distressed Securities. The Fund
has established no rating criteria for the debt
securities in which it may invest. In addition,
the Fund may invest in debt securities that are
in default as to payment of interest and/or
principal at the time of acquisition by the
Fund. Securities rated in medium to low rating
categories of nationally recognized statistical
rating organizations such as Standard & Poor's
Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's") and unrated
securities of comparable quality are
speculative with respect to the capacity to pay
interest and repay principal in accordance with
the terms of the security and generally involve
a greater volatility of
price than securities in higher rated
categories. Investment in Distressed Securities
is speculative and involves significant risk.
See "Risk Factors and Special Considerations--
Certain Risks of Debt Securities--No Rating
Criteria for Debt Securities" and
"--Distressed Securities."
Sovereign Debt. Investment in sovereign debt
involves a high degree of risk. The
governmental entity that controls the
repayments of sovereign debt may not be able or
willing to repay the principal and/or interest
when due in accordance with the terms of such
debt. A governmental entity's willingness or
ability to repay principal and interest due in
a timely manner may be affected by, among other
factors, its cash flow situation, the extent of
its foreign reserves, the availability of
sufficient foreign exchange on the date a
payment is due, the relative size of the debt
service burden to the economy as a whole, the
governmental entity's policy towards the
International Monetary Fund and the political
constraints to which a governmental entity may
be subject. Consequently, governmental entities
may default on their sovereign debt. Holders of
sovereign debt, including the Fund, may be
requested to participate in the rescheduling of
such debt and to extend further loans to
governmental entities. There is no bankruptcy
proceeding by which sovereign debt on which a
governmental entity has defaulted may be
collected. See "Risk Factors and Special
Considerations--Certain Risks of Debt
Securities--Sovereign Debt."
Other Investment Management Techniques. The
Fund may use various other investment
management techniques that also involve
9
<PAGE>
special considerations including engaging in
hedging transactions, repurchase agreements and
purchase and sale contracts, short sales,
lending of portfolio securities, and investing
in private placements, convertible securities,
warrants, distressed securities and others.
Certain of these investment techniques are
considered highly speculative and involve great
risk. See "Other Investment Policies and
Practices" and "Risk Factors and Special
Considerations."
Illiquid Securities. The Fund may invest in
illiquid securities, for which there may be no
or only a limited trading market and for which
a low trading volume of a particular security
may result in abrupt and erratic price
movements. The Fund may encounter substantial
delays and could incur losses in attempting to
resell illiquid securities. If the shareholders
of the Fund vote to convert the Fund to an
open-end investment company, the Fund will be
limited in the portion of its assets that may
be invested in illiquid securities. See "Risk
Factors and Special Considerations--Conversion
to Open-End Status."
Risk Factors of Derivatives. In order to seek
to enhance income and to hedge various
portfolio positions, the Fund may invest in
certain instruments which may be characterized
as derivatives. Investments in indexed
securities, including inverse securities,
subject the Fund to the risks associated with
changes in the particular indices, which may
include reduced or eliminated interest payments
and losses of invested principal. Interest rate
transactions involve the risk of an imperfect
correlation between the index used in the
hedging transactions and that pertaining to the
securities which are the subject of such
transactions. Similarly, utilization of options
and futures transactions involves the risk of
imperfect correlation in movements in the price
of options and futures and movements in the
price of the securities or interest rates which
are the subject of the hedge. For a further
discussion of the risks associated with these
investments, see "Risk Factors and Special
Considerations--Hedging Strategies","--Risk
Factors of Derivatives" and "Appendix B--
Options and Futures Transactions."
Withholding and Other Taxes. Income and capital
gains on securities held by the Fund may be
subject to withholding and other taxes imposed
by certain emerging market Asia-Pacific
countries, which would reduce the return to the
Fund on those securities. The imposition of
such taxes and the rates imposed are subject to
changes.
10
<PAGE>
The Fund intends to elect, when eligible, to
"pass through" to the Fund's shareholders, as a
deduction or credit, the amount of foreign
taxes paid by the Fund. The taxes passed
through to shareholders will be included in
each shareholder's income. Certain
shareholders, including non-U.S. shareholders,
will not be entitled to the benefit of a
deduction or credit with respect to foreign
taxes paid by the Fund. Other foreign taxes,
such as transfer taxes, may be imposed on the
Fund, but would not give rise to a credit, or
be eligible to be passed through to
shareholders. See "Taxes."
Foreign Subcustodians and Securities
Depositories. Rules adopted under the
Investment Company Act permit the Fund to
maintain its foreign securities and cash in the
custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in
foreign countries may not be eligible
subcustodians for the Fund, in which event the
Fund may be precluded from purchasing
securities in which it would otherwise invest,
and other banks that are eligible foreign
subcustodians may be recently organized or
otherwise lack extensive operating experience.
Borrowings to Meet Redemptions. In the event it
converts to an open-end investment company, the
Fund is authorized to borrow up to 20% of its
total assets in order to meet redemptions so as
not to force the Fund to liquidate securities
at a disadvantageous time. Any such borrowings
will create expenses for the Fund.
Non-Diversified Classification. The Fund is
classified as a "non-diversified" investment
company under the Investment Company Act, which
means that the Fund is not limited by the
Investment Company Act in the proportion of its
assets that may be invested in the securities
of a single issuer. However, the Fund intends
to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a
regulated investment company. As a non-
diversified investment company, the Fund may
invest a greater proportion of its assets in
the securities of a smaller number of issuers
and, as a result, will be subject to greater
risk of loss with respect to its portfolio
securities.
Conversion to Open-End Status. The Fund's
Articles of Incorporation require the Board of
Directors to submit a proposal to convert the
Fund to an open-end investment company during
the first quarter of 1996, unless the Board of
Directors determines that conversion at that
time would not be in the best interest of
shareholders. Conversion to open-end status
would require possibly
11
<PAGE>
disadvantageous changes to the Fund's
investment policies and could have an adverse
effect on the management of the Fund's
investment portfolio. See "The 1996 Vote to
Convert to Open-End Status."
Anti-takeover Provisions. The Fund's Articles
of Incorporation include provisions that could
have the effect of limiting the ability of
other entities or persons to acquire control of
the Fund or to change the composition of its
Board of Directors and could have the effect of
depriving shareholders of an opportunity to
sell their shares at a premium over prevailing
market prices by discouraging a third party
from seeking to obtain control of the Fund. See
"Description of Shares--Certain Provisions of
the Articles of Incorporation."
Operating Expenses. The Fund's estimated annual
operating expenses are higher than those of
many other investment companies investing
exclusively in the securities of U.S. issuers.
The operating expenses are, however, believed
by the Investment Adviser to be comparable to
expenses of other closed-end management
investment companies that invest primarily in
the securities of companies in emerging market
Asia-Pacific countries.
12
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load (as a percentage of offering price)................ 5.50%(a)
Automatic Dividend Reinvestment Plan Fees............................. None
ANNUAL EXPENSES (as a percentage of net assets)
Management Fees(b).................................................... 1.00%
Other Expenses........................................................ 0.25%
----
TOTAL ANNUAL EXPENSES.................................................. 1.25%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, including the maximum
sales load of $55.00 and assuming (1) total
annual expenses of 1.25% and (2) a 5% annual
return throughout the periods: $67.03 $92.47 $119.86 $197.82
</TABLE>
- --------
(a) Reduced to 4.55% for purchases in single transactions of between 6,668 and
16,835 shares and to 3.57% for purchases in single transactions of 16,836
or more shares. See the cover page of this Prospectus and "Underwriting."
(b) See "Investment Advisory and Management Arrangements."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" in the Fee Table
above are based on estimated amounts through the end of the Fund's first fiscal
year on an annualized basis. The Example set forth above assumes reinvestment
of all dividends and distributions and utilizes a 5% annual rate of return as
mandated by Securities and Exchange Commission regulations. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
13
<PAGE>
THE FUND
Emerging Tigers Fund, Inc. (the "Fund") is a newly organized, non-
diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on December 23, 1993, and
has registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). See "Description of Shares." The Fund's principal
office is located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and
its telephone number is (609) 282-2000.
THE 1996 VOTE TO CONVERT TO OPEN-END STATUS
The Fund's Articles of Incorporation require the Board of Directors to submit
a proposal to convert the Fund to an open-end investment company to
shareholders during the first quarter of 1996. However, if in the Board's
discretion, conversion at that time would not be in the best interest of
shareholders of the Fund, the Board of Directors retains the right to withhold
such proposal until such time as the Board deems conversion to be in the best
interest of the shareholders. Approval of such a proposal would require the
affirmative vote of a majority of the outstanding shares entitled to be voted
thereon. Shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by the Investment Company Act) at the next determined net asset
value of such shares, less such redemption charges, if any, as might be in
effect at the time of redemption. Accordingly, open-end investment companies
are subject to continuous asset in-flows and out-flows that can complicate
portfolio management. All redemptions will be made in cash. If shareholders
vote to convert the Fund to open-end status it is anticipated that redemption
of shares of the Fund will be subject to a redemption charge of up to 2%, and
may be subject to an ongoing account maintenance fee at an annual rate of up to
0.25% of the average daily net asset value of the Fund.
In considering whether to submit such proposal to shareholders, the Fund's
Board of Directors will consider a number of factors, including the effect on
the Fund's investment policies and portfolio management and whether shares of
the Fund have historically, and continue to, trade at a discount from their net
asset value. For example, in light of the position of the Securities and
Exchange Commission (the "Commission") that illiquid securities and certain
securities subject to legal or contractual limitations on resale not exceed 15%
of the total assets of a registered open-end investment company, any attempt to
convert the Fund to an open-end company will have to take into account the
percentage of such securities in the Fund's portfolio at the time, and other
relevant factors. The Fund cannot predict whether, on this basis, it would be
able to effect any such conversion or whether, if relief from the Commission's
position were required, it could be obtained. The conversion of the Fund to
open-end status will require a change to the Fund's fundamental objective and
policies to the extent such fundamental objective and policies are inconsistent
with those permissible for an open-end investment company.
If the Fund is converted to an open-end investment company, it could be
required to liquidate portfolio securities to meet requests for redemption and
the shares would no longer be listed on the New York Stock Exchange. If a large
volume of shares is offered for redemption at one time the Fund could be forced
to liquidate portfolio securities at a disadvantageous time causing a loss to
the Fund. To prevent such a loss, the Fund is authorized to borrow up to 20% of
its net asset value for purposes of redeeming shares of the Fund. The Fund is
not otherwise authorized to borrow or issue senior securities. The necessity to
liquidate portfolio securities could affect the Fund's ability to meet its
investment objective or to use investment policies and
14
<PAGE>
techniques that are more appropriate for a fixed portfolio than a portfolio
subject to cash in-flows and out-flows. If the Fund converts to open-end
status, it may commence a continuous offering of its shares as is the case with
most mutual funds.
In the event shareholder approval of the proposal to convert to an open-end
fund is not obtained, the Fund will continue as a closed-end investment
company.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming Merrill Lynch exercises the over-allotment
option in full) after payment of the sales load and organizational and offering
costs.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies between approximately three and six
months after completion of the offering of the shares of Common Stock,
depending on market conditions and the availability of appropriate securities.
Pending such investment, it is anticipated that the proceeds will be invested
in U.S. Government securities or high grade corporate debt securities. See
"Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in equity securities of companies in
designated emerging market countries located in Asia and the Pacific Basin
("Asia-Pacific countries"). For purposes of its investment objective, the Fund
considers emerging market Asia-Pacific countries to be all countries in Asia
and the Pacific Basin other than Japan, Taiwan, Australia, New Zealand and Hong
Kong. Under current market conditions, the Fund intends to emphasize
investments in companies in Malaysia, India, Thailand, Singapore, China, the
Philippines, Indonesia, Pakistan and Sri Lanka. Under normal market conditions
at least 65% of the Fund's total assets will be invested in equity securities
of companies in emerging market Asia-Pacific countries. This investment
objective is a fundamental policy of the Fund and may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act. The Fund is authorized to
employ a variety of investment techniques to hedge against market and currency
risk, although suitable hedging instruments may not be available on a timely
basis and on acceptable terms. There can be no assurance that the Fund's
investment objective will be achieved.
The Fund may also seek capital appreciation through investment of up to 35%
of its total assets in debt securities of companies or governments in emerging
market Asia-Pacific countries. Such debt securities may be lower rated or
unrated obligations of corporate or sovereign issuers. The Fund's investments
in high yield securities will include debt securities, preferred stocks and
convertible securities which are rated in the lower rating categories of the
established rating services ("Baa" or lower by Moody's Investors Service, Inc.
("Moody's") and "BBB" or lower by Standard & Poor's Corporation ("S&P")), or in
unrated U.S. and non-U.S. securities considered by the Investment Adviser to be
of comparable quality. Securities rated below "Baa" by Moody's or below "BBB"
by S&P, and unrated securities of comparable quality, are commonly known as
"junk bonds." In addition, the Fund may invest in debt securities that are in
default as to the payment of interest and/or principal at the time of
acquisition by the Fund ("Distressed Securities"). The
15
<PAGE>
Fund will invest in Distressed Securities only when the Investment Adviser
believes it is reasonably likely that the issuer of the securities will make an
exchange offer or will be the subject of a plan of reorganization. Capital
appreciation in debt securities may arise as a result of a favorable change in
relative foreign exchange rates, in relative interest rate levels, or in the
creditworthiness of issuers. The receipt of income from such debt securities is
incidental to the Fund's objective of long-term capital appreciation.
The economies of a number of the emerging market Asia-Pacific countries have
been among the most rapidly growing economies in the world in recent years. The
economies of countries such as India, Thailand, Malaysia and Indonesia, which,
together with Singapore, the Philippines and Brunei, are members of the
Association of Southeast Asian Nations ("ASEAN"), began to emerge, making
significant economic progress. This regional growth has resulted from
government policies directed towards market-oriented economic reform and, in
particular, seeking to encourage the development of labor-intensive, export-
oriented industries. There also has been growth resulting from an increase in
domestic demand. In addition, certain Asia-Pacific countries have been
introducing deregulatory reforms to encourage development of their securities
markets and, in varying degrees, permit foreign investment. A number of these
securities markets have been undergoing rapid growth. While investments in
securities of companies in emerging market Asia-Pacific countries are subject
to considerable risks (see "Risk Factors and Special Considerations"), the
objective of the Fund reflects the belief that the securities markets of
emerging market Asia-Pacific countries present attractive investment
opportunities.
Investment in shares of Common Stock of the Fund offers several benefits.
Many investors, particularly individuals, lack the information or capability to
invest in emerging market Asia-Pacific countries. The Fund offers investors the
possibility of obtaining capital appreciation through a professionally managed
portfolio comprised of securities of emerging market Asia-Pacific issuers. In
managing such portfolio, the Investment Adviser will provide the Fund and its
shareholders with professional analysis of investment opportunities and the use
of professional money management techniques. Unlike many intermediary
investment vehicles, such as closed-end investment companies that are limited
to investment in a single country, the Fund has the ability to diversify
investment risk among the capital markets of a number of countries.
The Fund will normally seek to diversify investments among at least three
emerging market Asia-Pacific countries. However, the Fund is not limited as to
the percentage of assets it may invest per country. The allocation of the
Fund's assets among the various securities markets of the emerging market Asia-
Pacific countries will be determined by the Investment Adviser.
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 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 "Risk Factors and Special
Considerations--Certain Risks of Debt Securities."
The Fund may invest in debt securities ("sovereign debt") issued or
guaranteed by emerging market Asia-Pacific governments (including emerging
market Asia-Pacific countries, provinces and municipalities) or their agencies
and instrumentalities ("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.
16
<PAGE>
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 Asian Development Bank. The governmental
members or "stockholders" of a supranational entity 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.
A company ordinarily will be considered to be in an emerging market Asia-
Pacific country when it is organized in, or the primary trading market of its
securities is located in, an emerging market Asia-Pacific country. The Fund may
consider a company to be in an emerging market Asia-Pacific country, without
reference to such company's domicile or to the primary trading market of its
securities, when at least 50% of the company'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 securities of
companies in emerging market Asia-Pacific countries that are denominated in
currencies other than an emerging Asia-Pacific currency. The Fund also may
consider a debt security that is denominated in an emerging market Asia-Pacific
currency to be a security of a company in an emerging market Asia-Pacific
country without reference to the principal trading market of the security or to
the location of its issuer. The Fund may consider investment companies or other
pooled investment vehicles to be located in the country or countries in which
they primarily make their portfolio investments.
Equity investments of the Fund include, but are not limited to, stocks,
preferred stocks, American Depository Receipts ("ADRs"), Global Depository
Receipts ("GDRs"), International Depository Receipts ("IDRs"), debt securities
convertible into common stock, warrants, joint venture interests, equity
securities of other investment companies and venture capital funds, limited
partnership interests and other securities ordinarily considered to be equity
securities. The equity securities in which the Fund may invest include direct
investments. Such securities are not listed on an exchange and do not have any
active trading market. 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 Fund may also invest in
venture capital investments and illiquid privately placed securities.
The Fund reserves the right, as a temporary defensive measure in anticipation
of investment in emerging market Asia-Pacific 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").
DESCRIPTION OF CERTAIN INVESTMENTS
Warrants. The Fund may invest in warrants, which are securities permitting,
but not obligating, their holder to subscribe for other securities. Warrants do
not carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holders to purchase, and they do not
represent any rights in the assets of the issuer. As a result, an investment in
warrants may be considered more speculative than certain other types of
investments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date.
17
<PAGE>
Illiquid Securities. The Fund may invest 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 a comparable more liquid security. Illiquid sovereign debt and
corporate fixed income securities may trade at a discount from comparable, more
liquid investments. In addition, the Fund may invest in privately placed
securities which may or may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. See
"Private Placements" below.
Risk Factors of Derivatives. In order to seek to enhance income and to hedge
various portfolio positions, the Fund may invest in certain instruments which
may be characterized as derivatives. Investments in indexed securities,
including inverse securities, subject the Fund to the risks associated with
changes in the particular indices, which may include reduced or eliminated
interest payments and losses of invested principal. Interest rate transactions
involve the risk of an imperfect correlation between the index used in the
hedging transactions and that pertaining to the securities which are the
subject of such transactions. Similarly, utilization of options and futures
transactions involves the risk of imperfect correlation in movements in the
price of options and futures and movements in the price of the securities or
interest rates which are the subject of the hedge. For a further discussion of
the risks associated with these investments, see "Risk Factors and Special
Considerations--Hedging Strategies" and "Appendix B--Options and Futures
Transactions."
Distressed Securities. The Fund may invest in distressed securities, which
are securities which are currently in default or in risk of default at the time
of acquisition. Such investment involves significant risk. The Fund only will
make such investments when the Investment Adviser believes it is reasonably
likely that the issuer of the securities will make an exchange offer or will be
the subject of a plan of reorganization; however, there can be no assurance
that such an exchange offer will be made or that such a plan of reorganization
will be adopted. A significant period of time may pass between the time at
which the Fund makes its investment in Distressed Securities and the time that
any such exchange offer or plan of reorganization is completed. During this
period, it is unlikely that the Fund will receive any interest payments on the
Distressed Securities. In addition, as a result of the Fund's participation in
negotiations with respect to any exchange offer or plan of reorganization with
respect to an issuer of Distressed Securities, the Fund may be precluded from
disposing of such securities.
Convertible Securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics such as (1) higher yields than common
stocks, but lower yields than comparable nonconvertible securities, (2) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) the potential for capital appreciation if
the market price of the underlying common stock increases. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
Private Placements. The Fund may invest in securities of companies or
governments of emerging market Asia-Pacific countries that are sold in private
placement transactions between their issuers and their
18
<PAGE>
purchasers and that are neither listed on an exchange nor traded in other
established markets. In many cases, privately placed securities will be subject
to contractual or legal restrictions on transfer. As a result of the absence of
a public trading market, privately placed securities may in turn be less liquid
or illiquid and more difficult to value than publicly traded securities. To the
extent that privately placed securities may be resold in privately negotiated
transactions, the prices realized from the sales could, due to illiquidity, be
less than those originally paid by the Fund or less than their fair value. In
addition, issuers whose securities are not publicly traded may not be subject
to the disclosure and other investor protection requirements that may be
applicable if their securities were publicly traded. If any privately placed
securities held by the Fund are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Fund may be required
to bear the expenses of registration. Certain of the Fund's investments in
private placements may consist of direct investments and may include
investments in smaller, less-seasoned companies, which may involve greater
risks. These companies may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group. In addition,
in the event the Fund sells such securities, any capital gains realized on such
transactions may be subject to higher rates of taxation than taxes payable on
the sale of listed securities.
Indexed and Inverse Securities. The Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an "index"). As an illustration, the Fund may invest in a security that
pays interest and returns principal based on the change in an index of interest
rates or on the value of a precious or industrial metal. Interest and principal
payable on a security may also be based on relative changes among particular
indices. In addition, the Fund may invest in securities whose potential
investment return is inversely based on the change in particular indices. For
example, the Fund may invest in securities that pay a higher rate of interest
and principal when a particular index decreases and pay a lower rate of
interest and principal when the value of the index increases. To the extent
that the Fund invests in such types of securities, it will be subject to the
risks associated with changes in the particular indices, which may include
reduced or eliminated interest payments and losses of invested principal. An
example of such types of securities are indexed or inverse securities issued
with respect to a stock market index in a particular emerging market Asia-
Pacific country.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
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 companies. In addition,
under the Investment Company Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment company and not more than 5% of the
value of the Fund's total assets may be invested in the securities of any
investment company. If the Fund acquires shares in investment companies or
venture capital funds, shareholders would bear both their proportionate share
of expenses in the Fund (including management and advisory fees) and,
indirectly, the expenses of such investment companies or venture capital funds
(including management and
19
<PAGE>
advisory fees). Investment in such venture capital funds involves substantial
risk of loss to the Fund of its entire investment.
OTHER INVESTMENT POLICIES AND PRACTICES
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund is authorized to engage in various portfolio strategies to hedge its
portfolio against adverse movements in equity, debt and currency markets. The
Fund has authority to write (i.e., sell) covered put and call options on its
portfolio securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and financial futures,
and related options on such futures. The Fund may also deal in forward foreign
exchange transactions and foreign currency options and futures, and related
options on such futures. Each of these portfolio strategies is described below.
Although certain risks are involved in options and futures transactions (as
discussed in "Risk Factors and Special Considerations-- Hedging"), the
Investment Adviser believes that, because the Fund will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
volatility, the net asset value of Fund shares will fluctuate.
There can be no assurance that the Fund's hedging transactions will be
effective. Suitable hedging instruments may not be available with respect to
securities of companies in emerging market Asia-Pacific countries on a timely
basis and on acceptable terms. Furthermore, the Fund will only engage in
hedging activities from time to time and will not necessarily engage in hedging
transactions when movements in any particular equity, debt and currency markets
occur.
Set forth below are descriptions of certain hedging strategies in which the
Fund is authorized to engage.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified future
date and price set at the time of the contract. The principal reason for
writing options is to attempt to realize, through the receipt of premiums, a
greater return than would be realized on the securities alone. By writing
covered call options the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained
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cash, cash equivalents, U.S. Government securities or other high grade liquid
debt securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the option is
outstanding. The Fund may engage in closing transactions in order to terminate
put options that it has written. The Fund will not write put options if the
aggregate value of the obligations underlying the put options shall exceed 50%
of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the exercise price,
thus limiting the Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any appreciation in
the value of the underlying security will be partially offset by the amount of
the premium paid for the put option and any related transaction costs. Prior to
its expiration, a put option may be sold in a closing sale transaction and
profit or loss from the sale will depend on whether the amount received is more
or less than the premium paid for the put option plus the related transaction
costs. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of any offsetting sale of an identical option
prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is authorized
to engage in transactions in stock index options and futures and financial
futures, and related options on such futures. The Fund may purchase or write
put and call options on stock indices to hedge against the risks of marketwide
stock price movement in the securities in which the Fund invests. Options on
indices are similar to options on securities except that on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Fund may invest in stock index
options based on a broad market index or based on a narrow index representing
an industry or market segment.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of this
settlement. The Fund may effect transactions in stock index futures contracts
in connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions".
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The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market
advance, it may purchase futures in order to gain rapid market exposure that
may in part or entirely offset increases in the cost of securities that the
Fund intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. The Investment
Adviser does not consider purchases of futures contracts to be a speculative
practice under these circumstances. It is anticipated that, in a substantial
majority of these transactions, the Fund will purchase such securities upon
termination of the long futures position, whether the long position is the
purchase of a futures contract or the purchase of a call option or the writing
of a put option on a future, but under unusual circumstances (e.g., the Fund
experiences a significant amount of redemptions or there is a change in market
conditions), a long futures position may be terminated without the
corresponding purchase of securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies are utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
in which the Fund enters into futures transactions. The Fund may purchase put
options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of its securities. Similarly, the Fund may purchase call
options, or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which the Fund
intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated
by the buyer and seller.
Foreign Currency Hedging. The Fund has authority to deal in forward exchange
among currencies of the different countries in which it will invest and
multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price set at the time of the contract. The
Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of
shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Fund has no limitation on transaction hedging. The Fund will not speculate
in foreign forward exchange. If the Fund enters into a position hedging
transaction, the Fund's custodian will place cash or liquid debt securities in
a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account so that the value of the
account will equal the amount of the Fund's commitment with respect to such
contracts. Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged
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currency should rise. Moreover, it may not be possible for the Fund to hedge
against a devaluation that is so generally anticipated that the Fund is not
able to contract to sell the currency at a price above the devaluation level it
anticipates. Investors should be aware that in certain emerging market Asia-
Pacific countries no forward market for foreign currencies currently exists or
such market may be closed to investment by the Fund.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a Philippine peso denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of Philippine peso
for dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the Philippine peso relative to the dollar
will tend to be offset by an increase in the value of the put option. To
offset, in whole or in part, the cost of acquiring such a put option, the Fund
may also sell a call option which, if exercised, requires it to sell a
specified amount of Philippine pesos for dollars at a specified price by a
future date (a technique called a "straddle"). By selling such a call option in
this illustration, the Fund gives up the opportunity to profit without limit
from increases in the relative value of the Philippine peso to the dollar. The
Investment Adviser believes that "straddles" of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the
policies described above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of currency for a set price on a future date. Futures contracts and options on
futures contracts are traded on boards of trade or futures exchanges. The Fund
will not speculate in foreign currency options, futures or related options.
Accordingly, the Fund will not hedge a currency substantially in excess of the
market value of the securities which it has committed or anticipates to
purchase which are denominated in such currency and, in the case of securities
which have been sold by the Fund but not yet delivered, the proceeds thereof in
its denominated currency. The Fund may not incur potential net liabilities of
more than 20% of its total assets from foreign currency options, futures or
related options.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Fund provide that the futures
trading activities described herein will not result in the Fund being deemed a
"commodity pool" under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell futures contracts
and options thereon (i) for bona fide hedging purposes, and (ii) for non-
hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts and options.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
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OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it may invest in securities of
a single issuer. The Fund's investments will be limited, however, in order to
qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended (the "Code"). See "Taxes". To qualify, the
Fund will comply with certain requirements, including limiting its investments
so that at the close of each quarter of the taxable year (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities of a single issuer and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer, and the Fund will not
own more than 10% of the outstanding voting securities of a single issuer. A
fund which elects to be classified as "diversified" under the Investment
Company Act must satisfy the foregoing 5% and 10% requirements with respect to
75% of its total assets. To the extent that the Fund assumes large positions in
the securities of a small number of issuers, the Fund's net asset value may
fluctuate to a greater extent than that of a diversified company as a result of
changes in the financial condition or in the market's assessment of the
issuers, and the Fund may be more susceptible to any single economic, political
or regulatory occurrence than a diversified company.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of commitment. The Fund will enter
into such agreements only for the purpose of investing in the security
underlying the commitment at a yield and price that is considered advantageous
to the Fund. The Fund will at all times maintain a segregated account with its
custodian of cash, cash equivalents, U.S. Government securities or other high
grade liquid debt securities denominated in U.S. dollars or non-U.S. currencies
in an aggregate amount equal to the purchase price of the securities underlying
the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Because of 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 which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities.
Purchase and sale contracts may be entered into only with financial
institutions which have capital of at least $50 million or whose obligations
are guaranteed by an entity having capital of at least $50 million. Under such
agreements, the other party agrees, upon entering into the contract with the
Fund, to repurchase the security at a mutually agreed upon time and price in a
specified currency, thereby determining the yield
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<PAGE>
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. In the case of repurchase agreements, the
prices at which the trades are conducted do not reflect the accrued interest on
the underlying obligations; whereas, in the case of purchase and sale
contracts, the prices take into account accrued interest. Such agreements
usually cover short periods, often less than one week. Repurchase agreements
may be construed to be collateralized loans by the purchaser to the seller
secured by the securities transferred to the purchaser. In the case of a
repurchase agreement, as a purchaser, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market values of such securities
and the accrued interest on the securities. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
resulting from market fluctuations following the failure of the seller to
perform. While the substance of purchase and sale contracts is similar to
repurchase agreements, because of the different treatment with respect to
accrued interest and additional collateral, management believes that the
purchase and sale contracts are not repurchase agreements as such term is
understood in the banking and brokerage community.
Short Sales. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund expects to make
short sales both as a form of hedging to offset potential declines in long
positions in similar securities and in order to maintain portfolio flexibility.
When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. Government
securities or other high grade liquid securities similar to those borrowed. The
Fund will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current market
value of the security sold short. Depending on arrangements made with the
broker-dealer from which it borrowed the security regarding payment over of any
payments received by the Fund on such security, the Fund may not receive any
payments (including interest) on its collateral deposited with such broker-
dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
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Lending Portfolio Securities. The Fund may from time to time lend securities
from its portfolio, with a value not exceeding 33 1/3% of its total assets, to
banks, brokers and other financial institutions and receive collateral in cash
or securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities which will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. The purpose
of such loans is to permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral is received by
the Fund, it is invested in short-term money market securities, and a portion
of the yield received in respect of such investment is retained by the Fund.
Alternatively, if securities are delivered to the Fund as collateral, the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for lending its portfolio securities. In either event, the total yield on
the Fund's portfolio is increased by loans of its portfolio securities. The
Fund will have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights, subscription rights and
rights to dividends, interest or other distributions. Such loans are terminable
at any time. The Fund may pay reasonable finder's, administrative and custodial
fees in connection with such loans.
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a "when-issued" basis. When such transactions are negotiated, the
price is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Fund will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. If the Fund
disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss. At the time the Fund enters into a
transaction on a when-issued or forward commitment basis, it will segregate
with the custodian cash or other liquid high grade debt securities with a value
of not less than the value of the when-issued or forward commitment securities.
The value of these assets will be monitored daily to ensure that their marked
to market value will at all times exceed the corresponding obligations of the
Fund. There is always a risk that the securities may not be delivered, and the
Fund may incur a loss. Settlements in the ordinary course, which may take
substantially more than five business days, are not treated by the Fund as
when-issued or forward commitment transactions and accordingly are not subject
to the foregoing restrictions.
INVESTMENT RESTRICTIONS
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or management.
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.
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3. Purchase or sell real estate, commodities or commodity contracts,
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
4. Make loans to other persons, except that the acquisition of bonds,
debentures, loan participations or other corporate debt securities and
investment in government obligations, or participations therein, short-term
commercial paper, certificates of deposit, bankers' acceptances and
repurchase agreements and purchase and sale contracts shall not be deemed
to be the making of a loan, and except further that the Fund may lend its
portfolio securities as set forth in (5) below.
5. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loans may only be made in
accordance with the guidelines set forth above.
6. Issue senior securities (including borrowing money) except that in
the event it converts to an open-end investment company, the Fund is
authorized to borrow up to 20% of its total assets in order to meet
redemptions; or pledge its assets other than to secure such issuances or 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 in selling portfolio securities.
8. Purchase or sell interests (including leases) in oil, gas or other
mineral exploration or development programs, except that the Fund may
invest in securities issued by companies that engage in oil, gas or other
mineral exploration or development activities.
9. Invest more than 25% of its total assets in the securities of issuers
in any one industry, provided that this limitation shall not apply with
respect to obligations issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities.
An additional investment restriction adopted by the Fund, which may be
changed by the Board of Directors, provides that the Fund may not:
1. Purchase any securities on margin, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities. The payment by the Fund of initial or variation margin
in connection with futures or related options transactions, if applicable,
shall not be considered the purchase of a security on margin.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Investment Adviser or its affiliates or any of their directors,
officers or employees, acting as principal, unless pursuant to a rule or
exemptive order under the Investment Company Act. If a percentage restriction
on investment policies or the use of assets set forth above is adhered to at
the time a transaction is effected, later changes in percentage resulting from
changing values will not be considered a violation.
Because of the affiliation of the Investment Adviser with the Fund, the Fund
is prohibited from engaging in certain transactions involving the Investment
Adviser's affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("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". Without such an exemptive order, the Fund
would be prohibited from engaging in portfolio transactions with Merrill Lynch
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or its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act of 1933, as
amended, in which such firms or any of their affiliates participate as an
underwriter or dealer.
RISK FACTORS AND SPECIAL CONSIDERATIONS
GENERAL
Because the Fund intends to invest primarily in equity securities of
companies in emerging market Asia-Pacific countries, an investor in the Fund
should be aware of certain risk factors and special considerations relating to
investing in such securities. More generally, the investor should also be aware
of risks and considerations related to international investing and investing in
smaller capital markets, each of which may involve risks which are not
typically associated with investments in securities of U.S. companies.
Consequently, an investment in the Fund should not be considered a balanced
investment program.
FOREIGN CURRENCY AND EXCHANGE RATE RISKS
The Fund's assets will be invested in foreign securities and substantially
all income will be received by the Fund in foreign currencies. However, the
Fund will compute and distribute its income in dollars, and the computation of
income will be made on the date of its receipt by the Fund at the foreign
exchange rate in effect on that date. Therefore, if the value of the foreign
currencies in which the Fund receives its income decreases relative to the
dollar between receipt of the income and the making of Fund distributions, the
Fund will be required to liquidate securities in order to make distributions if
the Fund has insufficient cash in dollars to meet distribution requirements.
The value of the assets of the Fund as measured in dollars also may be
affected favorably or unfavorably by fluctuations in currency rates and
exchange control regulations. Certain of the risks associated with
international investments are heightened for investments in companies in
emerging market Asia-Pacific countries. For example, some of the currencies of
emerging market Asia-Pacific countries have experienced devaluations relative
to the U.S. dollar, and major adjustments have been made periodically in
certain of such currencies. Certain countries, such as India, face serious
exchange constraints. Further, the Fund will incur costs in connection with
conversions between various currencies.
INVESTING ON AN INTERNATIONAL BASIS AND IN COUNTRIES WITH SMALLER CAPITAL
MARKETS
Investing on an international basis and in countries with smaller capital
markets involves certain risks not involved in domestic investments, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Since the Fund will invest heavily in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of
investments. In addition, with respect to certain foreign countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could affect investments in
those countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rates of inflation, capital reinvestment, resources, self-sufficiency
and balance of payments position. Certain foreign investments may also be
subject to foreign withholding taxes. These risks are often heightened for
investments in smaller capital markets and emerging market Asia-Pacific
countries.
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Most of the securities held by the Fund will not be registered with the
Securities and Exchange Commission, nor will the issuers thereof be subject to
the reporting requirements of such agency. Accordingly, there may be less
publicly available information about a foreign company than about a U.S.
company, and such foreign companies may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those of U.S.
companies. As a result, traditional investment measurements, such as
price/earnings ratios, as used in the United States, may not be applicable to
certain smaller capital markets. Foreign companies, and companies in smaller
capital markets in particular, are not generally subject to uniform accounting,
auditing and financial reporting standards or to practices and requirements
comparable to those applicable to domestic companies. Foreign markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have failed to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. There is generally less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities since
the expenses of the Fund, such as management and advisory fees and custodial
costs, are higher. In addition, the Fund will incur costs associated with the
exchange of currencies.
RISKS RELATING TO INVESTMENT IN EMERGING MARKET ASIA-PACIFIC COUNTRIES'
SECURITIES MARKETS AND ECONOMIES
The securities markets of emerging Asia-Pacific countries are not as large as
the U.S. securities markets and have substantially less trading volume,
resulting in a lack of liquidity with high price volatility. Certain markets
are in only the earliest stages of development. There is also a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets
in the region, such as in Japan and Hong Kong. Brokers in emerging market Asia-
Pacific countries typically are fewer in number and less capitalized than
brokers in the United States. These factors, combined with the U.S. regulatory
requirements for closed-end companies and the restrictions on foreign
investment discussed below, result in potentially fewer investment
opportunities for the Fund and may have an adverse impact on the investment
performance of the Fund.
The investment objective of the Fund reflects the belief that the economies
of the emerging market Asia-Pacific countries will continue to grow in such a
fashion as to provide attractive investment opportunities. At the same time,
emerging economies present certain risks that do not exist in more established
economies; especially significant is that political and social uncertainties
exist for many of the emerging market Asia-Pacific countries. Many of the
emerging market Asia-Pacific countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States and Western European countries. Such instability may result from, among
other things: (i) authoritarian governments or military
29
<PAGE>
involvement in political and economic decision-making, including changes in
government through extra-constitutional means; (ii) popular unrest associated
with demands for improved political, economic and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection. In addition, the governments of
many of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy. Another risk common to most such countries is that the
economy is heavily export oriented and, accordingly, is dependent upon
international trade. The existence of overburdened infrastructure and obsolete
financial systems also present risks in certain countries, as do environmental
problems. Certain economies also depend to a significant degree upon exports of
primary commodities and, therefore, are vulnerable to changes in commodity
prices which, in turn, may be affected by a variety of factors.
The legal systems in certain emerging market Asia-Pacific countries also may
have an adverse impact on the Fund. For example, while the potential liability
of a shareholder in a U.S. corporation with respect to acts of the corporation
is generally limited to the amount of the shareholder's investment, the notion
of limited liability is less clear in certain emerging market Asia-Pacific
countries. Similarly, the rights of investors in emerging market Asia-Pacific
companies may be more limited than those of shareholders of U.S. corporations.
It may be difficult or impossible to obtain and/or enforce a judgment in an
emerging market Asia-Pacific country.
Certain of the risks associated with international investments and investing
in smaller capital markets are heightened for investments in emerging market
Asia-Pacific countries. Governments of many emerging market Asia-Pacific
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. In certain cases, the government owns or
controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic
conditions in emerging market Asia-Pacific countries, which could affect
private sector companies and the Fund, as well as the value of securities in
the Fund's portfolio. In addition, economic statistics of emerging market Asia-
Pacific countries may be less reliable than economic statistics of more
developed nations.
In addition to the relative lack of publicly available information about
emerging market Asia-Pacific issuers and the possibility that such issuers may
not be subject to the same accounting, auditing and financial reporting
standards as U.S. companies, inflation accounting rules in some emerging market
Asia-Pacific 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 emerging market Asia-
Pacific companies.
Satisfactory custodial services for investment securities may not be
available in some emerging market Asia-Pacific countries, which may result in
the Fund incurring additional costs and delays in providing transportation and
custody services for such securities outside such countries.
As a result, management of the Fund may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or
appropriate to invest in a particular emerging market Asia-Pacific country. The
Fund may invest in countries in which foreign investors, including management
of the Fund, have had no or limited prior experience.
RESTRICTIONS ON FOREIGN INVESTMENTS
Some emerging market Asia-Pacific countries prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As
30
<PAGE>
illustrations, certain countries may require governmental approval prior to
investments by foreign persons or limit the amount of investment by foreign
persons in a particular company or limit the investment by foreign persons to
only a specific class of securities of a company which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. There can be no assurance that the Fund will be able
to obtain required governmental approvals in a timely manner. In addition,
changes to restrictions on foreign ownership of securities subsequent to the
Fund's purchase of such securities may have an adverse effect on the value of
such securities. Certain countries may restrict investment opportunities in
issuers or industries deemed important to national interests.
The manner in which foreign investors may invest in companies in certain
emerging market Asia-Pacific countries, as well as limitations on such
investments, also may have an adverse impact on the operations of the Fund. For
example, the Fund may be required in certain of such countries to invest
initially through a local broker or other entity and then have the shares
purchased re-registered in the name of the Fund. Re-registration may in some
instances not be able to occur on a timely basis, resulting in a delay during
which the Fund may be denied certain of its rights as an investor, including
rights as to dividends or to be made aware of certain corporate actions. There
also may be instances where the Fund places a purchase order but is
subsequently informed, at the time of re-registration, that the permissible
allocation of the investment to foreign investors has been filled, depriving
the Fund of the ability to make its desired investment at that time.
Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or proceeds of sales of
securities by foreign investors. The Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments.
A number of publicly traded closed-end investment companies have been
organized to facilitate indirect foreign investment in emerging market Asia-
Pacific countries, and certain of such countries, such as Thailand and South
Korea, have specifically authorized such funds. There also are investment
opportunities in certain of such countries in pooled vehicles that resemble
open-end investment companies. In accordance with the Investment Company Act,
not more than 5% of the Fund's assets 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 emerging market
Asia-Pacific 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 of investment companies or of venture capital
funds, shareholders would bear both their proportionate share of expenses in
the Fund (including management and advisory fees) and, indirectly, the expenses
of such investment companies or venture capital funds.
CERTAIN RISKS OF DEBT SECURITIES
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest and such securities may
not be rated at all for creditworthiness. Securities rated in the medium to low
rating categories of nationally recognized statistical rating organizations
such as Standard & Poor's Corporation ("S&P") and Moody's Investors Service,
Inc. ("Moody's"), unrated securities of comparable quality (such lower rated
and unrated securities are referred to herein as "high yield/high risk
securities") are speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. See "Appendix A--Ratings of Fixed Income Securities". These
securities are commonly referred to as "junk" bonds. In purchasing such
securities, the Fund will rely on the Investment Adviser's judgment,
31
<PAGE>
analysis and experience in evaluating the creditworthiness of an issuer of such
securities. The Investment Adviser 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 market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress especially if such issuers are highly leveraged.
During such periods, service of debt obligations also may be adversely affected
by specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of high yield/high risk securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers
of prices for actual sales. The Fund's Directors, or the Investment Adviser
will carefully consider the factors affecting the market for high yield/high
risk, lower rated securities in determining whether any particular security is
liquid or illiquid and whether current market quotations are readily available.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Fund's net asset value. In addition, the Fund
may incur additional expenses to the extent it is required to seek recovery
upon a default on a portfolio holding or participate in the restructuring of
the obligations.
Sovereign Debt. Certain emerging market Asia-Pacific countries, such as the
Philippines and India, owe significant amounts of debt to commercial banks and
foreign governments. Investment in sovereign debt involves a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner
32
<PAGE>
may be affected by, among other factors, its cash flow situation, the extent of
its foreign reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden to the
economy as a whole, the governmental entity's policy towards the International
Monetary Fund and the political constraints to which a governmental entity may
be subject. Governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearages on their debt. The commitment on
the part of these governments, agencies and others to make such disbursements
may be conditioned on a governmental entity's implementation of economic
reforms and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign
debt on which a governmental entity has defaulted may be collected in whole or
in part.
The sovereign debt instruments in which the Fund may invest involve great
risk and are deemed to be the equivalent in terms of quality to high yield/high
risk securities discussed above and are subject to many of the same risks as
such securities. Similarly, the Fund may have difficulty disposing of certain
sovereign debt obligations because there may be a thin trading market for such
securities.
Distressed Securities. Investment in Distressed Securities is speculative and
involves significant risk. The Fund only will make such investments when the
Investment Adviser believes it is reasonably likely that the issuer of the
securities will make an exchange offer or will be the subject of a plan of
reorganization; however, there can be no assurance that such an exchange offer
will be made or that such a plan of reorganization will be adopted. In
addition, a significant period of time may pass between the time at which the
Fund makes its investment in Distressed Securities and the time that any such
exchange offer or plan of reorganization is completed. During this period, it
is unlikely that the Fund will receive any interest payments on the Distressed
Securities, the Fund will be subject to significant uncertainty as to whether
or not the exchange offer or plan of reorganization will be completed, and the
Fund may be required to bear certain expenses to protect its interest in the
course of negotiations surrounding any potential exchange offer or plan of
reorganization. In addition, even if an exchange offer is made or a plan of
reorganization is adopted with respect to Distressed Securities held by the
Fund, there can be no assurance that the securities or other assets received by
the Fund in connection with such exchange offer or plan of reorganization will
not have a lower value or income potential than anticipated when the investment
was made. Moreover, any securities received by the Fund upon completion of an
exchange offer or plan of reorganization may be restricted as to resale. In
addition, as a result of the Fund's participation in negotiations with respect
to any exchange offer or plan of reorganization with respect to an issuer of
Distressed Securities, the Fund may be precluded from disposing of such
securities.
HEDGING STRATEGIES
The Fund may engage in various portfolio strategies to seek to hedge against
movements in the equity markets, interest rates and exchange rates between
currencies by the use of options, futures, options on futures
33
<PAGE>
and forward currency transactions. However, suitable hedging instruments may
not be available with respect to emerging market Asia-Pacific securities on a
timely basis and on acceptable terms. Furthermore, even if hedging techniques
are available, the Fund will only engage in hedging activities from time to
time and may not necessarily be engaging in hedging activities when market or
currency movements occur. Hedging transactions in foreign markets are also
subject to the risk factors associated with foreign investments generally, as
discussed above. Investors should be aware that the forward currency market for
the purchase of U.S. dollars in most, if not all, emerging market Asia-Pacific
countries is not highly developed, and that, in certain emerging market Asia-
Pacific countries, no forward market for foreign currencies currently exists or
such market may be closed to investment by the Fund.
Utilization of options and futures transactions involves the risk of
imperfect correlation in movements in the prices of options and futures and
movements in the prices of the securities or currencies which are the subject
of the hedge. If the price of the options and futures moves more or less than
the prices of the hedged security or currency, the Fund will experience a gain
or loss which will not be completely offset by movements in the prices of the
subject of the hedge. The successful use of options and futures also depends on
the Investment Adviser's ability to predict correctly price movements in the
market involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded options or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into options or futures
transactions on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that a
liquid secondary market for such options or futures contract will exist at any
specific time. Thus, it may not be possible to close an option or futures
position. The Fund will acquire only over-the-counter options for which
management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option), unless a quotation from only one dealer is available, in
which case only that dealer's price will be used, or which can be sold at a
formula price provided for in the over-the-counter option agreement. In the
case of a futures position or an option on a futures position written by the
Fund in the event of adverse price movements, the Fund would continue to be
required to make daily cash payments of variation margin. In such situations,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the currency or security underlying the futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is
theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) which may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day. An
exchange may order the liquidation of positions found to be in violation of
these limits, and it may impose other sanctions or restrictions.
34
<PAGE>
ILLIQUID INVESTMENTS
The Fund may invest in illiquid securities. Investment of the Fund's assets
in relatively 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 in situations in which the Fund's
operations require cash, such as when the Fund repurchases shares or pays
dividends or distributions, and could result in the Fund borrowing to meet
short-term cash requirements or incurring capital losses on the sale of
illiquid investments. Further, companies whose securities are not publicly
traded are not subject to the disclosure and other investor protection
requirements which would be applicable if their securities were publicly
traded.
WITHHOLDING AND OTHER TAXES
Income and capital gains on securities held by the Fund may be subject to
withholding and other taxes imposed by emerging market Asia-Pacific countries,
which would reduce the return to the Fund on those securities. The Fund intends
to elect, when eligible, to "pass-through" to the Fund's shareholders, as a
deduction or credit, the amount of foreign taxes paid by the Fund. The taxes
passed through to shareholders will be included in each shareholder's income.
Certain shareholders, including non-U.S. shareholders, will not be entitled to
the benefit of a deduction or credit with respect to foreign taxes paid by the
Fund. Other taxes, such as transfer taxes, may be imposed on the Fund, but
would not give rise to a credit, or be eligible to be passed through to
shareholders.
FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES
Rules adopted under the Investment Company Act permit the Fund to maintain
its foreign securities and cash in the custody of certain eligible non-U.S.
banks and securities depositories. Certain banks in foreign countries may not
be eligible subcustodians for the Fund under such rules, in which event the
Fund may be precluded from purchasing securities in which it would otherwise
invest, and other banks that are eligible foreign subcustodians may be recently
organized or otherwise lack extensive operating experience. In addition, in
certain countries there may be legal restrictions or limitations on the ability
of the Fund to recover assets held in custody by foreign subcustodians in the
event of the bankruptcy of the subcustodian.
BORROWINGS TO MEET REDEMPTIONS
In the event it converts to an open-end investment company, the Fund is
authorized to borrow up to 20% of its total assets in order to meet redemptions
so as not to force the Fund to liquidate securities at a disadvantageous time.
Any such borrowing will create expenses for the Fund.
NET ASSET VALUE DISCOUNT; NON-DIVERSIFICATION
The Fund is a newly organized company with no prior operating history. Prior
to this offering, there has been no public market for the Fund's Common Stock.
Shares of closed-end investment companies have in the past frequently traded at
a discount from their net asset values and initial offering price. This
characteristic of shares of a closed-end fund is a risk separate and distinct
from the risk that a fund's net asset value will decrease. The Fund cannot
predict whether its own shares will trade at, below or above net asset value.
This risk of loss associated with purchasing shares of a closed-end investment
company is more pronounced for investors who purchase in the initial public
offering and who wish to sell their shares in a relatively short period of
time.
35
<PAGE>
The Fund is classified as a non-diversified investment company under the
Investment Company Act, which means that the Fund is not limited by the
Investment Company Act in the proportion of its assets that may be invested in
the obligations of a single issuer. The Fund, however, intends to comply with
the diversification requirements imposed by the Code for qualification as a
regulated investment company. Thus, the Fund may invest a greater proportion of
its assets in the securities of a smaller number of issuers and, as a result,
will be subject to greater risk of loss with respect to its portfolio
securities. See "Taxes" and "Investment Restrictions."
CONVERSION TO OPEN-END STATUS
The Fund's Articles of Incorporation require the Board of Directors to submit
a proposal to shareholders to convert the Fund to an open-end investment
company during the first quarter of 1996, unless the Board of Directors
determines that conversion at that time would not be in the best interest of
shareholders. Conversion to open-end status would require possibly
disadvantageous changes to the Fund's investment policies and could have an
adverse effect on the management of the Fund's investment portfolio. See "The
1996 Vote to Convert to Open-End Status."
ANTI-TAKEOVER PROVISIONS
The Fund's Articles of Incorporation contain certain anti-takeover provisions
that may have the effect of limiting the ability of other persons to acquire
control of the Fund. In certain circumstances, these provisions might also
inhibit the ability of holders of Common Stock to sell their shares at a
premium over prevailing market prices. The Fund's Board of Directors has
determined that these provisions are in the best interests of shareholders. See
"Description of Shares--Certain Provisions of the Articles of Incorporation."
OPERATING EXPENSES
The Fund's estimated annual operating expenses are higher than those of many
other investment companies investing exclusively in the securities of U.S.
issuers. The operating expenses are, however, believed by the Investment
Adviser to be comparable to expenses of other closed-end management investment
companies with investment objectives similar to the investment objective of the
Fund.
SELECTED ECONOMIC AND MARKET DATA
The Asian continent covers approximately one-fifth of the earth's surface and
is home to more than half the world's population. It is among the most
economically diverse areas of the world, with economies ranging from that of
Japan, a leading industrialized nation, to that of impoverished and politically
volatile Cambodia.
In between are the "emerging market" countries of Asia, and even among them
there is significant economic diversity. Singapore, for example, has well
developed industrial, financial and service sectors but limited natural
resources. China and India are less industrialized but have vast land areas and
abundant natural resources, including electricity, oil and gas, as well as
mineral resources, the largest of which are coal, iron ore, tin ore and
tungsten.
The Investment Adviser anticipates investing initially in companies based in
nine of the emerging market Asia-Pacific countries: China, India, Indonesia,
Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka and
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<PAGE>
Thailand. The sub-region formed by grouping these nine countries, which
includes portions of Central, East and Southeast Asia, extends from Pakistan's
border with Iran in the west to the eastern-most point of Manchurian China, the
eastern coastline of the Philippines and the southeastern extremities of the
Indonesia archipelago. For ease of reference herein, these nine countries are
sometimes referred to collectively as the "sub-regional Asian countries," and
the area that consists of only the sub-regional Asian countries is sometimes
referred to as the "Asian sub-region." Since the Investment Adviser does not
plan initially to invest in any other countries or territories of the region,
all such other countries and territories are excluded from the meaning of the
foregoing defined terms as used herein. Data on the United States is presented
for comparative purposes.
The following is a discussion of (1) the development of the economies in the
Asian sub-region, (2) certain conditions indicating continued growth in the
sub-region, (3) the development of and recent activity on the sub-region's
securities markets and (4) information with respect to certain sub-regional
Asian countries.
ECONOMIC DEVELOPMENT OF THE ASIAN SUB-REGION
Industrialization: 1970-1992. Since 1970, there has been a downward shift in
the percentage of GDP accounted for by the agricultural sector in the sub-
regional Asian countries and a commensurate increase in output by the
industrial sector and, to a lesser extent, the services sector. See Table 1
below. The most noteworthy industrialization has taken place in Indonesia. With
the support of pro-business governmental policies, Indonesia's industrial
sector grew from 19% to 41% of its GDP over the period 1970 through 1991.
Similarly, Malaysia, which had a largely agricultural economy in the early
1980s, is now the world's largest producer of air conditioners, and in 1992
manufactured products accounted for approximately 45% of its total exports. The
Filipino economy is shifting to industry far more slowly but is expected to
benefit from certain market-oriented reforms and the development of basic
infrastructure such as electrical power facilities.
TABLE 1
BREAKDOWN OF GDP: PERCENTAGES FOR AGRICULTURE,
INDUSTRY AND SERVICES: 1970 AND 1991
<TABLE>
<CAPTION>
INDUSTRY* SERVICES
AGRICULTURE (%) (%) (%)
--------------- --------- ---------
1970 1991 1970 1991 1970 1991
------- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
China................................... 34 27 38 42 28 32
India................................... 45 31 22 27 33 41
Indonesia............................... 45 19 19 41 36 39
Malaysia................................ 29 N/A 25 N/A 46 N/A
Pakistan................................ 37 26 22 26 41 49
Philippines............................. 30 21 32 34 39 44
Singapore............................... 2 0 30 38 68 62
Sri Lanka............................... 28 27 24 25 48 48
Thailand................................ 26 12 25 39 49 49
</TABLE>
- --------
Source: The World Bank World Development Report, 1993.
* Includes construction.
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<PAGE>
Growth Rates: 1980-1992. According to data from the International Monetary
Fund, eight of the ten fastest growing economies in the developing world are
located in Asia. As shown in Table 2 below, the average annual economic growth
of each of the sub-regional Asian countries (except for that of the
Philippines) significantly out-paced that of the United States over the last
decade and through 1992. As discussed below, the leading factor contributing to
economic growth in the sub-region has been export performance. See "Trade and
Exports." The fastest growing economy of any of the sub-regional Asian
countries over this period was that of China, with an average annual growth
rate of 9.7%. China's growth rate was followed by that of Thailand, with an
average annual growth rate of 7.9% fueled by significant tourism as well as
automobile sales and credit growth, and then Singapore, which had an average
annual growth rate of 6.5%. In comparison, the average annual growth rate of
the United States over this period was 2.6%.
TABLE 2
REAL GDP
<TABLE>
<CAPTION>
AVERAGE REAL GDP
GROWTH FOR THE PERIOD NOMINAL GDP
1980-1992 1992
--------------------- --------------
(%) (US$ BILLIONS)
<S> <C> <C>
China...................................... 9.7 435**
Thailand*.................................. 7.9 104
Singapore.................................. 6.5 46
Pakistan................................... 6.1 48
Malaysia*.................................. 5.9 55
Indonesia.................................. 5.6 126
India*..................................... 5.3 266
Sri Lanka.................................. 4.0 10
Philippines................................ 1.0 52
United States.............................. 2.5 5,951
</TABLE>
- --------
Source (except as hereinafter noted): World Bank: World Development Report
1993; International Monetary Fund, World Economic Outlook, May 1993 and October
1993, International Monetary Fund, International Financial Statistics Yearbook
1993.
* India source: Centre for Monitoring Indian Economy, August 1993; Malaysia
source: Bank Negara, Annual Report 1992; Thailand source: Bank of Thailand.
** China: GNP.
For the year ended December 31, 1992, GDP growth ranged between 4.0 and 12.8%
in the sub-regional Asian countries, excluding the Philippines. In the
Philippines, economic growth was constrained by political instability and
severely deficient infrastructure during this period. There has been recent
progress, however, including the implementation of certain market-oriented
policies and the development of certain basic infrastructure such as power
generation.
Stages of Development: Existing levels of economic development differ widely
among the sub-regional Asian countries. One measure of economic development is
GNP per capita, and Singapore's GNP per capita is far higher than that of any
other country in this group, as shown in Table 3. At 1991, Singapore had the
highest GNP per capita of the "four tigers" (Hong Kong, Korea, Singapore and
Taiwan) and among all Asian
38
<PAGE>
countries was second only to Japan. Although its economic strength is broad-
based, Singapore has been notably successful in shipping, export finance and,
more recently, the manufacture and export of electronics/computer products. The
other countries in the sub-region are at earlier stages in their economic
development but, even among them, there are wide variations. Malaysia's GNP per
capita, for example, is more than that of Thailand and the Philippines combined
and almost seven times that of India.
TABLE 3
1991 GNP PER CAPITA
<TABLE>
<CAPTION>
GNP
PER CAPITA
(US$)
COUNTRY/TERRITORY ----------
<S> <C>
Singapore...................................................... 14,210
Malaysia....................................................... 2,520
Thailand....................................................... 1,570
Philippines.................................................... 730
Indonesia...................................................... 610
Sri Lanka...................................................... 500
Pakistan....................................................... 400
China.......................................................... 370
India.......................................................... 330
United States.................................................. 22,240
</TABLE>
- --------
Source: World Bank; World Development Report 1993.
CONDITIONS INDICATING CONTINUED GROWTH
While numerous variables will affect the economic progress of countries in
the sub-region, the Investment Adviser has identified certain fundamental
conditions that indicate continued growth:
Young Work Forces and Competitive Wages. The sub-regional Asian countries
have young populations. As shown in Table 4, each such country has a greater
percentage of persons under 15 years old and a smaller percentage of persons
over 65 years old than has the United States.
39
<PAGE>
TABLE 4
DEMOGRAPHIC STRUCTURE: 1991
<TABLE>
<CAPTION>
% OF % OF % OF
POPULATION POPULATION POPULATION
UNDER 15 15-64 65 AND
COUNTRY/TERRITORY YEARS YEARS ABOVE
----------------- ---------- ---------- ----------
<S> <C> <C> <C>
China.......................................... 27 66 7
Singapore...................................... 23 71 6
Thailand....................................... 32 66 2
Malaysia....................................... 39 59 2
Philippines.................................... 39 59 2
Indonesia...................................... 36 60 4
Pakistan....................................... 44 54 2
Sri Lanka...................................... 32 64 4
India.......................................... 36 60 4
United States.................................. 22 66 12
</TABLE>
- --------
Source: The World Bank World Development Report, 1993.
The relatively high percentage of young people in the sub-regional Asian
countries indicates a plentiful potential supply of new labor force
participants. In this respect, India, Indonesia, Malaysia, Pakistan, the
Philippines, Sri Lanka and Thailand are particularly well-positioned. The
larger this percentage, the lower the likelihood of significant upward pressure
on wage rates over the medium term, which should help ensure a continuation of
the current, favorable cost structure these countries enjoy relative to that of
the United States and Japan. The Investment Adviser believes that the sub-
region's large pool of disciplined and low cost (and in parts of East Asia,
well educated) labor, will continue to attract high levels of capital
investment by firms based in the industrialized countries. See "Established
Networks for Direct Foreign Investment" below. It should be noted that the
poorer countries in particular will need to maintain a sufficient level of
overall economic activity in order to provide employment opportunities to new
applicants to the work force. If this cannot be achieved, the export of labor
may occur, which has in fact happened in the case of the Philippines. Direct
investment and the establishment of labor intensive industries, such as
textiles, have had a favorable impact on job creation in the sub-regional Asian
countries. Such investment may be deterred, however, by the absence of basic
infrastructure such as energy, telephone lines, ports, roads and railways, as
has occurred in the Philippines with shortages of electricity.
High Savings Rates; Infrastructure. If the sub-regional Asian countries are
to reach their economic potential, a substantial investment in infrastructure
will be required, particularly in the poorer of these countries. One example of
the inadequate infrastructure is the low penetration rate of telephone lines
relative to the population that exists in China, India, Indonesia, Malaysia,
Pakistan and Thailand. Several of the sub-regional Asian countries should have
the means to overcome the deficiency in infrastructure because of their high
domestic savings rates, which are shown in Table 5.
A high rate of savings is generally associated with strong investment, rising
productivity and faster GDP growth. As of 1991, the percentage of savings to
GDP in each sub-regional Asian country was higher than that of the United
States. Singapore, with savings equal to 47% of GDP, followed by China at 39%
and Indonesia at 36%, in particular compare favorably with the United States,
where savings was 15% of GDP at 1991. The savings rates of Sri Lanka, Pakistan,
India and the Philippines are the lowest in the region and, in the opinion of
the Investment Adviser, will need to be improved if investment, and resulting
growth, is to
40
<PAGE>
accelerate in such countries. It should be noted that the lack of financial
intermediaries capable of channelling available funds between savers and
investors may constrain growth in the short term.
TABLE 5
SAVINGS RATE
<TABLE>
<CAPTION>
1991
SAVINGS AS
% OF GDP*
----------
<S> <C>
Singapore................................... 47
China....................................... 39
Indonesia................................... 36
Thailand.................................... 32
Malaysia.................................... 30
Philippines................................. 19
India....................................... 19
Sri Lanka................................... 13
Pakistan.................................... 12
United States............................... 15
</TABLE>
- --------
* Source (except as hereinafter noted): World Bank: World Bank Development
Report 1993.
Established Networks for Direct Foreign Investment. Direct foreign investment
has supported economic growth in the Asian sub-region. With the rapid
appreciation of the Yen since the end of 1985, Japanese investment flows have
increased considerably. Japanese firms have built significant regional networks
of manufacturing affiliates in the sub-region (most notably in electronics).
The Investment Adviser believes that companies based in Singapore, following
the example of Japanese companies, will also become significant direct
investors in the sub-region and that Singapore's future growth will be based on
expansion of its companies in some of the poorer Asian countries, such as
China, India and Vietnam, which have large consumer markets and low-cost labor.
The Investment Adviser believes that in addition to increasing the
availability of capital, direct foreign investment confers a number of benefits
which enhance the long-term growth potential of the recipient countries,
including, among others, (1) the mobilization of domestic savings for
productive purposes in joint ventures between multi-national corporations and
local companies, (2) the improvement of local training and education as local
employees are exposed to modern production techniques and established training
methods, (3) the modernization of management and accounting, (4) a transfer of
technology and (5) the promotion of exports.
Trade and Exports. The growth of most countries in the Asian sub-region has
been tied to strong export performance, including exports by foreign
manufacturing facilities operating in such countries. During the 1980s, a
significant portion of exports from Asia was shipped to the United States and
Europe, which resulted in severe trade account imbalances. The appreciation of
the Japanese Yen since the end of 1985, together with increasingly persistent
attempts on the part of various United States administrations to lower Asian
trade barriers, has resulted in a shift in the pattern of trade. Table 6 shows
that in 1992 42.3% of Asian exports went to markets in Asia, while 46.4% of
total Asian imports were from the countries in Asia. The Investment Adviser
believes that the growth of intra-Asian trade will benefit the sub-region by
providing stable growth and insulation from external shocks.
41
<PAGE>
TABLE 6
INTRA-ASIAN TRADE, 1992
(US$ IN MILLIONS)
<TABLE>
<CAPTION>
EXPORTS FROM: TO:
HONG SINGA- INDO- MALAY- PHILIP- THAI- PAKI SRI EXPORTS TOTAL
JAPAN KOREA TAIWAN KONG PORE NESIA SIA PINES LAND CHINA INDIA STAN LANKA TO ASIA EXPORTS
------- ------ ------ ------- ------ ------ ------ ------- ------ ------ ------ ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Japan............ -- 17,786 21,166 20,779 12,981 5,582 8,128 3,520 10,384 11,967 1,488 1,300 359 113,781 339,991
Korea............ 11,599 -- 2,262 5,909 3,222 1,935 1,136 746 1,532 2,654 438 372 210 31,433 74,790
Taiwan........... 9,449 1,315 -- 11,243 2,752 1,335 2,245 1,092 2,248 N/A 191 N/A N/A 31,870 80,723
Hong Kong........ 6,262 1,938 4,219 -- 3,130 734 832 1,108 1,059 35,412 330 73 280 55,024 119,512
Singapore........ 2,813 1,626 1,545 4,591 -- 1,868 5,699 684 2,700 1,124 1,105 132 255 23,755 49,604
Indonesia........ 11,607 1,385 1,345 869 2,878 -- 534 176 335 1,613 59 80 42 20,801 33,840
Malaysia......... 5,401 1,389 1,270 1,549 9,391 506 -- 477 1,490 772 430 370 109 22,675 40,709
Philippines...... 2,020 27 283 426 251 40 208 -- 109 146 20 4 3 3,530 10,274
Thailand......... 5,686 533 618 1,507 2,823 283 842 155 -- 386 65 70 100 12,896 32,473
China............ 11,691 2,435 N/A 37,464 2,029 471 645 209 893 -- 158 551 104 55,995 86,220
India............ 1,850 434 199 685 425 160 322 71 304 164 -- 47 192 4,614 20,683
Pakistan......... 557 170 -- 572 127 94 75 27 114 54 136 -- 85 1,820 6,494
Sri Lanka........ 138 41 7 18 46 2 5 2 20 5 12 30 -- 200 2,570
<CAPTION>
EXPORTS FROM:
ASIAN/
WORLD
TOTAL
(%)
------
<S> <C>
Japan............ 33.5
Korea............ 42.0
Taiwan........... 39.5
Hong Kong........ 46.0
Singapore........ 47.9
Indonesia........ 61.5
Malaysia......... 55.7
Philippines...... 34.4
Thailand......... 39.7
China............ 64.9
India............ 22.3
Pakistan......... 28.0
Sri Lanka........ 7.8
Imports from
Asia............ 68,378 28,868 32,907 85,022 39,882 12,914 20,591 8,238 21,054 54,238 4,284 N/A N/A 376,376 888,819
Total Imports... 232,947 81,405 67,926 123,430 76,129 27,606 39,927 16,140 40,686 81,739 23,638 N/A N/A 811,575
Asian/World Total
(%)............. 29.4 35.5 48.4 68.9 52.4 46.8 51.6 51.0 51.7 66.4 18.1 N/A N/A 46.4
Imports from
Asia............ 42.3
Total Imports...
Asian/World Total
(%).............
</TABLE>
- ------
Sources: Direction of Trade Statistics 1993, International Monetary Fund;
Taiwan source: Financial Statistics of the Central Bank of the ROC.
42
<PAGE>
Rising Per Capita Incomes. Overall economic activity in the Asian sub-region
has been supported by a rising trend in per capita GNP. See Table 3 above.
This trend is especially significant in light of the fact that the sub-region
contains three of the world's four most populous nations: China (1.15
billion), India (866 million) and Indonesia (181 million). As shown on Table
7, the population of the nine sub-regional countries combined is almost 10
times larger than that of the United States. As such, on a per capita GNP
basis there remains great potential for future growth in the sub-region,
particularly in the poorer countries, including China, India, Indonesia,
Pakistan, the Philippines, Sri Lanka and Thailand. The Investment Adviser
believes that these conditions will lead to increased consumption and the
growth of local markets for a wide range of products, both imported and
locally manufactured.
TABLE 7
POPULATION: 1991
<TABLE>
<CAPTION>
POPULATION
COUNTRY/TERRITORY (MILLIONS)
----------------- ----------
<S> <C>
China*...................................... 1,150
India....................................... 866
Indonesia................................... 181
Pakistan.................................... 116
Philippines................................. 63
Thailand.................................... 57
Malaysia.................................... 18
Sri Lanka................................... 17
Singapore................................... 3
-----
Total....................................... 2,471
=====
United States............................... 253
</TABLE>
- --------
Source: The World Bank--World Development Report 1993.
* Source: The Statistical Yearbook of the Republic of China, 1992.
SECURITIES MARKETS IN THE ASIAN SUB-REGION
The first stock exchange in the Asian sub-region was established in Bombay,
India in 1875. Since then, stock exchanges have been formed in the other
countries of the sub-region including, most recently, the Shenzhen Exchange in
China which has operated since only 1991. Although varying in size and
maturity, most of the stock exchanges in the sub-region, for a wide variety of
historical and/or ideological reasons, have at some time been subject to
restrictions on foreign ownership.
Up until 1987, investment in Indonesia was effectively closed to foreigners,
and India has only recently authorized direct access for approved
international institutional investors. Many companies in China, India,
Indonesia, Malaysia, the Philippines, Singapore and Thailand have foreign
investment restrictions which can result in foreign owned stock trading at a
substantial premium or discount to locally-owned shares. Foreign investment
restrictions may be subject to change. For example, the Securities Exchange
Commission of Thailand is currently studying various proposals to permit
foreigners to hold local stock without voting rights. If adopted, such
proposals could have the effect of reducing or eliminating the premium at
which many foreign owned stocks presently trade. This could have an adverse
effect on the Fund if it purchases such stocks at a premium prior to such
adoption. It is uncertain whether or when such a change may be implemented.
43
<PAGE>
Average daily volume can be much lower in the sub-region's markets than a
typical day's trading volume in the United States, particularly in the small
and medium capitalization sectors of the lesser developed stock markets. Since
the mid 1980s, however, stock market activity throughout the region, both with
respect to daily trading volume and the number of securities traded, has gained
momentum. Turnover on the Thai stock market, for example, more than doubled
between 1991 and 1992. The Thai stock market is typically regarded as a
liquidity-driven market with a high degree of retail business compared with
western markets, where institutional investors account for a much larger share
of total trades.
In terms of market capitalization, Malaysia is the largest stock market in
the Asian sub-region, followed by Thailand and India. Most of the markets in
the sub-region markets have seen significant expansion in the number of listed
companies. Indonesia experienced the largest percentage increase in new
listings between 1983 and 1992, increasing from 19 companies to 155. The number
of listed companies on the Stock Exchange of Thailand increased from 88 to 305
over the same period.
The stock market of each sub-regional Asian country has seen positive returns
over the past four calendar years, although such returns cannot be assured in
the future. These markets in general do not move together. For example, during
the period 1989 to 1992, the best performing market was India and the worst was
Indonesia, while for the first nine months of 1993 the best performing market
was Indonesia and the worst was India. The stock markets in Indonesia, Malaysia
and the Philippines are at high levels which may not be sustainable.
Accordingly, to the extent that the Fund purchases securities at present levels
in these and other high performing Asian stock markets, there may be a greater
risk that the value of such securities may decline.
TABLE 8
DEVELOPMENT OF CERTAIN ASIAN STOCK MARKETS
1983-1992
<TABLE>
<CAPTION>
ANNUAL TRADING NUMBER OF MARKET CAP DEC.
VALUE LISTED 31,
U.S.$ MILLIONS COMPANIES U.S.$ BILLIONS
-------------- ----------- ----------------
EXCHANGE LOCAL INDEX 1983 1992 1983 1992 1983 1992
- -------- ----------- -------------- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
China................... N/A N/A 13,363 N/A 53 N/A 18*
India................... SE Bombay Index 2,377 20,597 3,118 6,700 7 65
Indonesia............... JSE Composite 11 3,903 19 155 0.1 12
Malaysia................ KLSE Composite 3,398 21,730 204 366 23 94
Philippines............. Manila Com/Ind Index 483 3,104 208 170 1 14
Singapore............... DDS 50 5,588 14,084 118 163 16 49
Thailand................ SET 381 72,060 88 305 1 58
</TABLE>
- --------
Sources: Emerging Stock Markets Factbook 1993; International Finance Corp.
* As of December 31, 1993, market capitalization was approximately $39 billion
and $15 billion on the Shanghai Securities Exchange and the Shenzhen Stock
Exchange, respectively.
Certain privatization initiatives and relaxation of laws relating to foreign
investment in certain sectors should present future investment opportunities
and should be conducive to continued infusions of foreign capital. Malaysia,
for example, has implemented a major privatization plan which has included,
among other things, the stock offerings of Proton (automobile manufacturer) and
Tenaga Nasionale (power supplier). In
44
<PAGE>
Indonesia, the pro-business government recently passed laws enabling foreign
investors to hold up to 49% of the equity securities of Indonesian banks.
INFORMATION WITH RESPECT TO CERTAIN ASIAN SUB-REGION COUNTRIES
Malaysia. Foreign investment in Malaysia has increased significantly due to
recent market-oriented reforms. In recent years, Malaysia has reduced its
external debt, stabilized its inflation and increased its trade with other
nations. Its economy has become less dependent on the export of its natural
resources (i.e., rubber, palm oil and tin) and has benefited from the increased
competitiveness of its manufacturing sector.
India. India has recently undertaken several steps to open its economy and
markets. The rupee has become somewhat convertible, certain tariffs have been
lowered and foreign investors are now permitted to hold majority positions in
joint ventures in India. The Investment Adviser believes these changes may
encourage the development of small entrepreneurial companies in India. The
Investment Adviser also believes India's future economic development may
benefit from the presence of an affluent middle class even if its export
industry does not experience significant growth in the near future.
Thailand. Since 1988 the Thai economy has been the fastest growing economy in
Asia. Despite political changes during this period, Thailand's government has
consistently espoused market-oriented reforms. The formerly commodity-based
economy in Thailand has evolved into a more diverse industrial economy. Exports
in certain industrial sectors have had annual increases of more than 20% in
recent years. In particular, Thailand has become competitive in the global
marketplace with respect to its export of clothing, shoes, electronics,
foodstuffs and jewelry.
Singapore. Singapore has a smaller economy that is sensitive to the level of
worldwide trade, and has significant service industries in banking and
shipbuilding. Its economy has benefitted from increasing trade with other Asian
sub-region countries. There is a large presence of U.S. multinational
electronic companies in Singapore, and, as a result, Singapore's economy is
impacted by the performance of the U.S. electronics industry and the U.S.
economy.
China. In recent years China has undertaken significant reforms in its
economic policy and structure. With a consumer market of more than 1.1 billion
people, China has exhibited a strong economic growth rate which should continue
as its market-oriented reforms continue. The Investment Adviser believes this
economic performance should provide attractive investment opportunities.
The Philippines. Following a period of readjustment after 20 years under the
rule of Marcos, the Philippines is implementing presently certain market-
oriented reforms. The Philippines is also undertaking improvements to its
infrastructure, such as electrical power generation. The Filipino stock market
was the best performing stock market in its region during 1993, despite slow
growth in its economy. Such performance can be attributed to the corporate
earnings growth rate in 1993 and the expected continued growth in such earnings
in 1994. In the corporate sector, certain larger Filipino corporations, in
particular those that are oligopolistic in nature, have grown at a faster rate
than the broader economy.
Indonesia. Indonesia has a relatively young work force and its economy is
largely agrarian. The Indonesian government has undertaken market reforms,
which have resulted in an increase in both foreign and local investment. There
has also been a trend in Indonesia toward processing raw materials in Indonesia
prior to their export. The Indonesian government recently maintained a tight
monetary policy in order to control inflation. The Investment Adviser believes
a decline in interest rates in Indonesia may stimulate further investment and
lead to growth in corporate earnings of Indonesian companies.
45
<PAGE>
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations during the last five years are set forth below. Unless otherwise
noted, the address of each Director and executive officer is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
ARTHUR ZEIKEL --President and Director (1)(2)--Director and Chief Investment
Officer of the Investment Adviser and Merrill Lynch Asset Management, L.P.
("MLAM"); President and Director of Princeton Services, Inc. since 1993;
Executive Vice President of Merrill Lynch & Co., Inc. since 1990; Executive
Vice President of Merrill Lynch since 1990 and a Senior Vice President thereof
from 1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc. ("MLFD").
DONALD CECIL--Director (2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982; Member of Institute of Chartered Financial Analysts; Member and
Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER--Director (2)--777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Executive Officer since
1970 and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc., Ethan Allen Interiors Inc. and
Harman International Industries, Inc.
CHARLES C. REILLY--Director (2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association.
RICHARD R. WEST--Director (2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance, and Dean from 1984 to 1993, New York University Leonard
N. Stern School of Business Administration; Director of Vornado Realty Trust
(real estate investment trust), Smith-Corona Corporation (manufacturer of
typewriters and word processors), Alexander's Inc. and Bowne & Co., Inc.
TERRY K. GLENN--Executive Vice President (1)(2)--Executive Vice President of
the Investment Adviser and of MLAM since 1983; President of MLFD since 1986 and
a Director thereof since 1991.
KARA W. Y. TAN BHALA--Vice President and Portfolio Manager (1)--Portfolio
Manager with MLAM since 1992; Vice President of James Capel Inc. from 1988 to
1990; Senior Investment Analyst of James Capel (Far East) Ltd. from 1986 to
1988.
GERALD M. RICHARD--Treasurer (1)(2)--Senior Vice President and Treasurer of
MLAM and the Investment Adviser since 1984; Vice President of MLFD since 1981
and Treasurer since 1984.
MICHAEL J. HENNEWINKEL--Secretary (1)(2)--Vice President of MLAM since 1985
and attorney associated with the Investment Adviser and MLAM since 1982.
- --------
(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 one or more
other investment companies for which the Investment Adviser or MLAM acts as
investment adviser.
46
<PAGE>
The Fund pays each Director not affiliated with the Investment Adviser a fee
of $ per year plus $ per meeting attended, together with such Director's
actual out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its audit committee, which consists of all of the
Directors not affiliated with the Investment Adviser, an annual fee of $ ;
the chairman of the audit committee receives an additional annual fee of $ .
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM, which is owned and controlled
by Merrill Lynch & Co., Inc. ("ML & Co."). The Investment Adviser will provide
the Fund with investment advisory and management services. The Investment
Adviser or MLAM acts as the investment adviser for over 90 other registered
investment companies. The Investment Adviser also offers portfolio management
and portfolio analysis services to individuals and institutions. As of December
31, 1993, the Investment Adviser and MLAM had a total of approximately $160
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Investment Adviser. In addition
to such assets under management, as of that date ML & Co. and its subsidiaries
held assets aggregating over $500 billion on behalf of their customers. The
principal business address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
The Investment Advisory Agreement between the Fund and the Investment Adviser
(the "Investment Advisory Agreement") provides that, subject to the direction
of the Board of Directors of the Fund, the Investment Adviser is responsible
for the actual management of the Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Investment Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser also will be responsible for the performance of certain
administrative and management services for the Fund.
For the services rendered, the facilities furnished and the expenses assumed
by the Investment Adviser under the Investment Advisory Agreement, the Fund
will pay a monthly fee at the annual rate of 1.00% of the Fund's average weekly
net assets ("average weekly net assets" means the average weekly value of the
total assets of the Fund minus the sum of (i) accrued liabilities of the Fund
and (ii) any accrued and unpaid interest on outstanding borrowings). For
purposes of this calculation, average weekly net assets are determined at the
end of each month on the basis of the average net assets of the Fund for each
week during the month. The assets for each weekly period are determined by
averaging the net assets at the last business day of a week with the net assets
at the last business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser 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 compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, stock
certificates and
47
<PAGE>
shareholder reports, listing fees, charges of the custodian and the transfer
agent, dividend disbursing agent and registrar, Securities and Exchange
Commission fees, fees and expenses of unaffiliated Directors, accounting and
pricing costs, insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, mailing and other expenses properly
payable by the Fund. Accounting services are provided to the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.
Securities held by the Fund also may be held by or be appropriate investments
for other funds for which the Investment Adviser or MLAM acts as an advisor or
by investment advisory clients of MLAM. Because of different investment
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities for the Fund or other funds for which the
Investment Adviser or MLAM acts as investment adviser or for their advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or MLAM 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.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect until , 1996, and from year to year
thereafter if approved annually (a) by the Board of Directors of the Fund or by
a majority of the outstanding shares of the Fund and (b) by a majority of the
Directors who are not parties to such contract or interested persons (as
defined in the Investment Company Act) of any such party. Such contract is not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by the vote of the shareholders of the
Fund.
48
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable fee, commission or spread), size of order,
difficulty of execution and operational facilities of the firm involved, the
firm's risk in positioning a block of securities and the provision of
supplemental investment research by the firm. While the Investment Adviser
generally seeks reasonably competitive fees, commissions or spreads, the Fund
does not necessarily pay the lowest fee, commission or spread available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provide supplemental investment research to
the Investment Adviser, including Merrill Lynch, 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 Investment Adviser
under the Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
The Fund will invest in certain securities traded in the over-the-counter
market and, where possible, intends to deal directly with the dealers who make
markets in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Under the Investment Company Act,
except as permitted by exemptive order, persons affiliated with the Fund are
prohibited from dealing with the Fund as principals in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principals for their own account, the Fund
will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such 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 except pursuant to procedures
approved by the Board of Directors of the Fund which comply with rules adopted
by the Securities and Exchange Commission. To the extent Merrill Lynch is
active in distributions of securities of companies in emerging market Asia-
Pacific countries, the Fund may be disadvantaged in that it may not purchase
securities in such distributions. An affiliated person of the Fund may serve as
its broker in over-the-counter transactions conducted on an agency basis.
The Fund's ability and decisions to purchase and sell portfolio securities
may be affected by foreign laws and regulations relating to the convertibility
and repatriation of assets.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Investment Adviser. While it is not possible to predict
turnover rates with
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any certainty, at present it is anticipated that the Fund's annual portfolio
turnover rate, under normal circumstances, will be less than 100%. (The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income.
Dividends from such net investment income are paid at least annually. All net
realized long-term or short-term capital gains, if any, are distributed at
least annually to holders of Common Stock. From time to time, the Fund may
declare a special distribution at or about the end of the calendar year in
order to comply with a Federal income tax requirement that certain percentages
of its ordinary income and capital gains be distributed during the calendar
year.
Under the Investment Company Act, the Fund is not permitted to issue senior
securities unless immediately after such issuance the Fund has an asset
coverage of 300% of the aggregate outstanding principal amount of senior
securities. Additionally, under the Investment Company Act, the Fund may not
declare any dividend or other distribution upon any class of its capital stock,
or purchase any such capital stock, unless the aggregate amount of senior
securities of the Fund has, at the time of the declaration of any such dividend
or distribution or at the time of any such purchase, an asset coverage of at
least 300% after deducting the amount of such dividend, distribution, or
purchase price, as the case may be.
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of Common Stock may be
reinvested automatically in shares of Common Stock of the Fund. Dividends and
distributions may be taxable to shareholders whether they are reinvested in
shares of the Fund or received in cash.
TAXES
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
shareholders. The Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
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). Any loss upon the sale or exchange of Fund
shares held for six months or less, however, will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder.
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Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends.
Distributions by the Fund, whether from ordinary income or capital gains,
generally will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value
of the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible, and intends, to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes.
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 avoid 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.
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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 distributions from such company and on gain from the
disposition of the shares of such company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid
the taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs. Alternatively, under proposed regulations which, when
finalized, are expected to apply retroactively, the Fund may elect to "mark to
market" at the end of each taxable year all shares that it holds in PFICs. If
it makes this election, the Fund will recognize as ordinary income any increase
in the value of such shares. Unrealized losses, however, will not be
recognized. By making the mark-to-market election, the Fund can avoid
imposition of the interest charge with respect to its distributions from PFICs,
but in any particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
stock.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options, futures or forward foreign exchange 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 options, futures or
forward foreign exchange contract will be treated as sold for its fair market
value on the last day of the taxable year. Unless such contract is a non-equity
option or a regulated futures contract for a non-U.S. currency and the Fund
elects to have gain or loss in connection with the contract treated as ordinary
gain or loss under Code Section 988 (as described below), gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. 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 options, futures and interest rate transactions and its
short sales of securities. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain closing
transactions in options and futures contracts, interest rate swaps and certain
short sales of securities.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options or futures contract.
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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
currency contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund. The Fund may request a private letter
ruling from the Internal Revenue Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary
income or loss under Code Section 988. In certain circumstances, the Fund may
elect capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, and any 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. These rules and the mark-to-market
rules described above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of currency fluctuations with
respect to its investments.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain developing Asia-Pacific countries in which the Fund
intends to invest. No such regulations have been issued.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs that
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributed to U.S. Government obligations is exempt
from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluations of an investment
in the Fund.
----------------
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AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a shareholder otherwise elects, all dividend and capital gains
distributions will be reinvested automatically by , as agent for
shareholders in administering the Plan (the "Plan Agent"), in additional
shares of Common Stock of the Fund. Shareholders who elect not to participate
in the Plan will receive all distributions in cash paid by check mailed
directly to the shareholder of record (or, if the shares are held in street or
other nominee name, then to such nominee) by , as dividend paying agent.
Such participants may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to , as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently declared
dividend or distribution.
Whenever the Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in the Plan will receive cash, and participants in
the Plan will receive the equivalent in shares of Common Stock. The shares
will be acquired by the Plan Agent for the participant's account, depending
upon the circumstances described below, either (i) through receipt of
additional unissued but authorized shares of Common Stock from the Fund
("newly issued shares") or (ii) by purchase of outstanding shares of Common
Stock on the open market ("open-market purchases") on the New York Stock
Exchange or elsewhere. If on the payment date for the dividend, the net asset
value per share of the Common Stock is equal to or less than the market price
per share of the Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be credited
to the participant's account will be determined by dividing the dollar amount
of the dividend by the net asset value per share on the date the shares are
issued, provided that the maximum discount from the then current market price
per share on the date of issuance may not exceed 5%. If on the dividend
payment date the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Plan Agent
will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, participants in the
Plan will receive any dividends in newly issued shares. In addition, if the
Fund is converted to an open-end fund, its shares will no longer be listed on
any stock exchange and participants in the Plan will receive any dividends in
newly issued shares at their net asset value.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. If, before the Plan Agent
has completed its open-market purchases, the market price of a share of Common
Stock exceeds the net asset value per share, the average per share purchase
price paid by the Plan Agent may exceed the net asset value of the Fund's
shares, resulting in the acquisition of fewer shares than if the dividend had
been paid in newly issued shares on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan provides
that if the Plan Agent is unable to invest the full dividend amount in open-
market purchases during the purchase period or if the market discount shifts
to a market premium during the purchase period, the Plan
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<PAGE>
Agent will cease making open-market purchases and will invest the uninvested
portion of the dividend amount in newly issued shares at the close of business
on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent on behalf of the Plan participant,
and each shareholder's proxy will include those shares purchased or received
pursuant to the Plan. The Plan Agent will forward all proxy solicitation
materials to participants and vote proxies for shares held pursuant to the Plan
in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by
the record shareholders as representing the total amount registered in the
record shareholder's name and held for the account of beneficial owners who are
to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable either
in shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at .
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of the Fund in this offering will have an investment
option consisting of the right to reinvest the net proceeds from a sale of such
shares (the "Original Shares") in Class A initial sales charge shares of
certain Merrill Lynch- sponsored open-end mutual funds ("Eligible Class A
Shares") at their net asset value, without the imposition of the initial sales
charge, if the conditions set forth below are satisfied. First, the sale of the
Original Shares must be made through Merrill Lynch, and the net proceeds
therefrom must be reinvested immediately in Eligible Class A Shares. Second,
the Original Shares must either have been
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<PAGE>
acquired in this offering or be shares representing reinvested dividends from
shares acquired in this offering. Third, the Original Shares must have been
maintained continuously in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Class A shares of certain of the mutual funds may be subject to an account
maintenance fee at an annual rate of up to 0.25% of the average daily net asset
value of such mutual fund. The Eligible Class A Shares may be redeemed at any
time at the next determined net asset value, subject in certain cases to a
redemption fee. Prior to the time the shares commence trading on the New York
Stock Exchange, the distributor for the mutual funds will advise Merrill Lynch
financial consultants as to those mutual funds which offer the investment
option described above.
NET ASSET VALUE
Net asset value per share is determined at 4:15 P.M., New York time, on the
last business day in each week. For purposes of determining the net asset value
of a share of Common Stock, the value of the securities held by the Fund plus
any cash or other assets (including interest accrued but not yet received)
minus all liabilities (including accrued expenses) and the aggregate
liquidation value of any outstanding shares of preferred stock is divided by
the total number of shares of Common Stock outstanding at such time. Expenses,
including the fees payable to the Investment Adviser, are accrued daily.
The Fund determines and makes available for publication the net asset value
of its shares weekly. Currently, the net asset values of shares of publicly
traded, closed-end investment companies are published in Barron's and in the
Monday editions of The Wall Street Journal and The New York Times.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid
prices obtained from one or more dealers in the over-the-counter market prior
to the time of valuation. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Other investments, including futures
contracts and related options, are stated at market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund.
Certain portfolio securities (other than short-term obligations but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. Rights or warrants to acquire stock, or
stock acquired pursuant to the exercise of a right or warrant, may be valued
taking into account various factors such as original cost to the Fund, earnings
and net worth of the issuer, market prices for securities of similar issuers,
assessment of the issuer's future prosperity, liquidation value or third party
transactions involving the issuer's securities. Securities for which there
exist no price quotations or valuations and all other assets are valued at fair
value as determined in good faith by or on behalf of the Board of Directors of
the Fund.
DESCRIPTION OF SHARES
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares initially are classified as Common
Stock. The Board of Directors is authorized, however, to classify and
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other
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<PAGE>
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption. The Fund may reclassify an
amount of unissued capital stock into one or more additional or other classes
or series in accordance with limitations set forth in the Investment Company
Act.
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
As of , 1994, there were shares issued and outstanding, all of which
were owned by the Investment Adviser.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation require the Board of Directors to submit
a proposal to convert the Fund to an open-end investment company to
shareholders during the first quarter of 1996, unless the Board of Directors
determines that conversion at that time would not be in the best interest of
shareholders. See "The 1996 Vote to Convert to Open-End Status."
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. A Director may be removed from
office with or without cause but only by vote of the holders of at least 66
2/3% of the shares entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 66 2/3% of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with any other corporation,
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the by-laws of the Fund, in which case the affirmative vote of
a majority of the Fund's shares of capital stock is required.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be determined to be in the best interest of the shareholders of
the Fund by the Board of Directors prior to its submission to shareholders.
Such an amendment would require the favorable vote of the holders of at least a
majority of the Fund's outstanding shares (including any preferred stock)
entitled to be voted on the matter, voting as a single class (or a majority of
such shares if the amendment previously was approved, adopted or authorized by
at least two-thirds of the total number of Directors fixed in accordance with
the Fund's by-laws). Such a vote also
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<PAGE>
would satisfy a separate requirement in the Investment Company Act that the
change be approved by the shareholders. Shareholders of an open-end investment
company may require the company to redeem their shares of common stock at any
time (except in certain circumstances as authorized by or under the Investment
Company Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of a redemption. All redemptions will be made in
cash. If the Fund is converted to an open-end investment company, it could be
required to liquidate portfolio securities to meet requests for redemption and
the shares no longer would be listed on a stock exchange. Conversion to an
open-end investment company also would require changes in certain of the Fund's
investment policies and restrictions, such as those relating to the borrowing
of money and the purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the Investment Company Act, are in the best interests of shareholders
generally. Reference should be made to the Articles of Incorporation on file
with the Securities and Exchange Commission for the full text of these
provisions.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Wall Street, Boston, Massachusetts 02109,
will act as the custodian for the Fund's assets and will employ foreign sub-
custodians approved by the Fund's Board of Directors in accordance with
regulations of the Securities and Exchange Commission.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase shares of Common Stock from the
Fund. Merrill Lynch is committed to purchase all of such shares if any are
purchased.
Merrill Lynch has advised the Fund that it proposes initially to offer the
shares to the public at the public offering price set forth on the cover page
of this Prospectus, except that the price will be reduced to $14.85 per share
for purchases in single transactions of between 6,668 and 16,835 shares and to
$14.70 for purchases in single transactions of 16,836 or more shares. Merrill
Lynch also has advised the Fund that it may offer shares to certain dealers at
the initial offering price set forth in the preceding sentence less a
concession not in excess of $ per share ($ per share for
purchases in single transactions of between and shares and
$ for purchases in single transactions of or more shares).
Merrill Lynch may allow, and such dealers may reallow, a discount on sales to
certain other dealers not in excess of $ per share. After the initial
public offering, the public offering price, concession and discount may be
changed. Investors must pay for any shares of Common Stock purchased in the
initial public offering on or before , 1994. The maximum sales load of
$ per share is equal to %, the sales load of $ per share is
equal to % and the sales load of $ per share is equal to % of the
respective initial public offering prices.
The Fund has granted Merrill Lynch an option, exercisable for 45 days after
the date hereof, to purchase up to additional shares of Common Stock
to cover over-allotments, if any, at the initial offering price less the sales
load. If all such shares are purchased, the total maximum price to public,
maximum sales load and proceeds to the Fund will be $ , $ and $ ,
respectively.
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Prior to this offering, there has been no public market for the shares of the
Fund. The Fund's shares have been approved for listing on the New York Stock
Exchange under the symbol "TGF", subject to official notice of issuance.
However, during an initial period which is not expected to exceed four weeks
from the date of this Prospectus, the Fund's shares will not be listed on any
securities exchange. Additionally, during such period, Merrill Lynch does not
intend to make a market in the Fund's shares, although a limited market may
develop. Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period. In order to meet the requirements for listing,
Merrill Lynch has undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial owners.
The Fund anticipates that Merrill Lynch from time to time may act as a broker
in connection with the execution of the Fund's portfolio transactions.
Merrill Lynch is an affiliate of the Investment Adviser of the Fund. Merrill
Lynch's principal business address is Merrill Lynch World Headquarters, World
Financial Center, North Tower, New York, New York 10281-1305.
The Fund and the Investment Adviser have agreed to indemnify Merrill Lynch
against certain liabilities including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares of
the Fund is State Street Bank and Trust Company, Two Heritage Drive, Quincy,
Massachusetts 02171.
LEGAL OPINIONS
Certain legal matters in connection with the shares offered hereby will be
passed upon for the Fund and Merrill Lynch by Brown & Wood, New York, New York.
Brown & Wood will rely as to matters of Maryland law on the opinion of
Ginsburg, Feldman and Bress, Chartered, Washington, D.C.
EXPERTS
The statement of assets, liabilities and capital of the Fund included in this
Prospectus has been so included in reliance on the report of ,
independent auditors, and on their authority as experts in auditing and
accounting.
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder of
EMERGING TIGERS FUND, INC.
We have audited the accompanying statement of assets, liabilities and capital
of Emerging Tigers Fund, Inc. as of , 1994. This financial statement is
the responsibility of the Fund's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of Emerging Tigers
Fund, Inc. as of , 1994, in conformity with generally accepted
accounting principles.
, 1994
60
<PAGE>
EMERGING TIGERS FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 1994
<TABLE>
<S> <C>
ASSETS
</TABLE>
<TABLE>
<S> <C>
Cash.................................................................... $
Deferred organization and offering
costs (Note 1).........................................................
---
</TABLE>
<TABLE>
<S> <C>
Total Assets..........................................................
</TABLE>
<TABLE>
<S> <C>
LIABILITIES
</TABLE>
<TABLE>
<S> <C>
Deferred organization and offering
costs payable (Note 1) ................................................
-----
NET ASSETS................................................................ $
=====
</TABLE>
CAPITAL
<TABLE>
<S> <C>
Common Stock, par value $.10 per share;
200,000,000 shares authorized; 7,055
shares issued and outstanding (Note 1)................................ $
</TABLE>
<TABLE>
<S> <C>
Paid-in Capital in excess of par.......................................
-----
Total Capital-Equivalent of $
net asset value per share of
Common Stock (Note 1)............................................... $
=====
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on December
, 1993, as a closed-end, non-diversified management investment company and
has had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of shares for $ on ,
1994.
Deferred organization costs will be amortized on a straight-line basis over a
five-year period beginning with the commencement of operations of the Fund.
Direct costs relating to the public offering of the Fund's shares will be
charged to capital at the time of issuance.
61
<PAGE>
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee at the annual rate of 1.00% of the Fund's average weekly net assets
plus the proceeds of any outstanding borrowings used for leverage.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
62
<PAGE>
APPENDIX A
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF CORPORATE BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S"):
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and generally are referred to as
"gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as with Aaa securities
or fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than with Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
A-1
<PAGE>
The modifier 1 indicates that the bond ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its rating category.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
aaaAn issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and assets protection are,
nevertheless, expected to be maintained at adequate levels.
baaAn issue which is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of
time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caaAn issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
A-2
<PAGE>
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S CORPORATION ("S&P"):
<TABLE>
<S> <C>
AAA Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay interest
and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the higher-rated issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for bonds in this
category than in higher-rated categories.
BB, B, CCC, CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree of speculation. While such bonds
likely will have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
C The C rating is reserved for income bonds on which no interest is being paid.
D Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of bond as a matter of policy.
</TABLE>
Plus (+) or Minus (-): The ratings from AA to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
II. Nature of, and provisions of, the issue;
A-3
<PAGE>
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated
"AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for a preferred stock in this category than for
issues in "A" Category.
BB,B, CCC
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase, sell or
hold a security inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard & Poor's
earnings and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
A-4
<PAGE>
APPENDIX B
OPTIONS AND FUTURES TRANSACTIONS
Reference is made to the discussion under the caption "Other Investment
Policies and Practices--Portfolio Strategies Involving Options and Futures"
above for information with respect to various portfolio strategies involving
such portfolio strategies.
WRITING COVERED OPTIONS
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund writes only covered put options which means that so long as the Fund
is obligated as the writer of the option it will, through its custodian, have
deposited and maintained cash, cash equivalents, U.S. government securities or
other high grade liquid debt with the Fund's custodian with a value equal to or
greater than the exercise price of the underlying securities. By writing a put,
the Fund will be obligated to purchase the underlying security at a price that
may be higher than the market value of that security at the time of exercise
for as long as the option is outstanding. The Fund may engage in closing
transactions in order to terminate put options that it has written.
OPTIONS MARKETS
The options in which the Fund invests may be options issued by The Options
Clearing Corporation (the "Clearing Corporation") which are currently traded on
the Chicago Board Options Exchange, American Stock Exchange, Philadelphia Stock
Exchange, Pacific Stock Exchange, New York Stock Exchange or Midwest Stock
Exchange. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. If a secondary
market does not exist, it might not be possible to effect closing transactions
in particular options, with the result, in the case of a covered call option,
that the Fund will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market on an exchange include the following: (i)
there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or the
Clearing Corporations may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by the Clearing Corporation as a result of trade on that exchange would
continue to be exercisable in accordance with their terms.
The Fund may also enter into OTC options, which are two-party contracts with
price and terms negotiated between the buyer and seller. The staff of the
Commission has taken the position that OTC options and the assets used as cover
for written OTC options are illiquid securities. However, if the OTC option is
B-1
<PAGE>
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 as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money." This Policy 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.
FINANCIAL FUTURES AND OPTIONS THEREON
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin," are required to be made on a daily
basis as the price of the futures contracts fluctuates making the long and
short positions in the futures contracts more or less valuable, a process known
as "mark to the market." At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Fund has received an order from the Commission exempting it from the
provisions of Section 17(f) of the Investment Company Act in connection with
its strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
In the case of a futures position or an option on a futures position written
by the Fund, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the securities underlying futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to hedge effectively its portfolio.
The exchanges on which the Fund intends to conduct its options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security (whether or not covered) which may
be written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
B-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE
SUCH OFFER WOULD BE UNLAWFUL.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Fee Table.................................................................. 13
The Fund................................................................... 14
The 1996 Vote to Convert to Open-End Status................................ 14
Use of Proceeds............................................................ 15
Investment Objective and Policies.......................................... 15
Other Investment Policies and Practices.................................... 20
Investment Restrictions.................................................... 26
Risk Factors and Special Considerations.................................... 28
Selected Economic and Market Data.......................................... 36
Directors and Officers..................................................... 46
Investment Advisory and Management Arrangements............................ 47
Portfolio Transactions..................................................... 49
Dividends and Distributions................................................ 50
Taxes...................................................................... 50
Automatic Dividend Reinvestment Plan....................................... 54
Mutual Fund Investment Option.............................................. 55
Net Asset Value............................................................ 56
Description of Shares...................................................... 56
Custodian.................................................................. 58
Underwriting............................................................... 58
Transfer Agent, Dividend Disbursing Agent
and Registrar............................................................. 59
Legal Opinions............................................................. 59
Experts.................................................................... 59
Independent Auditors' Report............................................... 60
Statement of Assets, Liabilities and Capital............................... 61
Appendix A................................................................. A-1
Appendix B................................................................. B-1
</TABLE>
-----------------
UNTIL , 1994 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGA- TION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CODE #17032
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,500,000 SHARES
EMERGING TIGERS FUND, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MERRILL LYNCH & CO.
, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24.FINANCIAL STATEMENTS AND EXHIBITS.
(1)Financial Statements
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of , 1994
(2)Exhibits:
(a)Articles of Incorporation**
(b)Form of By-Laws**
(c)Not applicable
(d)(1)Specimen certificate for Common Stock*
(d)(2)Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant.***
(e)Form of Dividend Reinvestment Plan**
(f)Not applicable
(g)Form of Investment Advisory Agreement between the Fund and Fund
Asset Management, L.P.**
(h)(1)Form of Purchase Agreement
(2)Merrill Lynch Standard Dealer Agreement**
(i)Not applicable
(j)Custodian Contract between the Fund and Brown Brothers Harriman &
Co.*
(k)Registrar, Transfer Agency and Service Agreement between the Fund
and State Street Bank and Trust Company*
(l)Opinion and Consent of Brown & Wood, counsel to the Fund*
(m)Not applicable
(n)Consent of Deloitte & Touche, independent auditors for the Fund*
(o)Not applicable
(p)Certificate of Fund Asset Management, L.P.*
(q)Not applicable
- --------
* To be filed by amendment.
** Previously filed.
*** Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article IX, Article X, Article XI, Article XII
and Article XIII of the Registrant's Articles of Incorporation, filed as
Exhibit (a) to the Registration Statement; and to Article II, Article III
(sections 1, 3, 5 and 17), Article VI, Article VII, Article XIII and Article
XIV of the Registrant's By-Laws, filed as Exhibit (b) to the Registration
Statement.
C-1
<PAGE>
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration Fees................................................... $ *
Stock Exchange listing fee.......................................... *
Printing (other than stock certificates)............................ *
Engraving and printing stock certificates........................... *
Fees and expenses of qualifications under state securities laws (in-
cluding fees of counsel)........................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
NASD fees........................................................... *
Miscellaneous....................................................... *
----
Total............................................................. $ *
====
</TABLE>
- --------
* To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the caption "Investment Advisory and
Management Arrangements" and in Note l to the Statement of Assets, Liabilities
and Capital is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Fund's Articles of Incorporation, Article VI of the Fund's
By-Laws and the Investment Advisory Agreement to be filed as Exhibit (g)
provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be provided to directors, officers and controlling persons of the
Fund, pursuant to the foregoing provisions or otherwise, the Fund has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Fund of expenses incurred or
paid by a director, officer or controlling person of the Fund in connection
with any successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
C-2
<PAGE>
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h) (l) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P., (the "Investment Adviser") acts as investment
adviser for the following registered investment companies: Apex Municipal Fund,
Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Institutional
Tax-Exempt Fund, Merrill Lynch Multi-State Municipal Series Trust, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets
Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation
Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio
II, Inc., Taurus MuniCalifornia Holdings, Inc. and Taurus MuniNewYork Holdings,
Inc. The address of each of these investment companies is Box 9011, Princeton,
New Jersey 08543-9011, except that the address of Merrill Lynch Funds for
Institutional Series and Merrill Lynch Institutional Tax-Exempt Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Investment Adviser and its affiliate, Merrill Lynch Asset Management, L.P.
("MLAM"), also, is Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower, World Financial Center,
250 Vesey Street, New York, New York 10281-1213.
Set forth below is a list of each officer and director of the Investment
Adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged during the
previous two years for his own account or in the capacity of director, officer,
employee, partner or trustee. In addition, Mr. Zeikel is President and
Director, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
all or substantially all of the investment companies described in the preceding
paragraph and also hold the same positions with all or substantially all of the
investment companies advised by MLAM as they do with those advised by the
Investment Adviser. Messrs. Durnin, Giordano, Harvey, Hewitt and Monagle are
directors or officers of one or more of such companies.
C-3
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION(S) WITH THE BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- -------------------- ----------------------
<C> <C> <S>
Arthur Zeikel...... President and Director President and Director
of MLAM; Director of
Merrill Lynch Funds
Distributor, Inc.
("MLFD"); Executive Vice
President of ML & Co.;
Executive Vice President
of Merrill Lynch
Terry K. Glenn..... Executive Vice President and Executive Vice President
Director of MLAM; President and
Director of MLFD;
President of Princeton
Administrators, Inc.
Bernard J. Durnin.. Senior Vice President Senior Vice President of
MLAM
Vincent R. Gior- Senior Vice President Senior Vice President of
dano.............. MLAM
Elizabeth Griffin.. Senior Vice President Senior Vice President of
MLAM
Norman R. Harvey... Senior Vice President Senior Vice President of
MLAM
N. John Hewitt..... Senior Vice President Senior Vice President of
MLAM
Philip L. Kirstein. Senior Vice President, General Senior Vice President,
Counsel and Secretary General Counsel,
Director and Secretary
of MLAM; Director of
MLFD
Ronald M. Kloss.... Senior Vice President and Controller Senior Vice President
and Controller of MLAM
Joseph T. Monagle.. Senior Vice President Senior Vice President of
MLAM
Gerald M. Richard.. Senior Vice President and Treasurer Senior Vice President
and Treasurer of MLAM;
Vice President and
Treasurer of MLFD
Richard L. Rufener. Senior Vice President Senior Vice President of
MLAM; Vice President of
MLFD
Ronald L. Welburn.. Senior Vice President Senior Vice President of
MLAM
Anthony Wiseman.... Senior Vice President Senior Vice President of
MLAM
</TABLE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained at the offices of the Registrant (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), its investment adviser (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and its custodian (40 Wall Street, Boston,
Massachusetts 02109) and transfer agent (Two Heritage Drive, Quincy,
Massachusetts 02171 ).
C-4
<PAGE>
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend offering of the shares of Common Stock
covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10 percent from its net
asset value per share of Common Stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of Common Stock
increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(b) Registrant undertakes that:
(1) For the purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 497(h) under
the Securities Act shall be deemed to be part of the registration statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF PLAINSBORO AND STATE OF NEW JERSEY, ON THE 26TH DAY OF JANUARY,
1994.
EMERGING TIGERS FUND, INC.
(REGISTRANT)
Philip L. Kirstein*
By: _______________________________
(PHILIP L. KIRSTEIN,
PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATE(S) INDICATED.
SIGNATURES TITLE DATE
Philip L. Kirstein* President (Principal
- ------------------------------------- Executive Officer)
(PHILIP L. KIRSTEIN) and Director
Mark B. Goldfus* Treasurer (Principal
- ------------------------------------- Financial and
(MARK B. GOLDFUS) Accounting Officer)
and Director
/s/ Michael J. Hennewinkel Secretary and January 26,
- ------------------------------------- Director 1994
(MICHAEL J. HENNEWINKEL)
/s/ Michael J. Hennewinkel January 26,
*By:___________________________ 1994
(MICHAEL J. HENNEWINKEL, ATTORNEY-
IN-FACT)
C-6
<PAGE>
EXHIBIT INDEX
EXHIBIT NO.
99(h)(1)--Form of Purchase Agreement
<PAGE>
EXHIBIT 99(h)(i)
___________ Shares
EMERGING TIGERS FUND, INC.
(a Maryland corporation)
Common Stock
(Par Value $0.10 Per Share)
PURCHASE AGREEMENT
------------------
February __, 1994
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1305
Dear Sirs:
Emerging Tigers Fund, Inc., a Maryland corporation (the "Fund"), and Fund
Asset Management, L.P., a Delaware limited partnership (the "Adviser"), each
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the "Underwriter"), with respect to the sale by the Fund and
the purchase by the Underwriter of ___________ shares of common stock, par value
$.10 per share, of the Fund (the "Common Stock") and, with respect to the grant
by the Fund to the Underwriter of the option described in Section 2 hereof to
purchase all or any part of ___________ additional shares of Common Stock to
cover over-allotments. The aforesaid ____________ shares (the "Initial
Shares"), together with all or any part of the ___________ additional shares of
Common Stock subject to the option described in Section 2 hereof (the "Option
Shares"), hereinafter are referred to collectively as the "Shares".
Prior to the purchase and public offering of the Shares by the Underwriter,
the Fund and the Underwriter shall enter into an agreement substantially in the
form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may
take the form of an exchange of any standard form of written telecommunication
between the Fund and the Underwriter and shall specify such
<PAGE>
applicable information as is indicated in Exhibit A hereto. The offering of the
Shares will be governed by this Agreement, as supplemented by the Pricing
Agreement. From and after the date of the execution and delivery of the Pricing
Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and a registration statement on Form N-2 (No. 33-51701) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act, and the rules
and regulations of the Commission under the 1933 Act and the 1940 Act (the
"Rules and Regulations"), and has filed such amendments to such registration
statement on Form N-2, if any, and such amended preliminary prospectuses as may
have been required to the date hereof. The Fund will prepare and file such
additional amendments thereto and such amended prospectuses as hereafter may be
required. Such registration statement (as amended, if applicable) and the
prospectus constituting a part thereof (including in each case the information,
if any, deemed to be a part thereof pursuant to Rule 430A(b) of the Rules and
Regulations), as from time to time amended or supplemented pursuant to the 1933
Act, hereinafter are referred to as the "Registration Statement" and the
"Prospectus", respectively, except that if any revised prospectus shall be
provided to the Underwriter by the Fund for use in connection with the offering
of the Shares which differs from the Prospectus on file at the Commission at the
time the Registration Statement becomes effective (whether such revised
prospectus is required to be filed by the Fund pursuant to Rule 497(c) or Rule
497(h) of the Rules and Regulations), the term "Prospectus" shall refer to each
such revised prospectus from and after the time it first is provided to the
Underwriter for such use.
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after the
Registration Statement becomes effective and the Pricing Agreement has been
executed and delivered.
SECTION 1. Representations and Warranties. (a) The Fund and the Adviser
------------------------------
each severally represents and warrants to the Underwriter as of the date hereof
and as of the date of the Pricing Agreement (such later date hereinafter being
referred to as the "Representation Date") as follows:
(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration
2
<PAGE>
Statement will comply in all material respects with the requirements of the
1933 Act, the 1940 Act and the Rules and Regulations and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. At the time the Registration Statement becomes effective,
at the Representation Date and at Closing Time referred to in Section 2
hereof, the Prospectus (unless the term "Prospectus" refers to a prospectus
which has been provided to the Underwriter by the Fund for use in
connection with the offering of the Shares which differs from the
Prospectus on file with the Commission at the time the Registration
Statement becomes effective, in which case at the time such prospectus
first is provided to the Underwriter for such use) will not contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
--------
however, that the representations and warranties in this subsection shall
-------
not apply to statements in or omissions from the Registration Statement or
the Prospectus made in reliance upon and in conformity with information
furnished to the Fund in writing by the Underwriter expressly for use in
the Registration Statement or in the Prospectus.
(ii) The accountants who certified the statement of assets,
liabilities and capital included in the Registration Statement are
independent public accountants as required by the 1933 Act and the Rules
and Regulations.
(iii) The statement of assets, liabilities and capital included in the
Registration Statement presents fairly the financial position of the Fund
as at the date indicated and said statement has been prepared in conformity
with generally accepted accounting principles.
(iv) Since the respective dates as of which information is given in
the Registration Statement and in the Prospectus, and except as otherwise
stated therein, (A) there has been no material adverse change in the
condition, financial or otherwise, of the Fund, or in the earnings,
business affairs or business prospects of the Fund, whether or not arising
in the ordinary course of business, (B) there have been no transactions
entered into by the Fund which are material to the Fund other than those in
the ordinary course of business and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Fund on any class of
its capital stock.
3
<PAGE>
(v) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland with
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement; the Fund
is duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is required;
and the Fund has no subsidiaries.
(vi) The Fund is registered with the Commission under the 1940 Act as
a closed-end, non-diversified, management investment company, and no order
of suspension or revocation of such registration has been issued or
proceedings therefor initiated or threatened by the Commission.
(vii) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of
Shares"; the Shares have been duly authorized for issuance and sale to the
Underwriter pursuant to this Agreement and, when issued and delivered by
the Fund pursuant to this Agreement against payment of the consideration
set forth in the Pricing Agreement, will be validly issued and fully paid
and nonassessable; the Shares conform in all material respects to all
statements relating thereto contained in the Registration Statement; and
the issuance of the Shares is not subject to preemptive rights.
(viii) The Fund is not in violation of its articles of incorporation, as
amended (the "Charter"), or its by-laws, as amended (the "By-Laws"), or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which it is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement, the Pricing Agreement and the
Investment Advisory Agreement and the Custody Agreement referred to in the
Registration Statement (as used herein, the "Advisory Agreement" and the
"Custody Agreement", respectively) and the consummation of the transactions
contemplated herein and therein have been duly authorized by all necessary
corporate action and will not conflict with or constitute a breach of, or a
default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Fund pursuant to, any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Fund is a party or by which it may be bound
or to which any of the property or assets of the Fund is subject, nor will
such action result in any violation of the provisions of the Charter or the
By-Laws or, to the best knowledge of the Fund
4
<PAGE>
and the Adviser, any law, administrative regulation or administrative or
court decree; and no consent, approval, authorization or order of any court
or governmental authority or agency is required for the consummation by the
Fund of the transactions contemplated by this Agreement, the Pricing
Agreement, the Advisory Agreement and the Custody Agreement, except such as
has been obtained under the 1940 Act or as may be required under the 1933
Act or state securities or Blue Sky laws or foreign securities laws in
connection with the purchase and distribution of the Shares by the
Underwriter.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in
the Prospectus, and the Fund has not received any notice of proceedings
relating to the revocation or modification of any such licenses, permits,
covenants, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Fund or the Adviser, threatened against or affecting, the
Fund, which might result in any material adverse change in the condition,
financial or otherwise, business affairs or business prospects of the Fund,
or which might materially and adversely affect the properties or assets of
the Fund; and there are no material contracts or documents of the Fund
which are required to be filed as exhibits to the Registration Statement by
the 1933 Act, the 1940 Act or the Rules and Regulations which have not been
so filed.
(xi) The Fund owns or possesses, or can acquire on reasonable terms,
adequate trademarks, service marks and trade names necessary to conduct its
business as described in the Registration Statement, and the Fund has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, service marks or trade names which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the conduct of the
business, operations, financial condition or income of the Fund.
(xii) The Fund intends to, and will, direct the investment of the
proceeds of the offering described in the Registration Statement in such a
manner as to comply with the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended, and intends to qualify as a regulated
investment company under said Subchapter M.
5
<PAGE>
(xiii) This Agreement, the Pricing Agreement, the Advisory Agreement and
the Custody Agreement each has been duly authorized, executed and delivered
by the Fund, and each complies with all applicable provisions of the 1940
Act.
(b) The Adviser represents and warrants to the Underwriter as of the date
hereof and as of the Representation Date as follows:
(i) The Adviser has been duly formed and is validly existing as a
limited partnership under the laws of the State of Delaware, with
partnership power and authority to conduct its business as described in the
Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is
not prohibited by the Advisers Act or the 1940 Act, or the rules and
regulations under such acts, from acting under the Advisory Agreement for
the Fund as contemplated by the Prospectus.
(iii) This Agreement has been duly authorized, executed and delivered
by the Adviser; the Advisory Agreement has been duly authorized, executed
and delivered by the Adviser and constitutes a valid and binding obligation
of the Adviser, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization or other laws
relating to or affecting creditors' rights and to general equitable
principles; and neither the execution and delivery of this Agreement or the
Advisory Agreement, nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of any of
the terms and provisions of, or constitute, with or without the giving of
notice or the lapse of time or both, a default under, any agreement or
instrument to which the Adviser is a party or by which it is bound, or any
law, order, rule or regulation applicable to it of any jurisdiction, court,
Federal or state regulatory body, administrative agency or other
governmental body, stock exchange or securities asso-ciation having
jurisdiction over the Adviser or its respective properties or operations.
(iv) The Adviser has the financial resources available to it necessary
for the performance of its services and obligations as contemplated in the
Prospectus.
(v) Any advertisement approved by the Adviser for use in the public
offering of the Shares pursuant to Rule 482 under the Rules and Regulations
(an "Omitting Prospectus") complies with the requirements of such Rule 482.
6
<PAGE>
(c) Any certificate signed by any officer of the Fund or the Adviser and
delivered to the Underwriter shall be deemed a representation and warranty by
the Fund or the Adviser, as the case may be, to the Underwriter, as to the
matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
---------------------------------------------
(a) On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, the Fund agrees to
sell the Initial Shares to the Underwriter, and the Underwriter agrees to
purchase the Initial Shares from the Fund, at the price per share set forth in
the Pricing Agreement.
(i) If the Fund has elected not to rely upon Rule 430A under the
Rules and Regulations, the initial public offering price and the purchase
price per share to be paid by the Underwriter for the Shares have been
determined and set forth in the Pricing Agreement, dated the date hereof,
and an amendment to the Registration Statement and the Prospectus will be
filed before the Registration Statement becomes effective.
(ii) If the Fund has elected to rely upon Rule 430A under the Rules
and Regulations, the purchase price per share to be paid by the Underwriter
for the Shares shall be an amount equal to the applicable initial public
offering price, less an amount per share to be determined by agreement
between the Underwriter and the Fund. The applicable initial public
offering price per share shall be a fixed price based upon the number of
Shares purchased in a single transaction to be determined by agreement
between the Underwriter and the Fund. The initial public offering price
and the purchase price, when so determined, shall be set forth in the
Pricing Agreement. In the event that such prices have not been agreed upon
and the Pricing Agreement has not been executed and delivered by all
parties thereto by the close of business on the fourth business day
following the date of this Agreement, this Agreement shall terminate
forthwith, without liability of any party to any other party, except as
provided in Section 4 hereof, unless otherwise agreed to by the Fund, the
Adviser and the Underwriter.
In addition, on the basis of the representations and warranties herein
contained, and subject to the terms and condi-tions herein set forth, the Fund
hereby grants an option to the Underwriter to purchase all or any part of the
Option Shares at the price per share set forth above. The option hereby granted
will expire 45 days after the date hereof (or, if the Fund has elected to rely
upon Rule 430A under the Rules and Regulations, 45 days after the execution of
the Pricing Agreement) and may be exercised
7
<PAGE>
only for the purpose of covering over-allotments which may be made in connection
with the offering and distribution of the Initial Shares upon notice by the
Underwriter to the Fund setting forth the number of Option Shares as to which
the Underwriter is then exercising the option and the time, date and place of
payment and delivery for such Option Shares. Any such time and date of delivery
(a "Date of Delivery") shall be determined by the Underwriter but shall not be
later than seven full business days after the exercise of said option, nor in
any event prior to Closing Time, as hereinafter defined, unless otherwise agreed
upon by the Underwriter and the Fund.
(b) Payment of the purchase price for, and delivery of certificates for,
the Initial Shares shall be made at the office of Brown & Wood, One World Trade
Center, New York, New York 10048-0557, or at such other place as shall be agreed
upon by the Underwriter and the Fund, at 10:00 A.M. on the fifth business day
(unless postponed in accordance with the provisions of Section 10 hereof)
following the date the Registration Statement becomes effective (or, if the Fund
has elected to rely upon Rule 430A under the Rules and Regulations, the fifth
business day after execution of the Pricing Agreement), or such other time not
later than ten business days after such date as shall be agreed upon by the
Underwriter and the Fund (such time and date of payment and delivery herein
being referred to as "Closing Time"). In addition, in the event that any or all
of the Option Shares are purchased by the Underwriter, payment of the purchase
price for, and delivery of certificates for, such Option Shares shall be made at
the above-mentioned office of Brown & Wood, or at such other place as shall be
agreed upon mutually by the Fund and the Underwriter, on each Date of Delivery
as specified in the notice from the Underwriter to the Fund. Payment shall be
made to the Fund by certified or bank check or checks in New York Clearinghouse
or similar next-day funds payable to the order of the Fund, against delivery to
the Underwriter of certificates for the Shares to be purchased by it.
Certificates for the Initial Shares and Option Shares shall be in such
denominations and registered in such names as the Underwriter may request in
writing at least two business days before Closing Time or the Date of Delivery,
as the case may be. The certificates for the Initial Shares and the Option
Shares will be made available by the Fund for examination and packaging by the
Underwriter not later than 10:00 A.M. on the last business day prior to Closing
Time or the Date of Delivery, as the case may be.
8
<PAGE>
SECTION 3. Covenants of the Fund. The Fund covenants with the Underwriter
---------------------
as follows:
(a) The Fund will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and will advise the
Underwriter promptly as to the time at which the Registration Statement and
any amendments thereto (including any post-effective amendments) becomes so
effective and (ii) if required, to cause the issuance of any orders
exempting the Fund from any provisions of the 1940 Act, and the Fund will
advise the Underwriter promptly as to the time at which any such orders are
granted.
(b) The Fund will notify the Underwriter immediately, and will
confirm the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendments thereto (including any post-effective
amendments), (ii) of the receipt of any comments from the Commission, (iii)
of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (v) of the issuance by
the Commission of an order of suspension or revocation of the notification
on Form N-8A of registration of the Fund as an investment company under the
1940 Act or the initiation of any proceeding for that purpose. The Fund
will make every reasonable effort to prevent the issuance of any stop order
described in subsection (iv) hereunder or any order of suspension or
revocation described in subsection (v) hereunder and, if any such stop
order or order of suspension or revocation is issued, to obtain the lifting
thereof at the earliest possible moment.
(c) The Fund will give the Underwriter notice of its intention to
file any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Fund proposes for use by the
Underwriter in connection with the offering of the Shares, which differs
from the prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether such revised prospectus is required to
be filed pursuant to Rule 497(c) or Rule 497(h) of the Rules and
Regulations), whether pursuant to the 1940 Act, the 1933 Act, or otherwise,
and will furnish the Underwriter with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such amendment
9
<PAGE>
or supplement to which the Underwriter reasonably shall object.
(d) The Fund will deliver to the Underwriter, as soon as practicable,
two signed copies of the notification of registration and registration
statement as originally filed and of each amendment thereto, in each case
with two sets of the exhibits filed therewith, and also will deliver to the
Underwriter a conformed copy of the registration statement as originally
filed and of each amendment thereto (but without exhibits to the
registration statement or any such amendment) for the Underwriter.
(e) The Fund will furnish to the Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the
1933 Act, such number of copies of the Prospectus (as amended or
supplemented) as the Underwriter reasonably may request for the purposes
contemplated by the 1933 Act or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in
the opinion of counsel for the Underwriter, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of
the circumstances existing at the time it is delivered to a purchaser, the
Fund forthwith will amend or supplement the Prospectus by preparing and
furnishing to the Underwriter a reasonable number of copies of an amendment
or amendments of or a supplement or supplements to, the Prospectus (in form
and substance satisfactory to counsel for the Underwriter) so that, as so
amended or supplemented, the Prospectus will not contain an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
existing at the time the Prospectus is delivered to a purchaser, not
misleading.
(g) The Fund will endeavor, in cooperation with the Underwriter, to
qualify the Shares for offering and sale under the applicable securities
laws of such states and other jurisdictions of the United States as the
Underwriter may designate, and will maintain such qualifications in effect
for a period of not less than one year after the date hereof. The Fund
will file such statements and reports as may be required by the laws of
each jurisdiction in which the Shares have been qualified as above
provided.
(h) The Fund will make generally available to its security holders as
soon as practicable, but no later than 60 days after the close of the
period covered thereby, an
10
<PAGE>
earnings statement (in form complying with the provisions of Rule 158 of
the Rules and Regulations) covering a twelve-month period beginning not
later than the first day of the Fund's fiscal quarter next following the
"effective" date (as defined in said Rule 158) of the Registration
Statement.
(i) Between the date of this Agreement and the termination of any
trading restrictions or Closing Time, whichever is later, the Fund will
not, without your prior consent, offer or sell, or enter into any agreement
to sell, any equity or equity-related securities of the Fund other than the
Shares and shares of Common Stock issued in reinvestment of dividends or
distributions.
(j) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance
upon Rule 430A of the Rules and Regulations, then immediately following the
execution of the Pricing Agreement, the Fund will prepare, and file or
transmit for filing with the Commission in accordance with such Rule 430A
and Rule 497(h) of the Rules and Regulations, copies of an amended
Prospectus, or, if required by such Rule 430A, a post-effective amendment
to the Registration Statement (including an amended Prospectus), containing
all information so omitted.
(k) The Fund will use its best efforts to effect the listing of the
Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than four weeks from the date of the Prospectus.
SECTION 4. Payment of Expenses. The Fund will pay all expenses incident
-------------------
to the performance of its obligations under this Agreement, including, but not
limited to, expenses relating to
(i) the printing and filing of the registration statement as originally filed
and of each amendment thereto, (ii) the printing of this Agreement and the
Pricing Agreement, (iii) the preparation, issuance and delivery of the
certificates for the Shares to the Underwriter, (iv) the fees and disbursements
of the Fund's counsel and accountants, (v) the qualification of the Shares under
securities laws in accordance with the provisions of Section 3(g) hereof,
including filing fees and any reasonable fees or disbursements of counsel for
the Underwriter in connection therewith and in connection with the preparation
of the Blue Sky Survey, (vi) the printing and delivery to the Underwriter of
copies of the registration statement as originally filed and of each amendment
thereto, of the preliminary prospectus, and of the Prospectus and any amendments
or supplements thereto, (vii) the printing and delivery to the Underwriter of
copies of the Blue Sky Survey, (viii) the fees and expenses incurred with
respect to the
11
<PAGE>
filing with the National Association of Securities Dealers, Inc. and (ix) the
fees and expenses incurred with respect to the listing of the Shares on the New
York Stock Exchange.
If this Agreement is terminated by the Underwriter in accordance with the
provisions of Section 5 or Section 9(a)(i) hereof, the Fund or the Adviser shall
reimburse the Underwriter for all of its reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the Underwriter.
In the event the transactions contemplated hereunder are not consummated, the
Adviser agrees to pay all of the costs and expenses set forth in the first
paragraph of this Section 4 which the Fund would have paid if such transactions
had been consummated.
SECTION 5. Conditions of Underwriter's Obligations. The obligations of
---------------------------------------
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser herein contained, to the performance by
the Fund and the Adviser of their respective obligations hereunder, and to the
following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., New York City time, on the date of this Agreement, or at a
later time and date not later, however, than 5:30 P.M. on the first
business day following the date hereof, or at such later time and date as
may be approved by the Underwriter, and at Closing Time no stop order
suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened
by the Commission. If the Fund has elected to rely upon Rule 430A of the
Rules and Regulations, the price of the Shares and any price-related
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission
for filing pursuant to Rule 497(h) of the Rules and Regulations within the
prescribed time period, and prior to Closing Time the Fund shall have
provided evidence satisfactory to the Underwriter of such timely filing, or
a post-effective amendment providing such information shall have been filed
promptly and declared effective in accordance with the requirements of Rule
430A of the Rules and Regulations.
(b) At Closing Time, the Underwriter shall have received:
(1) The favorable opinion, dated as of Closing Time, of Brown &
Wood, counsel for the Fund and the Underwriter, to the effect that:
12
<PAGE>
(i) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland.
(ii) The Fund has corporate power and authority to own,
lease and operate its properties and conduct its business as
described in the Registration Statement and in the Prospectus.
(iii) The Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which such qualification is required.
(iv) The Shares have been duly authorized for issuance and
sale to the Underwriter pursuant to this Agreement and, when
issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in the Pricing
Agreement, will be validly issued and fully paid and
nonassessable; the issuance of the Shares is not subject to
preemptive or other similar rights; and the authorized capital
stock conforms as to legal matters in all material respects to
the description thereof in the Registration Statement under the
caption "Description of Shares".
(v) This Agreement and the Pricing Agreement each has been
duly authorized, executed and delivered by the Fund and each
complies with all applicable provisions of the 1940 Act.
(vi) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop
order suspending the effectiveness of the Registration Statement
has been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission.
(vii) At the time the Registration Statement became effective
and at the Representation Date, the Registration Statement (other
than the financial statements included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the 1940 Act
and the Rules and Regulations.
(viii) To the best of their knowledge and information, there
are no legal or governmental
13
<PAGE>
proceedings pending or threatened against the Fund which are
required to be disclosed in the Registration Statement, other
than those disclosed therein.
(ix) To the best of their knowledge and information, there
are no contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments of the Fund required to be described
or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to
therein or filed as exhibits thereto, the descriptions thereof
are correct in all material respects, references thereto are
correct, and no default exists in the due performance or
observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument so described, referred
to or filed.
(x) No consent, approval, authorization or order of any
court or governmental authority or agency is required in
connection with the sale of the Shares to the Underwriter, except
such as has been obtained under the 1933 Act, the 1940 Act or the
Rules and Regulations or such as may be required under state or
foreign securities laws; and to the best of their knowledge and
information, the execution and delivery of this Agreement, the
Pricing Agreement, the Advisory Agreement and the Custody
Agreement and the consummation of the transactions contemplated
herein and therein will not conflict with or constitute a breach
of, or a default under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of
the Fund pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Fund is a
party or by which it may be bound or to which any of the property
or assets of the Fund is subject, nor will such action result in
any violation of the provisions of the Charter or the By-Laws of
the Fund, or any law or administrative regulation, or, to the
best of their knowledge and information, any administrative or
court decree.
(xi) The Advisory Agreement and the Custody Agreement each
has been duly authorized and approved by the Fund, each complies
as to form in
14
<PAGE>
all material respects with all applicable provisions of the 1940
Act, and each has been duly executed by the Fund.
(xii) The Fund is registered with the Commission under the
1940 Act as a closed-end, diversified, management investment
company, and all required action has been taken by the Fund under
the 1933 Act, the 1940 Act and the Rules and Regulations to make
the public offering and consummate the sale of the Shares
pursuant to this Agreement; the provisions of the Charter and the
By-Laws of the Fund comply as to form in all material respects
with the requirements of the 1940 Act; and, to the best of their
knowledge and information, no order of suspension or revocation
of such registration under the 1940 Act, pursuant to Section 8(e)
of the 1940 Act, has been issued or proceedings therefor
initiated or threatened by the Commission.
(xiii) The information in the Prospectus under the caption
"Taxes", to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by them and is correct in
all material respects.
(2) The favorable opinion, dated as of Closing Time, of Philip
L. Kirstein, Esq., General Counsel of the Adviser, in form and
substance satisfactory to counsel for the Underwriter, to the effect
that:
(i) The Adviser has been duly organized and is validly
existing as a limited partnership under the laws of the State of
Delaware, with partnership power and authority to conduct its
business as described in the Registration Statement and in the
Prospectus.
(ii) The Adviser is duly registered as an investment adviser
under the Advisers Act, and is not prohibited by the Advisers Act
or the 1940 Act, or the rules and regulations under such Acts,
from acting under the Advisory Agreement for the Fund as
contemplated by the Prospectus.
(iii) This Agreement and the Advisory Agreement each has been
duly authorized, executed and delivered by the Adviser, and the
Advisory Agreement constitutes a valid and binding
15
<PAGE>
obligation of the Adviser, enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization or other laws relating to or affecting creditors'
rights and to general equitable principles; and, to the best of
his knowledge and information, neither the execution and delivery
of this Agreement or the Advisory Agreement nor the performance
by the Adviser of its obligations hereunder or thereunder will
conflict with, or will result in a breach of, any of the terms
and provisions of, or constitute, with or without the giving of
notice or the lapse of time or both, a default under, any
agreement or instrument to which the Adviser is a party or by
which the Adviser is bound, or any law, order, rule or regulation
applicable to the Adviser of any jurisdiction, court, Federal or
state regulatory body, administrative agency or other
governmental body, stock exchange or securities association
having jurisdiction over the Adviser or its properties or
operations.
(iv) To the best of his knowledge and information, the
description of the Adviser in the Registration Statement and in
the Prospectus does not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading.
(3) In giving their opinion required by subsection (b)(1) of this
Section 5, Brown & Wood additionally shall state that nothing has come
to their attention that would lead them to believe that the
Registration Statement, at the time it became effective or at the
Representation Date, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus, at the Representation Date (unless the term "Prospectus"
refers to a prospectus which has been provided to the Underwriter by
the Fund for use in connection with the offering of the Shares which
differs from the Prospectus on file at the Commission at the time the
Registration Statement becomes effective, in which case at the time it
first is provided to the Underwriter for such use) or at Closing Time,
included an untrue statement of a material fact or
16
<PAGE>
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. In giving their opinion, Brown & Wood may
rely as to matters involving the laws of the State of Maryland upon
the opinion of Ginsburg, Feldman and Bress, Chartered and Brown &
Wood may rely, as to matters of fact, upon certificates and written
statements of officers and employees of and accountants for the Fund
and the Adviser and of public officials.
(c) At Closing Time, (i) the Registration Statement and the
Prospectus shall contain all statements which are required to be stated
therein in accordance with the 1933 Act, the 1940 Act and the Rules and
Regulations, and in all material respects shall conform to the requirements
of the 1933 Act, the 1940 Act and the Rules and Regulations and neither the
Registration Statement nor the Prospectus shall contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and no
action, suit or proceeding at law or in equity shall be pending or, to the
knowledge of the Fund or the Adviser, threatened against the Fund or the
Adviser which would be required to be set forth in the Prospectus other
than as set forth therein, (ii) there shall not have been, since the date
as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, of the Fund or in its
earnings, business affairs or business prospects, whether or not arising in
the ordinary course of business, from that set forth in the Prospectus,
(iii) the Adviser shall have the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Registration Statement and the Prospectus and (iv) no
proceedings shall be pending or, to the knowledge of the Fund or the
Adviser, threatened against the Fund or the Adviser before or by any
Federal, state or other commission, board or administrative agency wherein
an unfavorable decision, ruling or finding would materially and adversely
affect the business, property, financial condition or income of either the
Fund or the Adviser other than as set forth in the Prospectus; and the
Underwriter shall have received, at Closing Time, a certificate of the
President or the Treasurer of the Fund and of the President or a Vice
President of the Adviser dated as of Closing Time, evidencing compliance
with the appropriate provisions of this subsection (c). As used in this
subsection (c), the term "Prospectus" means the Prospectus in the form
first used to confirm sales of the Shares.
17
<PAGE>
(d) At Closing Time, the Underwriter shall have received certificates,
dated as of Closing Time, (i) of the President or the Treasurer of the Fund
to the effect that the representations and warranties of the Fund contained
in Section 1(a) hereof are true and correct with the same force and effect
as though expressly made at and as of Closing Time and, (ii) of the
President or a Vice President of the Adviser to the effect that the
representations and warranties of the Adviser contained in Sections 1(a)
and (b) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time.
(e) At the time of execution of this Agreement, the Underwriter shall
have received from _______________ a letter, dated such date in form and
substance satisfactory to the Underwriter, to the effect that:
(i) they are independent accountants with respect to the Fund
within the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the statement of assets, liabilities and
capital examined by them and included in the Registration Statement
complies as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1940 Act and the Rules
and Regulations; and
(iii) they have performed specified procedures, not constituting
an audit, including a reading of the latest available interim
financial statements of the Fund, a reading of the minute books of the
Fund, inquiries of officials of the Fund responsible for financial
accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and
procedures nothing came to their attention that caused them to believe
that at the date of the latest available statement of assets,
liabilities and capital read by such accountants, or at a subsequent
specified date not more than five days prior to the date of this
Agreement, there was any change in the capital stock or net assets of
the Fund as compared with amounts shown on the statement of assets,
liabilities and capital included in the Prospectus.
(f) At Closing Time, the Underwriter shall have received from
________________________ a letter, dated as of Closing Time, to the effect
that they reaffirm the statements made in the letter furnished pursuant to
subsection (e) of this
18
<PAGE>
Section 5, except that the "specified date" referred to shall be a date not
more than five days prior to Closing Time.
(g) At Closing Time, all proceedings taken by the Fund and the
Adviser in connection with the organization and registration of the Fund
under the 1940 Act and the issuance and sale of the Shares as herein and
therein contemplated shall be satisfactory in form and substance to the
Underwriter.
(h) In the event the Underwriter exercises its option provided in
Section 2 hereof to purchase all or any portion of the Option Shares, the
representations and warranties of the Fund and the Adviser contained herein
and the statements in any certificate furnished by the Fund and the Adviser
hereunder shall be true and correct as of each Date of Delivery, and the
Underwriter shall have received:
(1) Certificates, dated the Date of Delivery, of the President
or the Treasurer of the Fund and of the President or a Vice President
of the Adviser confirming that the information contained in the
certificate delivered by each of them at Closing Time pursuant to
Section 5(c) or 5(d) hereof, as the case may be, remains true as of
such Date of Delivery.
(2) The favorable opinions of Brown & Wood, counsel for the
Fund, and Philip L. Kirstein, Esq., General Counsel to the Adviser,
each in form and substance satisfactory to the Underwriter, dated such
Date of Delivery, relating to the Option Shares and otherwise to the
same effect as the opinions required by Sections 5(b)(1) and (2)
hereof, respectively.
(3) A letter from _______________________ in form and
substance satisfactory to the Underwriter and dated such Date of
Delivery, substantially the same in scope and substance as the letter
furnished to the Underwriter pursuant to Section 5(e) hereof, except
that the "specified date" in the letter furnished pursuant to this
Section 5(h)(3) shall be a date not more than five days prior to such
Date of Delivery.
If any condition specified in this Section 5 shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Underwriter by notice to the Fund at any time at or prior to Closing Time, and
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof.
19
<PAGE>
SECTION 6. Indemnification. (a) The Fund and the Adviser jointly and
---------------
severally agree to indemnify and hold harmless the Underwriter and each person,
if any, who controls the Underwriter within the meaning of Section 15 of the
1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the information deemed to be part of
the Registration Statement pursuant to Rule 430A of the Rules and
Regulations, if applicable, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever as incurred to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with
the written consent of the indemnifying party; and
(iii) against any and all expense whatsoever (including the fees and
disbursements of counsel chosen by the Underwriter) reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto) or any
20
<PAGE>
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(b) The Underwriter agrees to indemnify and hold harmless the Fund and the
Adviser, their respective directors, officers and partners, each of the Fund's
officers who signed the Registration Statement, and each person, if any, who
controls the Fund or the Adviser within the meaning of Section 15 of the 1933
Act, against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section 6, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Registration Statement (or in any amendment
thereto) or in any preliminary prospectus or in the Prospectus (or in any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Fund by the Underwriter expressly for use in the
Registration Statement (or in any amendment thereto) or in any preliminary
prospectus or in the Prospectus (or in any amendment or supplement thereto).
(c) In addition to the foregoing indemnification, the Adviser also agrees
to indemnify and hold harmless the Underwriter and each person, if any, who
controls the Underwriter within the meaning of Section 15 of the 1933 Act,
against any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section 6, with respect to any
Omitting Prospectus or any advertising materials approved by the Adviser for use
in connection with the public offering of the Shares.
(d) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve it from any liability which it may have
otherwise than on account of this indemnity agreement. An indemnifying party
may participate at its own expense in the defense of any such action. In no
event shall the indemnifying parties be liable for the fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances.
SECTION 7. Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for in
Section 6 hereof for any reason is held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Fund, the Adviser
and the Underwriter shall contribute to the aggregate losses, liabilities,
claims, damages and expenses of the nature contemplated by said
21
<PAGE>
indemnity agreement as incurred by the Fund, the Adviser and the Underwriter, in
such proportion that the Underwriter is responsible for that portion represented
by the percentage that the aggregate underwriting compensation payable pursuant
to Section 2 hereof bears to the aggregate initial public offering price of the
Shares sold under this Agreement and the Fund and the Adviser are responsible
for the balance; provided, however, that no person guilty of fraudulent
-------- -------
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 7, the
Underwriter shall not be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter otherwise has been required to pay in respect of
such losses, liabilities, claims, damages and expenses. For purposes of this
Section 7, each person, if any, who controls the Underwriter within the meaning
of Section 15 of the 1933 Act shall have the same rights to contribution as the
Underwriter, and each director of the Fund and partner or officer of the
Adviser, respectively, each officer of the Fund who signed the Registration
Statement, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act, shall have the same rights to
contribution as the Fund and the Adviser, respectively.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement or in
the Pricing Agreement, or contained in certificates of officers of the Fund or
of the Adviser submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriter or controlling person, or by or on behalf of the Fund or the Adviser
and shall survive delivery of the Shares to the Underwriter.
SECTION 9. Termination of Agreement. (a) The Underwriter, by notice to
------------------------
the Fund, may terminate this Agreement at any time at or prior to Closing Time
(i) if there has been, since the date of this Agreement or since the date as of
which information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund or the Adviser, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or elsewhere or any
outbreak of hostilities or other calamity or crisis or any escalation of
existing hostilities the effect of which is such as to make it, in the
Underwriter's judgment, impracticable to market the Shares or enforce contracts
for the sale of the Shares, or (iii) if trading in the Common Stock
22
<PAGE>
has been suspended by the Commission or if trading generally on either the
American Stock Exchange or the New York Stock Exchange has been suspended, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required, by either of said exchanges or by
order of the Commission or any other governmental authority, or if a banking
moratorium has been declared by Federal or New York authorities. As used in
this subsection (a), the term "Prospectus" means the Prospectus in the form
first used to confirm sales of the Shares.
(b) If this Agreement is terminated pursuant to this Section 9, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof.
SECTION 10. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of written telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Merrill Lynch World Headquarters, North Tower,
World Financial Center, New York, New York 10281-1305, Attention: Richard N.
Doyle, Director; notices to the Fund or to the Adviser shall be directed to each
of them at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attention:
Arthur Zeikel, President.
SECTION 11. Parties. This Agreement and the Pricing Agreement shall inure
-------
to the benefit of and be binding upon the Underwriter, the Fund, the Adviser and
their respective successors. Nothing expressed or mentioned in this Agreement
or in the Pricing Agreement is intended or shall be construed to give any
person, firm or corporation, other than the parties hereto and their respective
successors and the controlling persons and officers and directors referred to in
Sections 6 and 7 hereof and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and the Pricing Agreement and all
conditions and provisions hereof are intended to be for the sole and exclusive
benefit of the parties hereto and thereto and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Shares from the Underwriter shall be deemed to be a successor
merely by reason of such purchase.
23
<PAGE>
SECTION 12. Governing Law and Time. This Agreement and the Pricing
----------------------
Agreement shall be governed by and construed in accordance with the laws of the
State of New York applicable to agreements made and to be performed in said
State. Specified times of day refer to New York City time.
If the foregoing is in accordance with your understanding of our Agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a single binding agreement between the
Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
EMERGING TIGERS FUND, INC.
By: _________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: _________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ________________________
Authorized Officer
24
<PAGE>
EXHIBIT A
_____________ Shares
Emerging Tigers Fund, Inc.
(a Maryland corporation)
Common Stock
(Par Value $.10 Per Share)
PRICING AGREEMENT
-----------------
February __, 1994
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281
Dear Sirs:
Reference is made to the Purchase Agreement, dated , 1994 (the
"Purchase Agreement"), relating to the purchase by Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"), of the above
shares of common stock, par value $.10 per share (the "Initial Shares"), of
Emerging Tigers Fund, Inc. (the "Fund") and relating to the option granted to
the Underwriter to purchase up to an additional _________ shares of common
stock, par value $.10 per share, of the Fund to cover over-allotments in
connection with the sale of the Initial Shares (the "Option Shares"). The
Initial Shares and all or any part of the Option Shares collectively are
referred to herein as the "Shares".
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with the
Underwriter as follows:
1. The applicable initial public offering price per share for the
Shares, determined as provided in said Section 2, shall be as follows:
A-1
<PAGE>
(a) $_____ for purchases in single transactions of less than
_____ Shares;
(b) $_____ for purchases in single transactions of _____ or more
Shares but less than _____ Shares; and
(c) $_____ for purchases in single transactions of _____ or more
Shares.
2. The purchase price per Share for the Shares to be paid by the
Underwriter shall be an amount equal to the applicable initial public
offering price set forth above less (i) $___ per Share for purchases in
single transactions of less than ____ Shares; (ii) $____ per Share for
purchases in single transactions of _____ or more Shares but less than
_____ Shares and (iii) $____ per Share for purchases in single transactions
of _____ or more Shares.
A-2
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund in accordance with its terms.
Very truly yours,
EMERGING TIGERS FUND, INC.
By: _________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ________________________
Authorized Officer
A-3
