<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997
SECURITIES ACT FILE NO. 333-2741
INVESTMENT COMPANY ACT FILE NO. 811-7135
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 1 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 6
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH 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) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH EMERGING TIGERS FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT
FISCAL YEAR WAS FILED ON JANUARY 24, 1997.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT OF MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock
(par value $.10 per
share)............... 9,187,381 $16.45 $329,987* $100
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
*(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during
Registrant's previous fiscal year was 10,894,282 shares of Common Stock.
(3) 1,726,961 of the shares described in (2) above have been used for
reduction pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment
Company Act of 1940 in previous filings during Registrant's current
fiscal year.
(4) 9,167,321 of the shares redeemed during Registrant's previous fiscal year
are being used for the reduction of the registration fee in this
amendment to the Registration Statement.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH EMERGING TIGERS FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-
1A ITEM NO. LOCATION
----------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table
Condensed Financial
Item 3. Information............ Financial Highlights; Performance Data
Item 4. General Description of
Registrant............. Risk Factors and Special
Considerations; Investment Objective
and Policies; Investment Restrictions;
Additional Information
Item 5. Management of the Fund.. Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other
Securities............. Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered.......... Cover Page; Fee Table; Merrill Lynch
Select PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or
Repurchase............. Fee Table; Merrill Lynch Select
PricingSM System; Shareholder
Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal
Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and
History................ Not Applicable
Item 13. Investment Objectives
and Policies........... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities............. Management of the Fund
Item 16. Investment Advisory and
Other Services......... Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices........ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities............. General Information--Description of
Shares
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.......... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status.............. Taxes
Item 21. Underwriters............ Purchase of Shares
Item 22. Calculation of
Performance Data....... Performance Data
Item 23. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
MARCH 25, 1997
MERRILL LYNCH EMERGING TIGERS FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Emerging Tigers Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks 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 also may invest
up to 35% of its total assets in debt securities of companies or governments
in emerging market Asia-Pacific countries. The Fund may employ a variety of
derivative investments and techniques to hedge against market and currency
risk. Also, the Fund may invest in certain derivative instruments, such as
indexed and inverse floaters, to enhance return. For more information on the
Fund's investment objectives and policies, please see "Investment Objective
and Policies" on page 21. There can be no assurance that the Fund's investment
objective will be achieved.
Investments in securities of issuers in emerging market Asia-Pacific
countries involve risks and special considerations 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. These securities are commonly
referred to as "junk bonds." See "Risk Factors and Special Considerations."
(Continued on Next Page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated March 25, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
(Continued from Cover Page)
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM System" on page 8.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], and other securities dealers which have entered into selected
dealers agreements with the Distributor, including Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"). To permit the Fund to invest the
net proceeds from the sale of its shares in an orderly manner, the Fund may,
from time to time, suspend the sale of its shares, except for dividend
reinvestments. The minimum initial purchase is $1,000, and the minimum
subsequent purchase is $50, except that for retirement plans, the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85, but as of May
1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through the Fund's transfer agent are not subject to
the processing fee. See "Purchase of Shares" and "Redemption of Shares."
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price)................................. 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments.......................... None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is None(d) 4.0% during the first year 1.0% for one None(d)
lower)................................. decreasing 1.0% annually year(f)
thereafter to 0.0% after
the fourth year(e)
Exchange Fee............................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PER-
CENTAGE OF AVERAGE NET ASSETS)(E):
Investment Advisory Fees(g)............. 1.00% 1.00% 1.00% 1.00%
Rule 12b-1 Fees(h):
Account Maintenance Fees.............. None 0.25% 0.25% 0.25%
Distribution Fees..................... None 0.75% 0.75% None
(Class B shares convert to Class D
shares automatically after
approximately eight years and cease
being subject to distribution fees)
OTHER EXPENSES:
Custodial Fees........................ .16% .16% .16% .16%
Shareholder Servicing Costs(i)........ .08% .20% .21% .14%
Other................................. .12% .31% .31% .33%
---- ---- ---- ----
Total Other Expenses................ .36% .67% .68% .63%
---- ---- ---- ----
Total Fund Operating Expenses........... 1.36% 2.67% 2.68% 1.88%
==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 36 and "Shareholder
Services--Fee-Based Programs"--page 47.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 38.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of $1,000,000
or more may not be subject to an initial sales charge. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--
page 36.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 47.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 47.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 47.
(g) See "Management of the Fund--Advisory and Management Arrangements"--page
31.
(h) See "Purchase of Shares--Distribution Plans"--page 41.
(i) See "Management of the Fund--Transfer Agency Services"--page 33.
3
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$52.50 initial sales charge (Class A and
Class D shares only) and assuming (1) the
Total Fund Operating Expenses for each class
set forth on page 3, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period (including any
applicable CDSC for Class B and Class C
shares):
Class A..................................... $66 $ 93 $123 $207
Class B..................................... $67 $103 $142 $282*
Class C..................................... $37 $ 83 $142 $301
Class D..................................... $71 $108 $149 $261
An investor would pay the following expenses
on the same $1,000 investment assuming no
redemption at the end of the period:
Class A..................................... $66 $ 93 $123 $207
Class B..................................... $27 $ 83 $142 $282*
Class C..................................... $27 $ 83 $142 $301
Class D..................................... $71 $108 $149 $261
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after purchase
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85, but as of May 1, 1997, $5.35) for confirming purchases and repurchases.
Purchases and redemptions made directly through the Fund's transfer agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information.
THE FUND
The Fund is a non-diversified, open-end management investment company
investing primarily in equity securities of companies in emerging market Asia-
Pacific countries. The Fund was originally organized as a closed-end investment
company and pursuant to a vote of its stockholders converted to open-end status
on June 10, 1996.
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 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 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 also may invest
up to 35% of its total assets in debt securities of companies or governments in
emerging market Asia-Pacific countries. See "Investment Objective and
Policies."
The Fund is authorized to employ a variety of derivative investments and
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. There are certain risks
associated with the use of futures and options to hedge investment portfolios.
See the Appendix to this Prospectus--"Futures, Options and Forward Foreign
Exchange Transactions". Also, the Fund may invest in certain derivative
instruments, such as indexed and inverse securities, to enhance its return.
There can be no assurance, however, that investment in such derivative
instruments will have the effect of enhancing return. See "Investment Objective
and Policies--Description of Certain Investments."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in securities of Asia-Pacific issuers involves risks and special
considerations not typically associated with investment in securities of U.S.
issuers, including the risks associated with international investing generally,
such as currency fluctuations; the risks of investing in countries with smaller
capital markets, such as limited liquidity, price volatility and restrictions
on foreign investment; and the risks associated with emerging economies of
developing countries, including significant political and social
5
<PAGE>
uncertainties, government involvement in the economies, the possibility of
asset expropriation or confiscatory levels of taxation, reliance upon exports
of primary commodities and different legal systems from those in the United
States. See "Risk Factors and Special Considerations."
The Fund has not established any 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 and unrated securities
of comparable quality (commonly referred to as "junk bonds") are speculative
and generally involve greater volatility of price than securities in higher
rating categories. Also, the Fund may invest in debt securities of corporate or
governmental issuers that are in default. See "Risk Factors and Special
Considerations."
INVESTMENT ADVISER
Fund Asset Management, L.P. (the "Investment Adviser" or "FAM"), which is
owned and controlled by Merrill Lynch & Co., Inc. ("ML&Co."), acts as the
investment adviser for the Fund and provides the Fund with investment advisory
and management services. The Investment Adviser, or its affiliate, Merrill
Lynch Asset Management, L.P. ("MLAM"), acts as the investment adviser for more
than 130 registered management investment companies. The Investment Adviser and
MLAM also offer portfolio management and portfolio analysis services to
individuals and institutions. As of February 28, 1997, the Investment Adviser
and MLAM had a total of approximately $248.2 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of the Investment Adviser. See "Management of the Fund--Advisory and
Management Arrangements."
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed (i) in the case of Class A or Class D shares, at the
time of the purchase or (ii) in the case of Class B or Class C shares, on a
deferred basis. Holders of Class D shares pay an ongoing account maintenance
fee, and holders of Class B and Class C shares pay ongoing account maintenance
and distribution fees. See "Purchase of Shares."
Shareholders may redeem their shares at any time at the next determined net
asset value. Class B shares may be subject to a CDSC on shares redeemed within
four years of purchase and Class C shares may be subject to a CDSC on shares
redeemed within one year of purchase. See "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of its net
investment income. Dividends from such net investment income are paid at least
annually. All net realized long-term and short-term capital gains, if any, will
be distributed to the Fund's shareholders at least annually. See "Dividends and
Distributions."
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Investment Adviser once
daily, 15 minutes after the close of business on the New York Stock Exchange
(the "NYSE") (generally, 4:00 p.m., New York time), on each day during which
the NYSE is open for trading. See "Additional Information--Determination of Net
Asset Value."
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the fiscal year ended November 30, 1996, are
included in the Statement of Additional Information. The following per share
data and ratios have been derived from information provided in the Fund's
audited financial statements. Further information about the performance of the
Fund is contained in the Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or by writing the Fund at
the telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A SHARES(/1/) CLASS B CLASS C CLASS D
--------------------------------- ------------ ------------ ------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR PERIOD PERIOD PERIOD PERIOD
ENDED MARCH 4, JUNE 10, JUNE 10, JUNE 10,
NOVEMBER 30, 1994+ TO 1996+ TO 1996+ TO 1996+ TO
------------------ NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1995 1994 1996 1996 1996
-------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 13.40 $ 14.47 $ 14.18 $15.53 $15.53 $15.53
-------- -------- -------- ------ ------ ------
Investment income
(loss)--net........... .05 .03 .12 (.05) (.05) (.01)
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net..... 2.15 (.96) .19 .05 .04 .06
-------- -------- -------- ------ ------ ------
Total from investment
operations............. 2.20 (.93) .31 -- (.01) .05
-------- -------- -------- ------ ------ ------
Less dividends and dis-
tributions:
Investment income--
net................... (.01) (.12) -- -- -- --
Realized gain on
investments--net...... -- (.02) -- -- -- --
-------- -------- -------- ------ ------ ------
Total dividends and dis-
tributions............. (.01) (.14) -- -- -- --
-------- -------- -------- ------ ------ ------
Capital charge resulting
from issuance of Common
Stock.................. -- --++ (.02) -- -- --
-------- -------- -------- ------ ------ ------
Net asset value, end of
period................. $ 15.59 $ 13.40 $ 14.47 $15.53 $15.52 $15.58
======== ======== ======== ====== ====== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 16.43% (6.23)% 2.05%# .00%# (.06)%# .32%#
======== ======== ======== ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.36% 1.32% 1.32%* 2.67%* 2.68%* 1.88%*
======== ======== ======== ====== ====== ======
Investment income
(loss)--net............ .23% .24% 1.12%* (.99)%* (.98)%* (.34)%*
======== ======== ======== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $193,545 $294,830 $318,414 $3,719 $ 887 $ 953
======== ======== ======== ====== ====== ======
Portfolio turnover...... 44.09% 18.84% 9.10% 44.09% 44.09% 44.09%
======== ======== ======== ====== ====== ======
Average commission rate
paid##................. $ .0086 -- -- $.0086 $.0086 $.0086
======== ======== ======== ====== ====== ======
</TABLE>
- --------
(/1/) The Fund converted to an open-end investment company on June 10, 1996.
The above financial information provided for periods prior to June 10,
1996 reflects the Fund's performance as a closed-end investment company
and, therefore, may not be indicative of its performance as an open-end
investment company. Shares of the Fund outstanding on June 10, 1996 have
been classified as Class A shares.
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Amount is less than $0.01 per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average commission rate paid"
includes commissions paid in foreign currencies which have been converted
into U.S. dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
7
<PAGE>
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by the Investment Adviser or by its
affiliate, MLAM. Funds advised by MLAM or FAM that utilize the Merrill Lynch
Select PricingSM System are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will
be calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares.
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select PricingSM System, followed
by a more detailed description of each class and a discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select PricingSM System that the investor believes is
most beneficial under his or her particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
8
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% No No No
initial sales charge(/2/)(/3/)
- --------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years, at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- --------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- --------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A:
Upon the conversion of the Fund to open-end status, the Fund's
outstanding shares were designated Class A shares. No sales charge was
due as a result of the conversion. Class A shares incur an initial sales
charge when they are purchased and bear no ongoing distribution or
account maintenance fees. Class A shares of the Fund are offered to a
limited group of investors and also will be issued upon reinvestment of
dividends on outstanding Class A shares. Investors that currently own
Class A shares of the Fund in a shareholder account are entitled to
purchase additional Class A shares of the Fund in that account. Other
eligible investors include certain retirement plans and participants in
certain fee-based programs. In addition, Class A shares will be offered
at net asset value to ML&Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML&Co., includes MLAM,
FAM and certain other entities directly or indirectly wholly-owned and
controlled by ML&Co.) and to their directors and employees and to
members of the Boards of MLAM-advised mutual funds. The maximum initial
sales charge of 5.25% is reduced for purchases of $25,000 and over, and
waived for purchases by certain retirement plans and participants in
connection with certain fee-based programs. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived, such purchases may be subject to a 1.0% CDSC if
the shares are redeemed within one year after purchase. Such CDSC may be
waived in connection
9
<PAGE>
with certain fee-based programs. Sales charges also are reduced under a
right of accumulation that takes into account the investor's holdings of
all classes of all MLAM-advised mutual funds. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class B shares, and a CDSC if they are redeemed
within four years of purchase. The CDSC may be modified in connection
with certain fee-based programs. Approximately eight years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert to Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares, and the conversion and holding
periods for certain retirement plans, is modified as described under
"Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC of 1.0% if they are redeemed within one year of purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived such purchases may be subject to a 1.0% CDSC if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. The schedule
of initial sales charges and reductions for Class D shares is the same
as the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D
shares also will be issued upon conversion of Class B shares as
described above under "Class B." See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares."
10
<PAGE>
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection
with purchases of Class B and Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time also may elect to purchase Class A or Class D shares,
because over time the accumulated ongoing account maintenance and distribution
fees on Class B or Class C shares may exceed the initial sales charge and, in
the case of Class D shares, the account maintenance fee. Although some
investors that previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other MLAM-advised mutual funds, those
previously purchased Class A shares, together with Class B, Class C and Class
D share holdings, will count toward a right of accumulation which may qualify
the investor for reduced initial sales charges on new initial sales charge
purchases. In addition, the ongoing Class B and Class C account maintenance
and distribution fees will cause Class B and Class C shares to have higher
expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges."
11
<PAGE>
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.
12
<PAGE>
Most of the securities held by the Fund will not be registered with the
Commission, nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign company than about a U.S. company, and such foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those 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 THE SECURITIES MARKETS AND ECONOMIES 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 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 open-end investment 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
13
<PAGE>
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 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.
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-
14
<PAGE>
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 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 of
1940, as amended (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. The Fund also may seek, at its own cost, to create its
own investment entities under the laws of certain emerging market Asia-Pacific
countries.
15
<PAGE>
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act limits the Fund's ability to
invest in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from "securities-related
activities," as defined by the rules thereunder. Since banks may engage in such
activities in many countries, the Fund's ability to invest in such banks may be
limited. The provisions of the Investment Company Act also may restrict the
Fund's investments in certain foreign banks and other financial institutions.
FOREIGN SUB-CUSTODIANS 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 sub-custodians for the Fund, in which event the Fund may be
precluded from purchasing securities in certain foreign countries in which it
otherwise would invest or which may result in the Fund's incurring additional
costs and delays in providing transportation and custody services for such
securities outside of such countries. The Fund may encounter difficulties in
effecting on a timely basis portfolio transactions with respect to any
securities of issuers held outside of their countries. Other banks that are
eligible foreign sub-custodians 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 sub-custodians in the event of the bankruptcy of the
sub-custodian.
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 Ratings Services ("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. These securities are commonly referred to as "junk" bonds. In
purchasing such securities, the Fund will rely on the Investment Adviser's
judgment, 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
16
<PAGE>
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 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,
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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 debts 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. The Fund may invest in debt securities of issuers that
are the subject of bankruptcy proceedings or otherwise in default as to
repayment of principal and/or payment of interest at the time of acquisition by
the Fund ("Distressed Securities"). Investment in Distressed Securities is
speculative and involves significant risk. Generally, the Fund expects to 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 restricted
from disposing of such securities.
DERIVATIVE INVESTMENTS
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments which may be characterized
as derivatives. There can be no assurance, however, that the use of derivative
investments to hedge various portfolio positions or to enhance return will be
effective. These
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investments include various types of options transactions, futures and options
thereon and currency transactions. Such investments also may consist of swap
agreements and indexed securities, including inverse securities. The Fund has
express limitations on the percentage of its assets that may be committed to
certain of such investments. Other of such investments have no express
quantitative limitations, although they may be made solely for hedging
purposes, not for speculation, and may in some cases require limitations as to
the type of permissible counterparty to the transaction. Swap agreements entail
the risk that a counterparty will default on its payment obligations to the
Fund thereunder. 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. Options transactions involve the potential
loss of the opportunity to profit from any price increase in the underlying
security above the option exercise price or the potential loss of the premium
paid for an option. Similarly, utilization of futures and options thereon and
currency transactions involves the risk of imperfect correlation between
movements in the price of the futures, options or currency hedge and movements
in the price of the securities or currency which are the subject of the hedge.
For a further discussion of the risks associated with these investments, see
"Investment Objective and Policies--Description of Certain Investments--Swap
Agreements" on page 24, "--Indexed and Inverse Securities" on page 25, "--Other
Investment Policies and Practices--Portfolio Strategies Involving Futures,
Options and Forward Foreign Exchange Transactions" on page 26 and the Appendix
to this Prospectus, "Futures, Options and Forward Foreign Exchange
Transactions" on page 55.
BORROWING
The Fund may borrow up to 20% of its total assets, taken at market value, but
only from banks as a temporary measure for extraordinary or emergency purposes,
including to meet redemptions (so as not to force the Fund to liquidate
securities at a disadvantageous time) or to settle securities transactions. The
Fund will not purchase securities while borrowings exceed 5% of its total
assets, except (a) to honor prior commitments or (b) to exercise subscription
rights when outstanding borrowings have been obtained exclusively for
settlements of other securities transactions. The purchase of securities while
borrowings are outstanding will have the effect of leveraging the Fund. Such
leveraging increases the Fund's exposure to capital risk, and borrowed funds
are subject to interest costs which will reduce net income.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities that lack an
established secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily of the
security and the price to be obtained upon disposition of the security, which
may be less than a comparable, more liquid security. Investment of the Fund's
assets in illiquid securities may restrict the ability of the Fund to dispose
of its investments in a timely fashion and for a fair price as well as its
ability to take advantage of market opportunities. The risks associated with
illiquidity will be particularly acute in situations in which the Fund's
operations require cash, such as when the Fund redeems shares or pays
dividends, and could result in the Fund borrowing to meet short-term cash
requirements or incurring capital losses on the sale of illiquid investments.
Further, issuers 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
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publicly traded. Illiquid sovereign debt securities and corporate fixed-income
and equity securities may trade at a discount from comparable, more liquid
investments. In making investments in such securities, the Fund may obtain
access to material nonpublic information which may restrict the Fund's ability
to conduct portfolio transactions in such securities. 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 "Investment Objective and Policies--
Description of Certain Investments--Illiquid Securities" on page 24.
WITHHOLDING AND OTHER TAXES
Ordinary income and capital gains on securities held by the Fund may be
subject to withholding and other taxes imposed by Asia-Pacific countries, which
would reduce the return to the Fund on those securities. The Fund intends,
unless ineligible, to elect to "pass through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. The taxes passed through to
shareholders will be included in each shareholder's income and potentially
offset by either a deduction or a credit. Certain shareholders, including non-
U.S. shareholders, will not be entitled to the benefit of a deduction or credit
with respect to foreign taxes paid by the Fund and passed through to
shareholders. Other taxes, such as transfer taxes, may be imposed on the Fund,
but will not give rise to a deduction or credit for shareholders. See
"Additional Information--Taxes."
NON-DIVERSIFICATION
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. 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. The Fund's investments will be limited, however, in order
to qualify for the special tax treatment afforded regulated investment
companies under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Additional Information--Taxes" on page 51 and "Investment Restrictions" on
page 30.
FEES AND EXPENSES
The investment advisory fee (at the annual rate of 1.00% of the Fund's
average daily net assets) and other operating expenses of the Fund may be
higher than the advisory fees and operating expenses of other mutual funds
managed by the Investment Adviser and other investment advisers of investment
companies investing exclusively in the securities of U.S. issuers. The
investment advisory fee and operating expenses, however, are believed by the
Investment Adviser to be comparable to expenses of other open-end management
investment companies that invest primarily in the securities of issuers in
emerging market countries with investment objectives similar to the investment
objective of the Fund.
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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 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 which are rated in the
lower rating categories of the established rating services ("Baa" or lower by
Moody's and "BBB" or lower by 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 Distressed Securities. Generally, the Fund expects to invest in
Distressed Securities 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.
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Investment in shares 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.
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.
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
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to the location of its issuer. Additionally, the Fund may consider a derivative
product tied to securities or issuers located in emerging market Asia-Pacific
countries to be the security of an emerging market Asia-Pacific 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.
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.
Distressed Securities. The Fund may invest in Distressed Securities, which
are securities that are the subject of bankruptcy proceedings or otherwise in
default as to repayment of principal and/or payment of interest at the time of
acquisition. Such investment involves significant risk. Generally, the Fund
expects to 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 restricted 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
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issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
have several unique investment characteristics such as (i) higher yields than
common stocks, but lower yields than comparable nonconvertible securities, (ii)
a lesser degree of fluctuation in value than the underlying stock since they
have fixed income characteristics, and (iii) the potential for capital
appreciation if the market price of the underlying common stock increases. A
convertible security might be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by 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.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. The Fund may invest in securities of issuers in Asia-
Pacific countries that are sold in private placement transactions between the
issuers and their purchasers and that are neither listed on an exchange nor
traded in other established markets. In many cases, privately placed securities
will be subject to contractual or legal restrictions on transfer. As a result
of the absence of a public trading market, privately placed securities in turn
may 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, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers,
which may involve greater risks. These issuers may have limited product lines,
markets or financial resources, or they may be dependent on a limited
management group. In making investments in such securities, the Fund may obtain
access to material nonpublic information which may restrict the Fund's ability
to conduct portfolio transactions in such securities.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under that Act. The Board of Directors has determined to treat as
liquid Rule 144A securities which are freely tradeable in their primary market
offshore. The Board of Directors may adopt guidelines and delegate to the
Investment Adviser the daily function of determining and monitoring liquidity
of restricted securities. The Board of Directors, however, will retain
sufficient oversight and be ultimately responsible for the determinations.
The Board of Directors will carefully monitor the Fund's investments in
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. Investment in
these types of securities could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these securities.
Swap Agreements. The Fund is authorized to enter into equity swap agreements,
which are generally contracts in which one party agrees to make periodic
payments based on the change in market value of a
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specified equity security, basket of equity securities or equity index in
return for periodic payments based on a fixed or variable interest rate or the
change in market value of a different equity security, basket of equity
securities or equity index. For example, swap agreements may be used to invest
in a market without owning or taking physical custody of securities in
circumstances in which direct investment is restricted for legal reasons or is
otherwise impractical. The swap agreement will be structured to provide for
early termination in the event, for example, that the Fund desires to lock in
appreciation.
Swap agreements entail the risk that a party will default on its payment
obligations to the Fund thereunder. The Fund will seek to lessen the risk to
some extent by entering into a transaction only with member banks of the
Federal Reserve System and primary dealers in U.S. Government securities or
with affiliates of such banks or dealers that have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million or any other bank or dealer having capital of at least $150
million or whose obligations are guaranteed by an entity having capital of at
least $150 million. Swap agreements also bear the risk that the Fund will not
be able to meet its obligation to the counterparty. The Fund, however, will
deposit in a segregated account with its custodian cash or cash equivalents or
other liquid securities permitted to be so segregated by the Commission in an
amount equal to or greater than the market value of the liabilities under the
swap agreement or the amount it would have cost the Fund initially to make an
equivalent direct investment, plus or minus any amount the Fund is obligated to
pay or is to receive under the swap agreement. The Fund will enter into a swap
transaction only if, immediately following the time the Fund enters into the
transaction, the aggregate notional principal amount of swap transactions to
which the Fund is a party would not exceed 5% of the Fund's net assets.
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 the value of a
securities index or a basket of securities or a precious or industrial metal.
Interest and principal payable on a security also may 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. Examples 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 generally
will 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.
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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 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 Futures, Options and Forward Foreign Exchange
Transactions. The Fund is authorized to engage in various portfolio strategies
to hedge its portfolio against adverse movements in the equity, debt and
currency markets. These hedging transactions are considered to be investments
in derivatives.
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 also may
engage in forward foreign exchange transactions and enter into foreign currency
futures and options, and related options on such futures. Each of these
portfolio strategies is described in more detail in the Appendix to this
Prospectus. Although certain risks are involved in futures and options
transactions (as discussed in the Appendix to this Prospectus), the Investment
Adviser believes that, because the Fund will engage in such transactions only
for hedging (including anticipatory hedging) purposes, the futures, options and
currency portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of futures, options and
currency transactions. While the Fund's use of hedging strategies is intended
to reduce the volatility of the net asset value of its shares, the net asset
value of Fund shares will fluctuate. Reference is made to the Appendix to this
Prospectus and to the Statement of Additional Information for further
information concerning these strategies.
There can be no assurance that the Fund's hedging transactions will be
effective. Suitable hedging instruments may not be available with respect to
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.
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. Since portfolio transactions
may be effected on foreign securities exchanges, the Fund may incur settlement
delays on certain of such exchanges. See "Risk Factors and Special
Considerations." In executing portfolio transactions, the Investment Adviser
seeks to obtain the best net results for the Fund, taking into account
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such factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the 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 may invest in certain securities
traded in the over-the-counter ("OTC") market and, where possible, will deal
directly with the dealers who make a market in the securities involved except
in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Such
portfolio securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. Securities firms may
receive brokerage commissions on certain portfolio transactions, including
futures, options and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options. The Fund has no obligation
to deal with any broker or group of brokers in the execution of transactions in
portfolio securities. 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.
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Affiliated persons of the Fund, and affiliated
persons of such affiliated persons, may serve as the Fund's broker in
transactions conducted on an exchange and in OTC transactions conducted on an
agency basis and may receive brokerage commissions from the Fund. In addition,
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 Commission. To the extent Merrill Lynch is
active in distributions of securities of issuers in Asia-Pacific countries, the
Fund may be disadvantaged in that it may not purchase securities in such
distributions. In addition, consistent with the Conduct Rules of the NASD, the
Fund may consider sales of shares of the Fund as a factor in the selection of
brokers or dealers to execute portfolio transactions for the Fund. It is
expected that the majority of the shares of the Fund will be sold by Merrill
Lynch. Costs associated with transactions in foreign securities are generally
higher than in the U.S., although the Fund will endeavor to achieve the best
net results in effecting its portfolio transactions.
The Fund anticipates that its brokerage transactions involving securities of
issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
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.
27
<PAGE>
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, in light of a change
in circumstances in general market, economic or financial conditions. As a
result of its investment policies, the Fund may engage in a substantial number
of portfolio transactions. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. A high portfolio turnover rate
involves certain tax consequences and correspondingly greater transaction costs
in the form of dealer spreads and brokerage commissions, which are borne
directly by the Fund.
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it may invest in securities of
a single issuer. The Fund's investments will be limited, however, in order to
qualify for the special tax treatment afforded regulated investment companies
under the 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. Foreign government securities (unlike
U.S. Government securities) are not exempt from the diversification
requirements of the Code and the securities of each foreign government issuer
are considered to be obligations of a single issuer. A fund which elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's net asset value may fluctuate to a greater extent
than that of a diversified investment company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified investment 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 or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of 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 liquid securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Because the issuance of the
security underlying the commitment is at the option of the issuer, the Fund may
bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
28
<PAGE>
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 financial institutions
which (i) have, in the opinion of the Investment Adviser, substantial capital
relative to the Fund's exposure, or (ii) have provided the Fund with a third-
party guaranty or other credit enhancement. Under such agreements, the other
party agrees, upon entering into the contract with the Fund, to repurchase the
security at a mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations 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.
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 102% 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.
29
<PAGE>
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 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
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, that 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). Among its fundamental policies,
the Fund may not invest more than 25% of its total assets, taken at market
value at the time of each investment, in the securities of issuers in any
particular industry (excluding the U.S. Government and its agencies or
instrumentalities). Investment restrictions and policies that are non-
fundamental policies may be changed by the Board of Directors without
shareholder approval. As a non-fundamental policy, the Fund may not borrow
amounts in excess of 20% of its total assets (taken at market value) and then
only from banks as a temporary measure for extraordinary or emergency purposes,
including to meet redemptions or to settle securities transactions. In
addition, the Fund will not purchase securities while borrowings exceed 5% of
its total assets (taken at market value). The purchase of securities while
borrowings are outstanding will have the effect of leveraging the Fund. Such
leveraging or borrowing increases the Fund's exposure to capital risk, and
borrowed funds are subject to interest costs which will reduce net income.
As a non-fundamental policy, the Fund will not invest in securities that
cannot be readily resold because of legal or contractual restrictions or that
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 15% of its
net assets taken at market value would be invested in such securities.
Notwithstanding the foregoing, the Fund may purchase without regard to this
limitation
30
<PAGE>
securities that are not registered under the Securities Act, but that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act, provided that the Fund's Board of Directors continuously
determines, based on the trading markets for the specific Rule 144A security,
that it is liquid. The Board of Directors may adopt guidelines and delegate to
the Investment Adviser the daily function of determining and monitoring
liquidity of restricted securities. The Board has determined that securities
which are freely tradeable in their primary market offshore should be deemed
liquid. The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President of the Investment Adviser and its affiliate, MLAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML&Co.; and Director of the Distributor.
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive Officer
of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser acts as the Fund's investment adviser and provides the
Fund with management and investment advisory services. The Investment Adviser
is a limited partnership of which ML&Co. is the sole limited partner and
Princeton Services is the sole general partner. ML&Co. is a financial services
holding company and the parent of Merrill Lynch. ML&Co. and Princeton Services
are "controlling persons" of the Investment Adviser as defined under the
Investment Company Act because of their ownership of its voting
31
<PAGE>
securities or their power to exercise a controlling influence over its
management or policies. The Investment Adviser or MLAM acts as the investment
adviser for more than 130 registered investment companies and offers portfolio
management and portfolio analysis services to individuals and institutions. As
of February 28, 1997 the Investment Adviser and MLAM had a total of
approximately $248.2 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Investment
Adviser.
The Fund has entered into an investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"). The Investment
Adviser also served as the Fund's Investment Adviser prior to the conversion of
the Fund from a closed-end investment company to an open-end investment
company. The Investment Advisory Agreement, which includes certain provisions
to accommodate the conversion of the Fund from a closed-end investment company
to an open-end investment company, was approved by the Fund's Board of
Directors on January 23, 1996 and by shareholders at a meeting held on April
23, 1996. Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect until May 31, 1998 and thereafter, if approved
at least annually (a) by the Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties
to such contract or interested persons (as defined in the Investment Company
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund. 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 manager for the Fund who
considers analyses from various sources (including brokerage firms with which
the Fund does business), makes the necessary decisions, and places transactions
accordingly. The Investment Adviser is also obligated to perform certain
administrative and management services for the Fund and is obligated to provide
all of the office space, facilities, equipment and personnel necessary to
perform its duties under the Investment Advisory Agreement.
The Fund pays the Investment Adviser a monthly fee at the annual rate of
1.00% of the average daily net assets of the Fund. This fee is higher than that
of most mutual funds, including most other mutual funds managed by the
Investment Adviser, but management of the Fund believes this fee is justified
by the additional investment research and analysis required in connection with
investing in smaller capital markets. For the fiscal year ended November 30,
1996 (during which the Fund operated as a closed-end investment company until
its conversion to open-end status on June 10, 1996), the investment advisory
fee paid by the Fund to the Investment Adviser aggregated $2,800,027 (based
upon average net assets of approximately $280.8 million).
Kara W.Y. Tan Bhala, Vice President of the Fund, is the Fund's Portfolio
Manager. Ms. Tan Bhala has been a Vice President of MLAM and a Senior Portfolio
Manager of the Investment Adviser and MLAM since 1992. Ms. Tan Bhala was a
Portfolio Manager with Fiduciary Trust Company International from 1990 to 1992;
a Vice President of James Capel Inc. from 1988 to 1990; and a Senior Investment
Analyst of James Capel (Far East) Ltd. from 1986 to 1988. Ms. Tan Bhala is
primarily responsible for the day-to-day management of the Fund's investment
portfolio.
32
<PAGE>
The Investment Advisory Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the management fee;
legal and audit fees; registration fees; unaffiliated Directors' fees and
expenses; custodian and transfer agency fees; accounting costs; the costs of
issuing and redeeming shares; and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Fund by the Investment Adviser, and the
Fund reimburses the Investment Adviser for its costs in connection with such
services. For the fiscal year ended November 30, 1996, the Fund reimbursed the
Investment Adviser $65,766 for accounting services. For the fiscal year ended
November 30, 1996, the ratio of total expenses to average net assets for Class
A shares was 1.36%. For the period June 10, 1996 (commencement of operations as
an open-end investment company) to November 30, 1996, the ratio of total
expenses to average net assets for Class B, Class C and Class D shares was
2.67%, 2.68% and 1.88%, respectively.
The Investment Adviser has also entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly-owned subsidiary of ML&Co. and an affiliate
of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM
U.K. a fee for providing investment advisory services to the Investment Adviser
with respect to the Fund in an amount to be determined from time to time by the
Investment Adviser and MLAM U.K. but in no event in excess of the amount that
the Investment Adviser actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement. MLAM U.K. has offices at Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Act that incorporates the Code of Ethics of the Investment Adviser
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a subsidiary of ML&Co., acts as the Fund's transfer agent pursuant to a
transfer agency, dividend disbursing agency and shareholder servicing agency
agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the
33
<PAGE>
opening and maintenance of shareholder accounts. Pursuant to the Transfer
Agency Agreement, the Transfer Agent receives a fee of up to $11.00 per Class A
or Class D account and up to $14.00 per Class B or Class C account and is
entitled to reimbursement for out-of-pocket expenses incurred by it under the
Transfer Agency Agreement. The term "account" includes a shareholder account
maintained directly by the Transfer Agent and any other account representing a
beneficial interest of a person in the relevant share class or a record-keeping
system, provided the recordkeeping system is maintained by a subsidiary of
ML&Co. For the fiscal period June 10, 1996 (commencement of operations as an
open-end investment company) to November 30, 1996, the Fund paid the Transfer
Agent $225,548 pursuant to the Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund
are offered continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). Shares of the Fund may be
purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. The minimum initial purchase is $1,000, and the minimum
subsequent purchase is $50, except for retirement plans, the minimum purchase
is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the NYSE
(generally, 4:00 p.m., New York time), which includes orders received after the
close of business on the previous day, the applicable offering price will be
based on the net asset value determined as of 15 minutes after the close of
business on the NYSE on that day, provided the Distributor in turn receives the
order from the securities dealer prior to 30 minutes after the close of
business on the NYSE on that day. If the purchase orders are not received by
the Distributor prior to 30 minutes after the close of business on the NYSE on
that day, such orders shall be deemed received on the next business day. The
Fund or the Distributor may suspend the continuous offering of the Fund's
shares at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee
(presently $4.85, but as of May 1, 1997, $5.35) to confirm a sale of shares to
such customers. Purchases directly through the Transfer Agent are not subject
to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that
34
<PAGE>
investors should consider in determining the method of purchasing shares under
the Merrill Lynch Select Pricing SM System is set forth under "Merrill Lynch
Select Pricing SM System" on page 8.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select Pricing SM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
35
<PAGE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors"
below.
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DISCOUNT TO
PERCENTAGE PERCENTAGE* OF SELECTED DEALERS
OF OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ------------------ ------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000............. 5.25% 5.54% 5.00%
$25,000 but less than
$50,000...................... 4.75 4.99 4.50
$50,000 but less than
$100,000..................... 4.00 4.17 3.75
$100,000 but less than
$250,000..................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000................... 2.00 2.04 1.80
$1,000,000 and over**......... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with certain fee-
based programs. If the sales charge is waived in connection with a purchase
of $1,000,000 or more, such purchases may be subject to a CDSC of 1.0% if
the shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. A sales charge of
0.75% will be charged on purchases of $1,000,000 or more of Class A or
Class D shares by certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charges, they may be deemed to be underwriters under the Securities Act.
For the period June 10, 1996 (commencement of operations as an open-end
investment company) to November 30, 1996, the Fund sold 376,008 Class A shares
for aggregate net proceeds of $5,726,244. The
36
<PAGE>
gross sales charges for the sale of Class A shares of the Fund for that period
were $15,530 of which $2,643 and $12,887 were received by the Distributor and
Merrill Lynch, respectively. For the period June 10, 1996 (commencement of
operations as an open-end investment company) to November 30, 1996, the
Distributor received no CDSCs with respect to redemptions within one year
after purchase of Class A shares purchased subject to a front-end sales charge
waiver. For the period June 10, 1996 (commencement of operations as an open-
end investment company) to November 30, 1996, the Fund sold 119,709 Class D
shares for aggregate net proceeds of $1,774,038. The gross sales charges for
the sale of Class D shares of the Fund for that period were $8,341, of which
$1,470 and $6,871 were received by the Distributor and Merrill Lynch,
respectively. For the period June 10, 1996 (commencement of operations as an
open-end investment company) to November 30, 1996, the Distributor received no
CDSCs with respect to redemptions within one year after purchase of Class D
shares purchased subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A
shares of the Fund in that account. Certain employer-sponsored retirement or
savings plans, including eligible 401(k) plans, may purchase Class A shares of
the Fund at net asset value provided such plans meet the required minimum
number of eligible employees or required amount of assets advised by MLAM or
any of its affiliates. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the program
has $3 million or more initially invested in MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA SM Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. Class A shares
are also offered at net asset value to ML&Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares
of certain MLAM-advised closed-end funds in their initial offerings who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional
Information are met. In addition, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other MLAM-advised mutual
funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee-Based Programs."
Class A and Class D shares are offered at net asset value to Employee Access
Accounts SM available through qualified employers that provide employer-
sponsored retirement and savings plans that are eligible
37
<PAGE>
to purchase such shares at net asset value. Class A shares are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and, subject to certain conditions, Class A and Class D shares are offered at
net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges,
including information regarding investment by employer-sponsored retirement and
savings plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and a distribution fee of 0.75% of net assets as discussed below under
"Distribution Plans."
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans."
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. Approximately eight years after issuance, Class B shares
will convert automatically into Class D shares of the Fund, which are subject
to an account maintenance fee but no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately ten years. If
Class B shares of the Fund are exchanged for Class B shares of another MLAM-
advised mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
38
<PAGE>
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC AS
A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
------------------- ----------------
<S> <C>
0-1................................................... 4.00%
1-2................................................... 3.00
2-3................................................... 2.00
3-4................................................... 1.00
4 and thereafter...................................... 0.00
</TABLE>
For the period June 10, 1996 (commencement of operations as an open-end
investment company) to November 30, 1996, the Distributor received CDSCs of
$2,389 with respect to redemptions of Class B shares, $2,052 of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate being
charged. Therefore it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
39
<PAGE>
The Class B CDSC is waived on redemption of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder.
The Class B CDSC also is waived on redemption of shares by certain eligible
401(a) and eligible 401(k) plans. The CDSC also is waived for any Class B
shares which are purchased by eligible 401(k) or eligible 401(a) plans which
are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied
IRA and held in such account at the time of redemption. The Class B CDSC also
is waived for any Class B shares which are purchased by a Merrill Lynch
rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the
time of redemption. The Class B CDSC also is waived for any Class B shares
which are purchased within Qualifying Employee Access Accounts SM. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information. The terms of the CDSC may be modified in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. The Class C CDSC may not be
assessed in connection with certain fee-based programs. See "Shareholder
Services--Fee-Based Programs." For the period June 10, 1996 (commencement of
operations as an open-end investment company) to November 30, 1996, the
Distributor received CDSCs of $84 with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.25% of net assets but are not subject
to the distribution fee that is borne by Class B shares. Automatic conversion
of Class B shares into Class D shares will occur at least once each month (on
the "Conversion Date") on the basis of the relative net asset values of the
shares of the two classes on the Conversion Date, without the imposition of
any sales load, fee or other charge. Conversion of Class B shares into Class D
shares will not be deemed a purchase of the Class D shares or a sale of the
Class B shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a
40
<PAGE>
single account will result in less than $50 worth of Class B shares being left
in the account, all of the Class B shares of the Fund held in the account on
the Conversion Date will be converted to Class D shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing
41
<PAGE>
shareholder and distribution services, and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B and Class C shares of the Fund. The Distribution Plans relating to
Class B and Class C shares are designed to permit an investor to purchase Class
B and Class C shares through dealers without the assessment of an initial sales
charge and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of the Class B and Class C shares. In
this regard, the purpose and function of the ongoing distribution fees and the
CDSC are the same as those of the initial sales charge with respect to the
Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and Class C
shares.
For the period June 10, 1996 (commencement of operations as an open-end
investment company) to November 30, 1996, the Fund paid the Distributor $12,392
pursuant to the Class B Distribution Plan (based on average net assets subject
to such Class B Distribution Plan of approximately $1.2 million), all of which
was paid to Merrill Lynch for providing account maintenance and distribution-
related activities and services in connection with Class B shares. For the
period June 10, 1996 (commencement of operations as an open-end investment
company) to November 30, 1996, the Fund paid the Distributor $3,088 pursuant to
the Class C Distribution Plan (based on average net assets subject to such
Class C Distribution Plan of approximately $310,000), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the period June
10, 1996 (commencement of operations as an open-end investment company) to
November 30, 1996, the Fund paid the Distributor $493 pursuant to the Class D
Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of approximately $198,000), all of which was paid to Merrill
Lynch for providing account maintenance activities in connection with Class D
shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses will
be presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information will be presented annually as of December 31 of each
year on a "fully allocated accrual" basis and quarterly on a "direct expense
and revenue/cash" basis. On the fully allocated accrual basis, revenues will
consist of the account maintenance fees, distribution fees, CDSCs and certain
other related revenues, and expenses will consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues will consist of the account maintenance fees,
distribution fees and CDSCs, and the expenses will consist of financial
consultant compensation.
As of December 31, 1996, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues, by
$9,000 (.23% of Class B net assets at that date). As of December 31, 1996, the
fully allocated accrual expenses incurred by the Distributor and Merrill Lynch
for the period since the commencement of operations of Class C shares equaled
fully allocated accrual revenues. As of November 30, 1996, direct cash revenues
for the period since the commencement of operations of Class B shares exceeded
direct cash expenses by $5,369 (.14% of Class B net assets at that date). As of
November 30, 1996, direct cash revenues for the period since the commencement
of operations of Class C shares exceeded direct cash expenses by $2,157 (.24%
of Class C net assets at that date).
42
<PAGE>
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fees and the CDSCs). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholders'
cost, depending on the market value of the securities held by the Fund at such
time. The Fund may from time to time borrow from banks as a temporary measure
to meet redemptions of Fund shares. See "Investment Objective and Policies--
Investment Restrictions."
43
<PAGE>
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. The redemption
request requires the signatures of all persons in whose names the shares are
registered, signed exactly as their names appear on the Transfer Agent's
register or on the certificates, as the case may be. The signatures on the
notice must be guaranteed by an "eligible guarantor institution" (including,
for example, Merrill Lynch branch offices and certain other financial
institutions) as such term is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents, such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash or certified check drawn on a U.S. bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
NYSE (generally, 4:00 p.m., New York time) on the day received and that such
request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE, on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE, in order to obtain
that day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85, but as of May 1, 1997, $5.35) to
confirm a repurchase of shares to such customers. Repurchases directly through
the Transfer Agent are not subject to the processing fee. The Fund reserves the
right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by the
Fund may redeem shares as set forth above.
44
<PAGE>
Redemption payments will be made within seven days of the proper tender of
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or how to change options with respect thereto, can be
obtained from the Fund by calling the telephone number on the cover page hereof
or from the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. These statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying
any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in
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transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of the Fund, a shareholder must either redeem
the shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in his or her account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares
of a second MLAM-advised mutual fund, and the shareholder does not hold Class
A shares of the second fund in his or her account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period for the newly acquired shares of
the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C
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or Class D shares. The period of time that Class A, Class B, Class C or Class D
shares are held in a money market fund, however, will not count toward
satisfaction of the holding period requirement for reduction of the CDSC
imposed on such shares, if any, and, with respect to Class B shares, toward
satisfaction of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are automatically reinvested in
full and fractional shares of the Fund, without sales charge, at the net asset
value per share next determined after the close of business on the NYSE on the
ex-dividend date of such dividend or distribution. A shareholder may at any
time, by written notification to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or by telephone (1-
800-MER-FUND) to the Transfer Agent if the shareholder's account is maintained
with the Transfer Agent, elect to have subsequent dividends, or both dividends
and capital gains distributions, paid in cash, rather than reinvested, in which
event payment will be mailed on the payment date. Cash payments can also be
directly deposited to the shareholder's bank account. No CDSC will be imposed
on redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his bank account on either a
monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain
conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by prearranged charges of $50 or more to
his or her regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset
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value. Under specified circumstances, participants in certain Programs may
deposit other classes of shares which will be exchanged for Class A shares.
Initial or deferred sales charges otherwise due in connection with such
exchanges may be waived or modified, as may the Conversion Period applicable to
the deposited shares. Termination of participation in a Program may result in
the redemption of shares held therein or the automatic exchange thereof to
another class at net asset value, which may be shares of a money market fund.
In addition, upon termination of participation in a Program, shares that have
been held for less than specified periods within such Program may be subject to
a fee based upon the current value of such shares. These Programs also
generally prohibit such shares from being transferred to another account at
Merrill Lynch, to another broker-dealer or to the Transfer Agent. Except in
limited circumstances (which may also involve an exchange as described above),
such shares must be redeemed and another class of shares purchased (which may
involve the imposition of initial or deferred sales charges and distribution
and account maintenance fees) in order for the investment not to be subject to
Program fees. Additional information regarding a specific Program (including
charges and limitations on transferability applicable to shares that may be
held in such Program) is available in such Program's client agreement and from
Merrill Lynch Investor Services at (800) MER-FUND or (800) 637-3863.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission. Average annual total return quotations
for the specified periods will be computed by finding the average annual
compounded rates of return (based on net investment income and any capital
gains or losses on portfolio investments over such periods) that would equate
the initial amount invested to the redeemable value of such investment at the
end of each period. Average annual total return will be computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including any CDSC that would
be applicable to a complete redemption of the investment at the end of the
specified period such as in the case of Class B and Class C shares and the
maximum sales charge in the case of Class A and Class D shares. Dividends paid
by the Fund with respect to all shares, to the extent any dividends are paid,
will be calculated in the same manner at the same time on the same day and will
be in the same amount, except that account maintenance and distribution fees
and any incremental transfer agency costs relating to each class of shares will
be borne exclusively by that class. The Fund will include performance data for
all classes of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements directed to investors whose
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purchases are subject to reduced sales charges in the case of Class A and Class
D shares or waiver of the CDSC in the case of Class B or Class C shares (such
as investors in certain retirement plans), performance data may take into
account the reduced, and not the maximum, sales charge or may not take into
account the CDSC and therefore may reflect greater total return since, due to
the reduced sales charges or waiver of the CDSC, a lower amount of expenses may
be deducted. See "Purchase of Shares." The Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate the effect
of such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Index, The Financial Times/Standard & Poor's Actuarial World Indices, the
Morgan Stanley Capital International Indices, the Dow Jones Industrial Average,
or performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. The per share dividends and
distributions on each class of shares will be reduced as a result of any
account maintenance, distribution and transfer agency fees applicable to that
class. See "Determination of Net Asset Value" below. Dividends and
distributions will be reinvested automatically in shares of the Fund, at net
asset value without sales load. A shareholder whose account is maintained at
the Transfer Agent may elect in writing to receive any such dividends or
distributions, or both, in cash. A shareholder whose account is maintained
through Merrill Lynch may elect either to have both dividends and distributions
reinvested or both paid in cash. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of the
Fund or received in cash. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its ordinary income and
capital gains be distributed during the calendar year.
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other income during a
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taxable year, (a) the Fund would not be able to make any ordinary income
dividend distributions, and (b) all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, rather than as ordinary income
dividends, thereby reducing each shareholder's tax basis in the Fund shares for
Federal income tax purposes and resulting in a capital gain for any shareholder
who received such a distribution greater than such shareholder's tax basis in
Fund shares (assuming the shares were held as a capital asset). For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Additional Information--Taxes." If in any fiscal year, the
Fund has net income from certain foreign currency transactions, such income
will be distributed annually.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be automatically reinvested in
shares unless the shareholder elects to receive such distributions in cash.
See "Shareholder Services--Automatic Reinvestment of Dividends and
Distributions" for information as to how to elect either dividend reinvestment
or cash payments.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund will be
determined once daily as of 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time) on each day during which the NYSE is open
for trading or on such other day that there is sufficient trading in portfolio
securities that the net asset value of the Fund's shares may be materially
affected. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies will be translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation.
The net asset value per share will be computed by dividing the sum of the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
management fees payable to the Investment Adviser and any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily. The per
share net asset value of Class A shares generally will be higher than the per
share net asset value of shares of the other classes, reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; moreover, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and
Class C shares, reflecting the daily expense accruals of the distribution and
higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately
the amount of the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more
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than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
traded in the OTC market are valued at the last available bid price in the OTC
market prior to the time of valuation. Portfolio securities which are traded
both in the OTC market and on a stock exchange are valued according to the
broadest and most representative market. When the Fund writes an option, the
amount of the premium received is recorded on the books of the Fund as an asset
and an equivalent liability. The amount of the liability is subsequently valued
to reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last bid price. 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.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and,
after such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable
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treaty law. Nonresident shareholders are urged to consult their own tax
advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under proposed
regulations the Fund would be able to elect to "mark to market" at the end of
each taxable year all shares that it holds in PFICs. If it made this election,
the Fund would recognize as ordinary income any increase in the value of such
shares. Unrealized losses, however, would not be recognized. By making the
mark-to-market election, the Fund could avoid imposition of the interest charge
with respect to its distributions from PFICs, but in any particular year might
be required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
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Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than such shareholder's basis
in Fund shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
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ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on December 23, 1993 as a
closed-end investment company under the name Emerging Tigers Fund, Inc. On
April 23, 1996, the shareholders of the Fund voted to convert the Fund to an
open-end investment company. Amended and Restated Articles of Incorporation,
effective as of June 10, 1996, (i) converted the Fund to an open-end investment
company, (ii) renamed the Fund "Merrill Lynch Emerging Tigers Fund, Inc." and
(iii) increase the authorized capital stock from 200,000,000 shares of common
stock, par value $.10 per share, to 400,000,000 shares of common stock, par
value $.10 per share. The shares of common stock are divided into four classes
designated Class A, Class B, Class C and Class D Common Stock. Class A and
Class D each consist of 100,000,000 shares; Class B consists of 150,000,000
shares and Class C consists of 50,000,000 shares. Each share of Class A, Class
B, Class C and Class D Common Stock represents an interest in the same assets
of the Fund and is identical in all respects except that Class B, Class C and
Class D shares bear certain expenses related to the account maintenance fee
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares." The Fund
may issue additional classes of shares if the Board of Directors deems such
issuance to be in the best interests of the Fund.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to elect Directors. Also, the by-laws of the Fund
require that a special meeting of shareholders be held upon the written request
of at least 10% of the outstanding shares of the Fund entitled to vote at such
meeting. Voting rights for Directors are not cumulative. Shares issued are
fully paid and non-assessable and have no preemptive rights. Shares have the
conversion rights described in this Prospectus. Each share of Common Stock is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund on liquidation or dissolution after
satisfaction of outstanding liabilities, except that, as noted above, the Class
B, Class C and Class D shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch Financial
Consultant or Merrill Lynch Financial Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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APPENDIX
FUTURES, OPTIONS AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund is authorized to engage in various portfolio hedging strategies.
These strategies are described in more detail below.
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency and stock index options and futures,
options on such futures and forward foreign exchange transactions. The Fund may
enter into such transactions only in connection with its hedging strategies.
While the Fund's use of hedging strategies is intended to reduce the volatility
of the net asset value of Fund shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund may not necessarily be engaging in
hedging activities when movements in the equity markets or currency exchange
rates occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.
Although certain risks are involved in futures and options transactions, the
Investment Adviser believes that, because the Fund only will engage in these
transactions for hedging purposes, the futures and options portfolio strategies
of the Fund will not subject the Fund to the risks frequently associated with
the speculative use of futures and options transactions. Tax requirements may
limit the Fund's ability to engage in the hedging transactions and strategies
discussed below. See "Additional Information--Taxes."
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified price on
or before a specified date, in the case of an option on securities or agrees to
pay to another party an amount based on any gain in a specified securities
index beyond a specified level on or before a specified date, in the case of an
option on a securities index. The principal reason for writing 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 (i.e., sell) put options which give the holder of the
option the right to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a put option which
increases the Fund's return. The Fund writes only covered put options, which
means that so long as the Fund is obligated as the writer of the option it
will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other liquid securities denominated
in U.S. dollars or non-U.S. currencies with a securities depository with a
value equal to or greater than the exercise price of the underlying securities.
By writing a put, the Fund will be obligated to purchase the underlying
55
<PAGE>
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 or Other Financial Index Options and Futures. The Fund is authorized to
engage in transactions in stock or other financial index options and futures,
and related options on such futures (including futures on government bonds).
The Fund may purchase or write put and call options on stock or other financial
indices to hedge against the risks of marketwide stock or bond 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 or other financial index
options based on a broad market index or based on a narrow index representing
an industry or market segment.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of 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."
56
<PAGE>
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 invested
or fully invested in any particular 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 (including financial futures) and stock or other financial
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 OTC markets. 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 foreign
exchange among currencies of the different countries in which it will invest
and multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (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 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
57
<PAGE>
amount of the Fund's commitment with respect to such contracts. Hedging against
a decline in the value of a currency does not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of such
securities decline. Such transactions also preclude the opportunity for gain if
the value of the hedged currency should rise. Moreover, it may not be possible
for the Fund to hedge against a devaluation that is so generally anticipated
that the Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates. Investors should be aware that 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 OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a 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 pesos
for dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the 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 "spread"). 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 "spreads" of the type which may be utilized by
the Fund constitute hedging transactions and are consistent with the policies
described above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. A futures 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.
58
<PAGE>
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 or option strategy is
unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
OTC stock index options, OTC foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million or any other
bank or dealer having capital of at least $150 million or whose obligations are
guaranteed by an entity having capital of at least $150 million.
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on financial futures
contracts) if, as a result of such transaction, the sum of the market value of
OTC options currently outstanding which are held by the Fund, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on financial futures contracts exceeds 15% of the net assets of the
Fund, taken at market value, together with all other assets of the Fund which
are illiquid or are not otherwise readily marketable. However, if the OTC
option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer
at a predetermined price, then the Fund will treat as illiquid such amount of
the underlying securities as is equal to the repurchase price less the amount
by which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money." This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Directors of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or
modify this policy prior to the change or modification by the Commission staff
of its position.
Risk Factors in Futures, Options and Currency Transactions. Utilization of
futures and options transactions to hedge the portfolio, including to affect
the Fund's exposure in various markets, involves the risk of imperfect
correlation in movements in the price of futures and options and movements in
the price of the securities or currencies which are the subject of the hedge.
If the price of its options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of futures and options also depends on the Investment
Adviser's ability to predict correctly price movements in the market involved
in a particular options or futures transaction. In addition, futures and
options transactions in foreign markets are subject to the risk factors
associated with foreign investments generally. See "Risk Factors and Special
Considerations."
The Fund intends to enter into futures and options transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC
59
<PAGE>
transactions, the Investment Adviser believes the Fund can receive on each
business day at least two independent bids or offers, unless a quotation from
only one dealer is available, in which case only that dealer's price will be
used, or which can be sold at a formula price provided for in the OTC option
agreement. There can be no assurance, however, that a liquid secondary market
will exist at any specific time. Thus, it may not be possible to close an
options or futures position. The inability to close futures and options
positions also could have an adverse impact on the Fund's ability to hedge
effectively its portfolio. There also is the risk of loss by the Fund of margin
deposits or collateral in the event of the bankruptcy of a broker with whom the
Fund has an open position in an option, a financial futures contract or related
option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) that may be written by a single investor whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts that any person may trade on a particular trading day. The
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.
60
<PAGE>
MERRILL LYNCH EMERGING TIGERS FUND, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Emerging Tigers Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................... 4. ................................
2. .................................... 5. ................................
3. .................................... 6. ................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
.................................................... Date......................
(Zip Code)
Occupation............................. Name and Address of Employer ......
...................................
...................................
....................................... ...................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Emerging Tigers Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (check one): [_] checking [_] savings
Name on your Account ..........................................................
Bank Name .....................................................................
Bank Number ........................ Account Number ...........................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor .................................. Date.................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
61
<PAGE>
MERRILL LYNCH EMERGING TIGERS FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Additional Information--Taxes") either because I have not been notified
that I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH-SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Emerging Tigers Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Emerging Tigers
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Emerging Tigers Fund, Inc. held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
We hereby authorize Merrill Lynch
- - - Funds Distributor, Inc. to act as
our agent in connection with
- - - transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
shareholder's signature.
This form when completed should be .....................................
mailed to: Dealer Name and Address
Merrill Lynch Emerging Tigers Fund,
Inc. By ...................................
c/o Merrill Lynch Financial Data Authorized Signature of Dealer
Services, Inc.
P.O. Box 45289 [_][_][_] [_][_][_][_] .............
Jacksonville, Florida 32232-5289 Branch-Code F/C No. F/C Last Name
[_][_][_] [_][_][_][_][_]
Dealer's Customer Account No.
62
<PAGE>
MERRILL LYNCH EMERGING TIGERS FUND, INC. -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR THE
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner..........................
First Name Initial Last Social Security No. or
Name Taxpayer Identification
No.
Name of Co-Owner (if any)..............
First Name Initial Last Name
Address................................ Account Number ....................
(if existing account)
.......................................
(Zip Code)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A or [_] Class D shares in Merrill Lynch Emerging
Tigers Fund, Inc. at cost or current offering price. Withdrawals to be made
either (check one) [_] Monthly on the 24th day of each month, or [_] Quarterly
on the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawals on or as soon as possible
thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below).
DRAW CHECKS PAYABLE (check one)
(a)I hereby authorize payment by check
[_] the address indicated in Item 1.
[_] to the order of..........................................................
MAIL TO (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner..................................... Date..................
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
SPECIFY TYPE OF ACCOUNT (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
63
<PAGE>
MERRILL LYNCH EMERGING TIGERS FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Emerging Tigers Fund, Inc. subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
YOU ARE HEREBY AUTHORIZED TO DRAW AN To...............................Bank
ACH DEBIT EACH MONTH ON MY BANK (Investor's Bank)
ACCOUNT FOR INVESTMENT IN MERRILL
LYNCH EMERGING TIGERS FUND, INC. AS
INDICATED BELOW: Bank Address.........................
Amount of each ACH debit $........
Account No. ......................
City...... State...... Zip Code......
Please date and invest ACH debits on
the 20th of each month beginning
________ or as soon thereafter as
(month) As a convenience to me, I hereby
possible. request and authorize you to pay and
charge to my account ACH debits
drawn on my account by and payable
I agree that you are preparing to Merrill Lynch Financial Data
these ACH debits voluntarily at my Services, Inc. I agree that your
request and that you shall not be rights in respect to each such debit
liable for any loss arising from any shall be the same as if it were a
delay in preparing or failure to check drawn on you and signed
prepare any such debit. If I change personally by me. This authority is
banks or desire to terminate or to remain in effect until revoked by
suspend this program, I agree to me in writing. Until you receive
notify you promptly in writing. I such notice, you shall be fully
hereby authorize you to take any protected in honoring any such
action to correct erroneous ACH debit. I further agree that if any
debits of my bank account or such debit be dishonored, whether
purchases of fund shares including with or without cause and whether
liquidating shares of the Fund and intentionally or inadvertently, you
crediting my bank account. I further shall be under no liability.
agree that if a debit is not honored
upon presentation, Merrill Lynch ............ .....................
Financial Data Services, Inc. is Date Signature of
authorized to discontinue immediately Depositor
the Automatic Investment Plan and to
liquidate sufficient shares held in ............ .....................
my account to offset the purchase Bank Signature of Depositor
made with the dishonored debit. Account (If joint account,
Number both must sign)
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
64
<PAGE>
[This Page Intentionally Left Blank]
65
<PAGE>
[This Page Intentionally Left Blank]
66
<PAGE>
INVESTMENT ADVISER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 3
Prospectus Summary......................................................... 5
Financial Highlights....................................................... 7
Merrill Lynch Select Pricing SM System..................................... 8
Risk Factors and Special Considerations.................................... 12
Investment Objective and Policies.......................................... 21
Description of Certain Investments........................................ 23
Other Investment Policies and Practices................................... 26
Investment Restrictions................................................... 30
Management of the Fund..................................................... 31
Board of Directors........................................................ 31
Advisory and Management Arrangements...................................... 31
Code of Ethics............................................................ 33
Transfer Agency Services.................................................. 33
Purchase of Shares......................................................... 34
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 36
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 38
Distribution Plans........................................................ 41
Limitations on the Payment of Deferred Sales Charges...................... 43
Redemption of Shares....................................................... 43
Redemption................................................................ 44
Repurchase................................................................ 44
Reinstatement Privilege--Class A and Class D Shares....................... 45
Shareholder Services....................................................... 45
Investment Account........................................................ 45
Exchange Privilege........................................................ 46
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 47
Systematic Withdrawal Plans............................................... 47
Automatic Investment Plans................................................ 47
Fee-Based Programs........................................................ 47
Performance Data........................................................... 48
Additional Information..................................................... 49
Dividends and Distributions............................................... 49
Determination of Net Asset Value.......................................... 50
Taxes..................................................................... 51
Organization of the Fund.................................................. 54
Shareholder Reports....................................................... 54
Shareholder Inquiries..................................................... 54
Appendix................................................................... 55
Authorization Form......................................................... 61
</TABLE>
Code #17034-0397
[LOGO] MERRILL LYNCH
Merrill Lynch
Emerging Tigers Fund, Inc.
[ART]
PROSPECTUS
March 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH EMERGING TIGERS FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Emerging Tigers Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks 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 also may invest
up to 35% of its total assets in debt securities of companies or governments in
emerging market Asia-Pacific countries. The Fund may employ a variety of
derivative investments and techniques to hedge against market and currency
risk. Also, the Fund may invest in certain derivative investments, such as
indexed and inverse floaters, to enhance return. There can be no assurance that
the Fund's investment objective will be achieved.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated March 25,
1997 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or by writing the Fund at the above telephone number or address. This Statement
of Additional Information has been incorporated by reference into the
Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is March 25, 1997
<PAGE>
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.
Reference is made to "Investment Objective and Policies" in the Prospectus for
a discussion of the investment objective and policies of the Fund.
The securities markets of many countries at times in the past have moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce
risk for the Fund's portfolio as a whole. This negative correlation also may
offset unrealized gains the Fund has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility is reduced when the various markets are combined into a single
portfolio. Of course, movements in the various securities markets may be offset
by changes in foreign currency exchange rates. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Fund Asset Management, L.P. (the "Investment Adviser" or
"FAM") will effect portfolio transactions without regard to holding period if,
in its judgment, such transactions are advisable in light of a change in
circumstances of a particular company or within a particular industry or in
general market, economic or financial conditions. As a result of the investment
policies described in the Prospectus, the Fund's portfolio turnover rate may be
higher than that of other investment companies. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. The portfolio
turnover rate for the fiscal years ended November 30, 1995 and 1996 was 18.84%
and 44.09%, respectively.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. See "Redemption of Shares." Under present
conditions, the Investment Adviser does not believe that these considerations
will have any significant effect on its portfolio strategy, although there can
be no assurance in this regard.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Investment Objective and Policies--Other Investment Policies and
Practices--Portfolio Strategies Involving Futures, Options and Forward Foreign
Exchange Transactions" in the Prospectus and to the Appendix to the
Prospectus--"Futures, Options and Forward Foreign Exchange Transactions."
2
<PAGE>
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency futures and options, stock or other
financial index futures and options, and options on such futures and forward
foreign currency transactions. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of its shares, the net
asset value of the Fund's shares will fluctuate.
Although certain risks are involved in futures and options transactions (as
discussed in the Prospectus and below), the Investment Adviser believes that,
because the Fund will only engage in these transactions for hedging purposes,
the futures and options portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative use of futures and
options transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified price on
or before a specified date, in the case of an option on securities, or agrees
to pay to another party an amount based on any gain in a specified securities
index beyond a specified level on or before a specified date, in the case of an
option on a securities index. The principal reason for writing 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 a decline in the price of the
underlying security.
The writer of a covered call option has no control over when he or she may be
required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her obligation
as a writer. If an option expires unexercised, the writer would nonetheless
retain the premium. Any gain represented by receipt of the premium may be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer would realize a gain
or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other liquid securities denominated in U.S. dollars or
non-U.S. currencies with a securities depository with a value equal to or
greater than the exercise price of the underlying securities. By writing a put,
the Fund will be obligated to purchase the underlying security at a price that
may be higher than the market value of that security at the time of exercise
for as long as the option is outstanding. The Fund may engage in closing
transactions in order to terminate put options that it has written. The Fund
will not write put options if the aggregate value of the obligations underlying
the put options shall exceed 50% of the Fund's net assets.
3
<PAGE>
Options referred to herein and in the Prospectus may be options traded on
foreign securities exchanges. An option position may be closed 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 Options Clearing Corporation (the "Clearing Corporation") may not, at
all times, be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The Fund also may enter into over-the-counter ("OTC") options transactions,
which are two-party contracts with prices and terms negotiated between the
buyer and seller. The Fund will only enter into OTC options transactions with
respect to portfolio securities 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). The staff of
the Commission has taken the position that OTC options and the assets used as
cover for written OTC options are illiquid securities.
Purchasing Options. The Fund 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 or other financial index options discussed below) if as a
result of such purchase, the aggregate cost (premium paid) of all outstanding
options on securities held by the Fund would exceed 5% of the market value of
the Fund's total assets.
Stock or Other Financial Index Options and Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock or other
financial index options and futures (including futures on government bonds),
and related options on such futures. Set forth below is further information
concerning futures transactions.
4
<PAGE>
A financial futures contract is an agreement between two parties to buy and
sell a security, or, in the case of an index-based financial futures contract,
to make and accept a cash settlement for a set price, on a future date. A
majority of transactions in financial futures contracts, however, do not result
in the actual delivery of the underlying instrument or cash settlement, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a financial 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 financial 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 financial futures
contract fluctuates, making the long and short positions in the financial
futures contract more or less valuable, a process known as "mark to the
market." At any time prior to the settlement date of the financial futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the financial futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker, and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in financial futures contracts. Section 17(f) relates to
the custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a financial futures
contract may be a "senior security" under the Investment Company Act.
Risk Factors in Futures and Options Transactions. Utilization of futures and
options transactions involves the risk of imperfect correlation in movements in
prices of futures and options contracts and movements in the prices of the
securities and currencies which are the subject of the hedge. If the prices of
the futures and options contracts move more or less than the prices of the
hedged securities and currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the securities and
currencies which are the subject of the hedge. The successful use of futures
and options 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 option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such option
or future. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or financial futures contract
at any specific time. Thus, it may not be possible to close an option or
futures position. The Fund will acquire only OTC options for which management
believes (i) the Fund can receive on each business day at least two
5
<PAGE>
independent bids or offers (one of which will be from an entity other than a
party to the option) unless there is only one dealer, in which case such
dealer's price will be used, or (ii) can be sold at a formula price provided
for in the OTC option agreement. In the case of a futures position or an option
on a futures position written by the Fund, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of variation margin. In such situations, if the Fund has insufficient cash, it
may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Fund may be required to take or make delivery of the security or currency
underlying the financial futures contracts it holds. The inability to close
futures and options positions also could have an adverse impact on the Fund's
ability to hedge effectively its portfolio.
There also is 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 financial
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these
limits, and it may impose other sanctions or restrictions. The 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.
Forward Foreign Exchange Transactions. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e., cash, basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 1/10 of 1% due to the cost of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange between currencies of the different countries
in whose securities it will invest as a hedge against possible variations in
the foreign exchange rates between these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date and price set at the time of the contract. The Fund's
dealing 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 by the Fund. Position hedging is the sale of
forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. If the Fund enters
into a position hedging transaction, its custodian will place cash or liquid
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
6
<PAGE>
will equal the amount of the Fund's commitment with respect to such contracts.
Alternatively, no such segregation of funds need be made when the Fund "covers"
its open positions. The position is considered "covered" if the Fund holds
securities denominated in the currency underlying the forward contract, or in a
demonstrably correlated currency, having a value equal to or greater than the
Fund's obligation under the forward contract. The Fund will not enter into a
forward contract with a term of more than one year. 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 OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a 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 pesos
for dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the 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 "spread"). 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 "spreads" of the type which may be utilized by
the Fund constitute hedging transactions and are consistent with the policies
described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it may invest in securities of
a single issuer. The Fund's investments will be limited, however, in order to
qualify for the special tax treatment afforded regulated investment companies
under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Dividends, Distributions and Taxes--Taxes." To qualify, the Fund will comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (i) not more than 25% of the market
value of the Fund's total assets will be invested in the securities of a single
issuer and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer, and the
7
<PAGE>
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.
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.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of 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 liquid securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Because the issuance of the
security underlying the commitment is at the option of the issuer, the Fund may
bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby 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.
8
<PAGE>
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with financial institutions
which (i) have, in the opinion of the Investment Adviser, substantial capital
relative to the Fund's exposure, or (ii) have provided the Fund with a third-
party guaranty or other credit enhancement. Under such agreements, the other
party agrees, upon entering into the contract with the Fund, to repurchase the
security at a mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations 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.
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 102% 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.
9
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental restrictions
and policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities (which
for this purpose and under the Investment Company Act means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its total 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.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements, purchase and sale
contracts and any similar instruments shall not be deemed to be the making
of a loan, and except further that the Fund may lend its portfolio
securities, provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set forth in the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that the Fund (i) may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) to the extent permitted
by applicable law, may borrow up to an additional 5% of its total assets
for temporary purposes, (iii) may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities
and (iv) may purchase securities on margin to the extent permitted by
applicable law. The Fund may not pledge its assets other than to secure
such borrowings or, to the extent permitted by the Fund's investment
policies as set forth in its Prospectus and Statement of Additional
Information, as they may be amended from time to time, in connection with
hedging transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional
10
<PAGE>
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors without stockholder approval. Under the non-
fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. Applicable law
currently allows the Fund to purchase the securities of other investment
companies only if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Fund, (ii) 5% of
the Fund's total assets, taken at market value, would be invested in any
one such company, (iii) 10% of the Fund's total assets, taken at market
value, would be invested in such securities, and (iv) the Fund, together
with other investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10% of the total
outstanding stock of any one closed-end investment company. Investments by
the Fund in wholly-owned investment entities created under the laws of
certain countries will not be deemed an investment in other investment
companies.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund does not, however,
currently intend to engage in short sales, except short sales "against the
box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its net assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be
liquid by the Fund's Board of Directors are not subject to the limitations
set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above, borrow
money or pledge its assets, except that the Fund (a) may borrow from a bank
as a temporary measure for extraordinary or emergency purposes or to meet
redemptions in amounts not exceeding 20% (taken at market value) of its
total assets and pledge its assets to secure such borrowings, (b) may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (c) may purchase securities
on margin to the extent permitted by applicable law. However, at the
present time, applicable law prohibits the Fund from purchasing securities
on margin. The deposit or payment by the Fund of initial or variation
margin in connection with financial futures contracts or options
transactions is not considered to be the purchase of a security on margin.
The purchase of securities while borrowings are outstanding will have the
effect of leveraging the Fund. Such leveraging or borrowing increases the
Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income. The Fund will not purchase securities
while borrowings exceed 5% of its total assets.
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.
11
<PAGE>
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options if, as a result of such transaction, the sum
of the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceeds 15% of the net assets
of the Fund, taken at market value, together with all other assets of the Fund
which are illiquid or are not otherwise readily marketable. However, if the OTC
option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer
at a predetermined price, then the Fund will treat as illiquid such amount of
the underlying securities as is equal to the repurchase price less the amount
by which the option is "in-the-money" (i.e., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money." This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the Board of Directors of
the Fund without the approval of the Fund's shareholders. However, the Fund
will not change or modify this policy prior to the change or modification by
the Commission staff of its position.
In addition, as a non-fundamental policy which may be changed by the Board of
Directors and to the extent required by the Commission or its staff, the Fund
will, for purposes of investment restriction (1) above, treat securities issued
or guaranteed by the government of any one foreign country as the obligations
of a single issuer.
As another non-fundamental policy, the Fund will not invest in securities
which are (a) subject to material legal restrictions on repatriation of assets
or (b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its net assets, taken at market value, would
be invested in such securities.
Because of the affiliation of the Investment Adviser with the Fund, the Fund
is prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with the Investment Adviser
or any of its affiliates acting as principal and from purchasing securities in
public offerings which are not registered under the Securities Act in which
such firm or any of its affiliates participate as an underwriter or dealer.
12
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund, including
their ages and their principal occupations for at least the last five years, is
set forth below. Unless otherwise noted, the address of each executive officer
and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (64)--President and Director(1)(2)--President of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1977; President of Merrill Lynch Asset Management, L.P. ("MLAM") (which term as
used herein includes its corporate predecessors) since 1977; President and
Director of Princeton Services, Inc. ("Princeton Services") since 1993;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990;
Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor") since
1977.
Donald Cecil (70)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer (70)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (65)--Director(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Richard R. West (59)--Director(2)--Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, Dean from 1984 to 1993 and currently Dean Emeritus, New
York University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors), and Alexander's, Inc. (real estate company).
Edward D. Zinbarg (62)--Director(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. Executive Vice President of The Prudential Insurance Company of
America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of The Prudential Foundation.
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice President
of the Investment Adviser and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
13
<PAGE>
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990.
Kara W.Y. Tan Bhala (37)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM and Senior Portfolio Manager of the Investment Adviser and
MLAM since 1992; Portfolio Manager with Fiduciary Trust Company International
from 1990 to 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 (47)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer thereof since 1984.
James W. Harshaw, III (38)--Secretary(1)(2)--Attorney associated with the
Investment Adviser and MLAM since 1994; associate at Sullivan & Cromwell from
1990 to 1994; judicial law clerk for the United States Court of Appeals for the
Third Circuit from 1989 to 1990.
- --------
(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
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
At February 28, 1997 the officers and Directors of the Fund as a group
(eleven persons) owned an aggregate of less than 1% of the outstanding shares
of the Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and
the other officers of the Fund owned less than 1% of the outstanding shares of
common stock of ML&Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser (each
a "non-affiliated Director") a fee of $3,500 per year plus $500 per Board
meeting attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. The Fund also compensates members of its
Audit and Nominating Committee (the "Committee"), which consists of all of the
non-affiliated Directors, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended November 30, 1996, fees and
expenses paid to non-affiliated Directors aggregated $33,562.
14
<PAGE>
The following table sets forth for the fiscal year ended November 30, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies advised by the Investment Adviser and its
affiliate, MLAM ("MLAM/FAM Advised Funds"), to the non-affiliated Directors:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM FUND AND
RETIREMENT OTHER MLAM/FAM
BENEFITS ACCRUED ADVISED FUNDS
COMPENSATION AS PART OF PAID TO
NAME OF DIRECTOR FROM FUND FUND'S EXPENSES DIRECTOR(1)
---------------- ------------ ---------------- --------------
<S> <C> <C> <C>
Donald Cecil..................... $7,250 None $268,933
Edward H. Meyer.................. $5,750 None $227,933
Charles C. Reilly................ $6,750 None $293,833
Richard R. West.................. $6,750 None $269,833
Edward D. Zinbarg................ $6,750 None $127,333
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios);
Mr. West (41 registered investment companies consisting of 54 portfolios);
and Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
ADVISORY AND MANAGEMENT ARRANGEMENTS
Reference is made to "Management of the Fund--Advisory and Management
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for its other advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or its affiliates
during the same period may increase the demand for securities being purchased
or the supply of securities being sold, there may be an adverse effect on
price.
The Fund has entered into an investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"). The Investment
Adviser also served as the Fund's investment adviser prior to the conversion of
the Fund from a closed-end investment company to an open-end investment
company. As discussed in the Prospectus, the Investment Adviser receives for
its services to the Fund monthly compensation at the annual rate of 1.00% of
the average daily net assets of the Fund. For the period March 4, 1994
(commencement of operations) to November 30, 1994 and for the fiscal years
ended November 30, 1995 and 1996 the investment advisory fee paid by the Fund
to the Investment Adviser aggregated $2,426,461, $3,068,007 and $2,800,027,
respectively.
15
<PAGE>
As described in the Prospectus, the Investment Adviser has also entered into
a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K.") pursuant to which MLAM U.K. provides investment advisory services
to the Investment Adviser with respect to the Fund.
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 fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays all other expenses incurred in its
operations, including, among other things, taxes; expenses for legal and
auditing services; costs of printing proxies, stock certificates, shareholder
reports and prospectuses and statements of additional information (except to
the extent paid by the Distributor); charges of the custodian, any sub-
custodian and transfer agent; expenses of redemption of shares; Commission
fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of unaffiliated Directors; accounting and pricing costs
(including the daily calculation of net asset value); insurance; interest;
brokerage costs; litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Fund. Accounting services are
provided to the Fund by the Investment Adviser, and the Fund reimburses the
Investment Adviser for its costs in connection with such services. For the
period March 4, 1994 (commencement of operations) to November 30, 1994 and for
the fiscal years ended November 30, 1995 and 1996, the amounts of such
reimbursement were $56,670, $73,536 and $65,766, respectively (includes
operations of the Fund as a closed-end investment company prior to June 10,
1996). Certain expenses in connection with the distribution of Class B, Class C
and Class D shares will be financed by the Fund pursuant to distribution plans
in compliance with Rule 12b-1 under the Investment Company Act. See "Purchase
of Shares--Distribution Plans."
The Investment Adviser is a limited partnership, the partners of which are
ML&Co. and Princeton Services. ML&Co. and Princeton Services are "controlling
persons" of the Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their power to exercise
a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Investment Advisory Agreement will remain in effect until May 31, 1998 and from
year to year thereafter if approved annually (a) by the Board of Directors or
by a majority of the outstanding shares of the Fund and (b) by a majority of
the Directors who are not parties to such contract or interested persons (as
defined in the Investment Company Act) of any such party. Such contract is not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by the vote of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and
16
<PAGE>
Class C are sold to investors choosing the deferred sales charge alternatives.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege."
The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment companies advised by the Investment Adviser or its affiliate, MLAM.
Funds advised by the Investment Adviser or MLAM that utilize the Merrill Lynch
Select PricingSM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Investment
Advisory Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
For the period June 10, 1996 (commencement of operations as an open-end
investment company) to November 30, 1996, the Fund sold its Class A and Class D
shares through the Distributor and Merrill Lynch, as a dealer. The gross sales
charges for the sale of Class A shares for that period were $15,530, of which
the Distributor received $2,643 and Merrill Lynch received $12,887 and the
gross sales charges for the sale of Class D shares for that period were $8,341,
of which the Distributor received $1,470 and Merrill Lynch received $6,871. For
the period June 10, 1996 (commencement of operations as an open-end investment
company) to November 30, 1996, the Distributor received no contingent deferred
sales charges ("CDSCs") with respect to redemptions within one year after
purchase of Class A or Class D shares purchased subject to a front-end sales
charge waiver.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account (including a pension, profit-
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the Code) although more than one beneficiary is involved.
The term "purchase" also includes purchases by any "company," as
17
<PAGE>
that term is defined in the Investment Company Act, but does not include
purchases by any such company which has not been in existence for at least six
months or which has no purpose other than the purchase of shares of the Fund or
shares of other registered investment companies at a discount. The term
"purchase" shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. The term "purchase" also
includes purchases by employee benefit plans not qualified under Section 401 of
the Code, including purchases by employees or by employers on behalf of
employees, by means of a payroll deduction plan or otherwise, of shares of the
Fund. Purchases by such a company or non-qualified employee benefit plan will
qualify for the above quantity discounts only if the Fund and the Distributor
are able to realize economies of scale in sales effort and sales related
expense by means of the company, employer or plan making the Fund's Prospectus
available to individual investors or employees and forwarding investments by
such persons to the Fund and by any such employer or plan bearing the expense
of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class A Shares") are offered at net asset value
to shareholders of certain closed-end funds advised by the Investment Adviser
or its affiliate, MLAM, who purchased such closed-end fund shares prior to
October 21, 1994 (the date the Merrill Lynch Select PricingSM System commenced
operations), and wish to reinvest the net proceeds from a sale of their closed-
end fund shares of common stock in Eligible Class A Shares, if the conditions
set forth below are satisfied. Alternatively, closed-end fund shareholders who
purchased such shares on or after October 21, 1994, and wish to reinvest the
net proceeds from a sale of their closed-end fund shares are offered Class A
shares (if eligible to buy Class A shares) or Class D shares of the Fund and
other MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
and the net proceeds therefrom must be immediately reinvested in Eligible Class
A or Class D Shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends
from shares of common stock acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must sell
his or her shares of common stock of the eligible fund (the "eligible shares")
back to the eligible fund in connection with a tender offer conducted by the
eligible fund and reinvest the proceeds immediately in the designated class of
shares of the Fund. This investment option is available only with respect to
eligible shares as to which no Early Withdrawal Charge or CDSC (each as defined
in the
18
<PAGE>
eligible fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at the
net asset value of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. The Fund offers a right of accumulation under which
investors are permitted to purchase shares of the Fund subject to an initial
sales charge at the offering price applicable to the total of (a) the public
offering price of the shares then being purchased plus (b) an amount equal to
the then current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of all classes of shares of the Fund and of other
MLAM-advised mutual funds. For any such right of accumulation to be made
available, the Distributor (in the case of a purchase made through a securities
dealer) must be provided at the time of purchase, by the purchaser or the
purchaser's securities dealer, with sufficient information to permit
confirmation of qualification for such right of accumulation. Acceptance of the
purchase order is subject to such confirmation. The right of accumulation may
be amended or terminated at any time. Shares held in the name of a nominee or
custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides
plan participant record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares but, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and
Class D shares of the Fund and of other MLAM-advised mutual funds presently
held, at cost or maximum offering price (whichever is higher), on the date of
the first purchase under the Letter of Intention, may be included as a credit
toward completion of such Letter but the reduced sales charge applicable to the
amount covered by such Letter will be applied only to new purchases. If the
total amount of shares does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the
Letter. Class A or Class D shares equal to five percent of the intended amount
will be held in escrow during the 13-month period (while remaining registered
in the name of the purchaser) for this purpose. The first purchase under the
Letter of Intention must be at least five percent of the dollar amount of such
Letter. If a purchase during the term of such Letter would otherwise be subject
to a further reduced sales charge based on the right of accumulation, the
purchaser will be entitled on that purchase and subsequent purchases to the
reduced percentage sales charge which would be applicable to a single purchase
equal to the total dollar value of the Class A shares then being purchased
under such Letter, but there will be no retroactive reduction of the sales
charges on any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the Letter
of Intention will be
19
<PAGE>
deducted from the total purchases made under such Letter. An exchange from a
MLAM-advised mutual fund into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access AccountsSM available through qualified employers
that provide employer-sponsored retirement or savings plans that are eligible
to purchase such shares at net asset value. The initial minimum for such
accounts is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, ML&Co. and its subsidiaries
(the term "subsidiaries" when used herein with respect to ML&Co., includes
MLAM, FAM and certain other entities directly or indirectly wholly-owned and
controlled by ML&Co.) and their directors and employees and any trust, pension,
profit-sharing or other benefit plan for such persons may purchase Class A
shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money
market fund.
Class D shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund sponsored by a non-
Merrill Lynch company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds from
a redemption of shares of the other mutual fund and such fund was subject to a
sales charge either at the time of purchase or on a deferred basis; and second,
such purchase of Class D shares must be made within 90 days after such notice
of termination.
Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of the other mutual funds and such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
20
<PAGE>
Acquisition of Assets of Certain Investment Companies. The public offering
price of Class D shares may be reduced to the net asset value per Class D share
in connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may, in appropriate cases, be adjusted to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or saving plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees will be
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the disbursement of
the account maintenance fees and/or distribution fees paid to the Distributor.
In their consideration of each Distribution Plan, the Directors must consider
all factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholder. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of
21
<PAGE>
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that such Distribution Plan
will benefit the Fund and its related class of shareholders. Each Distribution
Plan can be terminated at any time, without penalty, by the vote of a majority
of the Independent Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders, and all material
amendments are required to be approved by the vote of the Directors, including
a majority of the Independent Directors who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting
called for that purpose. Rule 12b-1 further requires that the Fund preserve
copies of each Distribution Plan and any report made pursuant to such plan for
a period of not less than six years from the date of such Distribution Plan or
such report, the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule will be applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor, however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
22
<PAGE>
The following table sets forth comparative information as of November 30,
1996, with respect to Class B and Class C shares of the Fund, indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule, and with respect to Class B shares, the Distributor's voluntary
maximum, for the period indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1996
---------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES FOR THE
PERIOD JUNE 10, 1996
(COMMENCEMENT OF
OPERATIONS AS AN OPEN-
END INVESTMENT COMPANY)
TO NOVEMBER 30, 1996:
Under NASD Rule as
Adopted................ $683 $43 $ 1 $44 $12 $32 $28
Under Distributor's
Voluntary Waiver....... $683 $43 $ 1 $44 $12 $32 $28
CLASS C SHARES FOR THE
PERIOD JUNE 10, 1996
(COMMENCEMENT OF
OPERATIONS AS AN OPEN-
END INVESTMENT COMPANY)
TO NOVEMBER 30, 1996:
Under NASD Rule as
Adopted................ $308 $19 $ 1 $20 $ 3 $17 $ 7
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended by the Fund for a period of up to seven days.
Suspensions of more than seven days may not be made except (1) for any period
(a) during which the New York Stock Exchange (the "NYSE") is closed other than
customary weekend and holiday closings or (b) during which trading on the NYSE
is restricted; (2) for any period during which an emergency exists as a result
of which (a) disposal by the Fund of securities owned by it is not reasonably
practicable or (b) it is not reasonably practicable for the Fund fairly to
determine the value of its net assets; or (3) for such other periods as the
Commission may by order permit for the protection of security holders of the
Fund. The Commission shall by rules and regulations determine the conditions
under which (i) trading shall be deemed to be restricted and (ii) an emergency
shall be deemed to exist within the meaning of clause (2) above.
23
<PAGE>
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
fund at such time.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge will be waived on redemptions of Class B shares in certain
instances, including in connection with certain post-retirement withdrawals
from an Individual Retirement Account ("IRA") or other retirement plan or on
redemptions of Class B shares following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies in the case of such
withdrawals are: (a) any partial or complete redemption in connection with a
distribution following retirement under a tax-deferred retirement plan or
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of
a series of equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) or any redemption resulting from the tax-free
return of an excess contribution to an IRA; or (b) any partial or complete
redemption following the death or disability (as defined in the Code) of a
Class B shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one year
of the death or initial determination of disability. For the period June 10,
1996 (commencement of operations as an open-end investment company) to November
30, 1996, the Distributor received CDSCs of $2,389 with respect to redemptions
of Class B shares, $2,052 of which were paid to Merrill Lynch. For the period
June 10, 1996 (commencement of operations as an open-end investment company) to
November 30, 1996, the Distributor received CDSCs of $84 with respect to
redemptions of Class C shares, all of which were paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices" in the Prospectus.
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 net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
Subject to obtaining the best price and execution, brokers who provide
supplemental investment research to the Investment Adviser 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. It is possible that certain of the
supplementary investment research so received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions
effected for such other accounts or investment companies.
24
<PAGE>
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less governmental supervision and regulation of foreign stock
exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the OTC market and, where
possible, deals directly with the dealers who make a market in the securities
involved, except in those circumstances in which better prices and execution
are available elsewhere. Under the Investment Company Act, persons affiliated
with the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own accounts,
affiliated persons of the Fund, including Merrill Lynch and any of its
affiliates, will not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in listed or OTC
transactions conducted on an agency basis provided that, among other things,
the fee or commission received by such affiliated broker is reasonable and fair
compared to the fee or commission received by non-affiliated brokers in
connection with comparable transactions. See "Investment Objective and
Policies--Current Investment Restrictions." For the fiscal year ended
November 30, 1996, the Fund paid total brokerage commissions of $1,448,138, of
which $35,356 or 2.44% was paid to Merrill Lynch for effecting 3.54% of the
aggregate dollar amount of transactions on which the Fund paid brokerage
commissions. For the fiscal year ended November 30, 1995, the Fund paid total
brokerage commissions of $676,709, of which $14,389 or 2.1% was paid to Merrill
Lynch for effecting 2.4% of the aggregate dollar amount of transactions on
which the Fund paid brokerage commissions. For the period March 4, 1994
(commencement of operations) to November 30, 1994, the Fund paid total
brokerage commissions of $2,527,986, of which $37,929 or 1.5% was paid to
Merrill Lynch for effecting 2.1% of the aggregate dollar amount of transactions
on which the Fund paid brokerage commissions. During such periods, however, the
Fund operated as a closed-end investment company and, consequently, such
amounts may not necessarily be indicative of the costs of future brokerage
commissions for the Fund.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions. Under present conditions, it
is not believed that these considerations will have any significant effect on
its portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement disclosing the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent
25
<PAGE>
Section 11(a) would apply to Merrill Lynch acting as a broker for the Fund in
any of its portfolio transactions executed on any such securities exchange of
which it is a member, appropriate consents have been obtained from the Fund and
annual statements as to aggregate compensation will be provided to the Fund.
The Directors have considered the possibility of seeking to recapture for the
benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the advisory fee paid by the Fund. After considering
all factors deemed relevant, the Directors made a determination not to seek
such recapture. The Directors will reconsider this matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 15 minutes after the close of business on the NYSE
(generally 4:00 P.M., New York time), on each day the NYSE is open for trading.
The NYSE is not open on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any
assets or liabilities initially expressed in terms of non-U.S. dollar
currencies will be translated into U.S. dollars at the prevailing market rates
as quoted by one or more banks or dealers on the day of valuation.
Net asset value will be computed by dividing the value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time. Expenses,
including the fees payable to the Investment Adviser and the account
maintenance and/or distribution fees, are accrued daily. The per share net
asset value of Class B, Class C and Class D shares generally will be lower than
the per share net asset value of Class A shares reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; moreover, the per share net asset value of Class B and Class C
shares generally will be lower than the per share net asset value of its Class
D shares reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities which are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
26
<PAGE>
When the Fund writes an option, the amount of the premium received is recorded
on the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of OTC options, the last bid
price. Other investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by
or under the direction of the Board of Directors of the Fund.
SHAREHOLDER SERVICES
The Fund will offer a number of shareholder services described below which
are designed to facilitate investment in its shares. Full details as to each of
such service, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund by calling the
telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the previous statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Fund's transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the transfer
agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the transfer
agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the transfer agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for his or her shares, and then must turn the
certificates over to the new
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firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic
investments made in the Fund in their CMA(R) or CBA(R) accounts or in certain
related accounts in amounts of $100 or more ($1 for retirement accounts)
through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions are automatically reinvested in full and fractional shares of the
Fund at the net asset value per share next determined after the close of
business on the NYSE on the ex-dividend date of such dividend or distribution.
Shareholders may elect to receive either their dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed or
direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based upon cost or the
current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with Class A or Class D shares with such a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's Investment Account to
provide the withdrawal payment specified by the
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shareholder. The shareholder may specify either a dollar amount or a percentage
of the value of his Class A or Class D shares. Redemptions will be made at the
net asset value as determined as of 15 minutes after the close of business on
the NYSE (generally 4:00 P.M., New York time) on the 24th day of each month or
the 24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on such date, the shares will be redeemed at the
net asset value next determined after the close of the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the
direct deposit of the withdrawal payment will be made, on the next business day
following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all shares in the Investment Account are
automatically reinvested in Class A or Class D shares of the Fund,
respectively. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the Fund's
transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends and capital gains distributions, the shareholder's
original investment may be correspondingly reduced. Purchase of additional
Class A or Class D shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for Class A or
Class D shares of the Fund from investors who maintain a Systematic Withdrawal
Plan unless such purchase is equal to at least one year's scheduled withdrawals
or $1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the CMA(R) or CBA(R) Systematic Redemption Program,
eligible shareholders should contact their Merrill Lynch Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund will have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select PricingSM System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his or her account
in which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, but does not hold Class A shares of the second fund in his
or her account at the time of the exchange and is
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not otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund. Class B, Class C and Class D shares will be exchangeable with
shares of the same class of other MLAM-advised mutual funds. For purposes of
computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period for the newly acquired shares of the
other fund as more fully described below. Class A, Class B, Class C and Class D
shares also will be exchangeable for shares of certain MLAM-advised money
market funds as follows: Class A shares may be exchanged for shares of Merrill
Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B,
Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and Class D shares acquired through dividend reinvestment
shall be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of certain money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales charge that may be payable on a disposition of
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the new Class B or Class C shares, the holding period for the outstanding Class
B or Class C shares is "tacked" to the holding period for the new Class B or
Class C shares. For example, an investor may exchange Class B shares of the
Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund")
after having held the Fund Class B shares for two and a half years. The 2% CDSC
that generally would apply to a redemption would not apply to the exchange.
Three years later the investor may decide to redeem the Class B shares of
Special Value Fund and receive cash. There will be no CDSC due on this
redemption, since by "tacking" the two and a half year holding period of Fund
Class B shares to the three year holding period for the Special Value Fund
Class B shares, the investor will be deemed to have held the new Class B shares
for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange of Class B or Class C shares of
the Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the fund received in such exchange will
be aggregated with previous holding periods for purposes of reducing the CDSC,
or with respect to Class B shares, toward satisfaction of the conversion
period. Thus, for example, an investor may exchange Class B shares of the Fund
for shares of Merrill Lynch Institutional Fund ("Institutional Fund") after
having held the Fund Class B shares for two and a half years and three years
later decide to redeem the shares of Institutional Fund for cash. At the time
of this redemption, the 2% CDSC that would have been due had the Class B shares
of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continued to hold for an additional two and a half years, any
subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised mutual
funds with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income, if any.
Dividends from such net investment income are paid at least annually. All net
realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. See "Shareholder Services--Automatic
Reinvestment of Dividends and Capital Gains Distributions" in the Prospectus
for information concerning the manner in which dividends and distributions may
be reinvested automatically in shares of the Fund. A shareholder whose account
is maintained through the transfer agent may elect in writing to receive any
such dividends or distributions, or both, in cash. A shareholder whose account
is maintained through Merrill Lynch may elect in writing to receive both
dividends and distributions in cash. Dividends and distributions are taxable to
shareholders as described below whether they are invested in shares of the Fund
or received in cash. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and
Class C shares; similarly, the per share dividends and distributions on Class D
shares will be lower than the per share dividends and distributions on Class A
shares as a result of the account maintenance fees applicable with respect to
the Class D shares. See "Determination of Net Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and,
after such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date
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in one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value
of the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible, and intends, to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate shares as taxes paid by them and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes. For this
purpose, the Fund will allocate foreign taxes and foreign source income among
the Class A, Class B, Class C and Class D shareholders according to a method
(which it believes is consistent with the Commission rule permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to the Class A, Class B, Class C and Class D shareholders
during the taxable year or such other method as the Internal Revenue Service
may prescribe.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales
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charge paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield/high risk securities may be purchased at a discount
and may therefore cause the Fund to accrue and distribute income before amounts
due under the obligations are paid. In addition, a portion of the interest
payments on such high yield/high risk securities may be treated as dividends
for Federal income tax purposes; in such case, if the issuer of such high
yield/high risk securities is a domestic corporation, dividend payments by the
Fund will be eligible for the dividends received deduction to the extent of the
deemed dividend portion of such interest payments.
The Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under proposed
regulations the Fund would be able to elect to "mark to market" at the end of
each taxable year all shares that it holds in PFICs. If it made this election,
the Fund would recognize as ordinary income any increase in the value of such
shares. Unrealized losses, however, would not be recognized. By making the
mark-to-market election, the Fund could avoid imposition of the interest charge
with respect to its distributions from PFICs, but in any particular year might
be required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
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TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. Application of these
rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain
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or loss treatment for such transactions. Regulated futures contracts, as
described above, will be taxed under Code Section 1256 unless application of
Section 988 is elected by the Fund. In general, however, Code Section 988 gains
or losses will increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than such shareholder's basis
in Fund shares (assuming the shares were held as a capital asset). These rules
and the mark-to-market rules described above, however, will not apply to
certain transactions entered into by the Fund solely to reduce the risk of
currency fluctuations with respect to its investments.
The 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, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs that
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return will be determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital
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gains or losses on portfolio investments over such periods) that would equate
the initial amount invested to the redeemable value of such investment at the
end of each period. Average annual total return is computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum sales
charge in the case of Class A and Class D shares and the CDSC that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment for various periods
other than those noted below. Such data will be computed as described above,
except that (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
37
<PAGE>
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES CLASS C SHARES CLASS D SHARES
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$1,000 AT THE END OF $1,000 AT THE END OF $1,000 AT THE END OF $1,000 AT THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
November 30,
1996........... 10.32 % $1,103.20
Inception (June
10, 1996) to
November 30,
1996........... (4.00)% $ 960.00 (1.06)% $989.40 (4.94)% $ 950.60
Inception (March
4, 1994) to
November 30,
1996........... 1.99 % $1,055.60
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
November 30,
1996........... 16.43 % $1,164.30
Year Ended
November 30,
1995........... (6.23)% $ 937.70
Inception (June
10, 1996) to
November 30,
1996........... 0.00 % $1,000.00 (0.06)% $999.40 0.32 % $1,003.20
Inception (March
4, 1994) to
November 30,
1994........... 2.05 % $1,020.50
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception (June
10, 1996) to
November 30,
1996........... (4.00) % $ 960.00
Inception (March
4, 1994) to
November 30,
1996........... 5.56 % $1,055.60 (1.06)% $989.40 (4.94)% $ 950.60
</TABLE>
- --------
* During such periods, the Fund operated as a closed-end investment company. On
June 10, 1996, the Fund converted to an open-end investment company and
shares outstanding as of that date were designated Class A.
In order to reflect the reduced sales charges in the case of Class A or Class
D shares, or the waiver of the CDSC in the case of Class B or Class C shares,
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares," respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may not take into account the waiver of
the CDSC and therefore may reflect greater total return since, due to the
reduced sales charges or the waiver of sales charges, a lower amount of
expenses may be deducted.
38
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on December 23, 1993 as a
closed-end investment company. On April 23, 1996, the shareholders of the Fund
voted to convert the Fund to an open-end investment company. Amended and
Restated Articles of Incorporation, effective June 10, 1996, (i) converted the
Fund to an open-end investment company, (ii) renamed the Fund "Merrill Lynch
Emerging Tigers Fund, Inc." and (iii) increased the authorized capital to
400,000,000 shares of Common Stock, par value $0.10 per share, divided into
four classes, designated Class A, Class B, Class C and Class D Common Stock.
Class A and Class D each consist of 100,000,000 shares; Class B consists of
150,000,000 shares and Class C consists of 50,000,000 shares. Each share of
Class A, Class B, Class C and Class D Common Stock represents an interest in
the same assets of the Fund and is identical in all respects except that the
Class B, Class C and Class D shares bear certain expenses related to the
account maintenance and/or distribution of such shares and have exclusive
voting rights with respect to matters relating to such account maintenance
and/or distribution expenditures. At the time of conversion of the Fund into an
open-end investment company, the Fund had approximately 22,007,055 shares of
Common Stock outstanding, all of which were reclassified into shares of Class A
Common Stock upon such conversion. The Fund may issue additional classes of
shares if the Board of Directors deems such issuance to be in the best
interests of the Fund.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold annual meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to elect Directors. Also, the by-laws
of the Fund require that a special meeting of shareholders be held upon the
written request of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting, if they comply with applicable Maryland law. Voting
rights for Directors are not cumulative. Shares issued are fully paid and non-
assessable and have no preemptive rights. Redemption and conversion rights are
discussed elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction
of outstanding liabilities, except that, as noted above, expenses related to
the account maintenance and/or distribution of the Class B, Class C and Class D
shares will be borne solely by such class. Stock certificates are issued by the
transfer agent only on specific request. Certificates for fractional shares are
not issued in any case.
39
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on November 30, 1996, and its shares outstanding on that date is as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Net Assets........................... $193,544,714 $3,719,464 $887,137 $952,501
============ ========== ======== ========
Number of Shares Outstanding......... 12,410,814 239,521 57,169 61,140
============ ========== ======== ========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................ $ 15.59 $ 15.53 $ 15.52 $ 15.58
Sales Charge (for Class A and Class D
shares: 5.25% of offering price
(5.54% of net asset value per
share))*............................ .86 ** ** .86
------------ ---------- -------- --------
Offering Price....................... $ 16.45 $ 15.53 $ 15.52 $ 16.44
============ ========== ======== ========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus
and "Redemption of Shares--Deferred Sales Charges--Class B and Class C
Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the United States and with certain
foreign banks and securities depositories. The Custodian is responsible for
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on
the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening, maintenance and servicing
of shareholder accounts. See "Management of the Fund--Transfer Agency
Services" in the Prospectus.
40
<PAGE>
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on November 30 of each year. The Fund will
send to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, will be sent to shareholders each
year. After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on February 28, 1997.
41
<PAGE>
APPENDIX
RATINGS DESCRIPTIONS
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-edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what 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
some time 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.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "B" in its corporate bond rating system. The
modifier 1 indicates that the 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.
42
<PAGE>
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.
AAA An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
A An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be
questionable over any great length of time.
BA An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
B An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
CAA An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
CA An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payments.
C This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification 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.
43
<PAGE>
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S RATINGS SERVICES
("S&P")
An S&P corporate debt rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
Investment Grade
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher-
rated categories.
Speculative Grade
Debt rated "BB", "B", "CCC", "CC" and "C" is 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 "C"
the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
44
<PAGE>
BB
Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
"BBB-" rating.
B Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
CC The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
N.R. indicates not rated.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A" and "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the Legal Investment Laws of various states may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
45
<PAGE>
DESCRIPTION OF S&P PREFERRED STOCK RATINGS
An S&P 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: (1)
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; (2) nature of, and
provisions of, the issue; and (3) 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 S&P 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 the "A" category.
BB Preferred stock rated "BB", "B" and "CCC" are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay
CCC 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.
N.R. indicates not rated.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
46
<PAGE>
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 S&P earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to S&P by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information.
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Emerging Tigers Fund, Inc.
(formerly Emerging Tigers Fund, Inc.)
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Emerging Tigers Fund, Inc. as of
November 30, 1996, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended and the financial highlights for each of the years in the two-year period
then ended and the period March 4, 1994 (commencement of operations) to
November 30, 1994. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and the financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
November 30, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Emerging Tigers Fund, Inc. as of November 30, 1996, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
January 9, 1997
48
<PAGE>
[This Page Intentionally Left Blank]
49
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Held/ Value Percent of
COUNTRY Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
China Conglomerates 4,702,000 Guangdong Investments, Ltd. (a) $ 3,258,754 $ 3,922,641 2.0%
800,000 ++Shanghai Industrial Holdings Ltd. 2,028,044 2,602,341 1.3
------------ ------------ ------
5,286,798 6,524,982 3.3
Food 8,000,000 Tingyi (Cayman Islands) Holding Co. 2,087,068 2,038,414 1.0
Infrastructure 903,000 New World Infrastructure Ltd. 2,333,319 2,686,283 1.4
Real Estate 1,723,000 China Resources Enterprise Ltd. 2,080,520 2,473,686 1.2
Investment
Total Long-Term Investments in
China 11,787,705 13,723,365 6.9
India Auto & Truck 151,566 Tata Engineering Locomotive Co.
(GDR)** 2,164,511 1,515,660 0.8
Cement 126,000 Gujarat Ambuja Cement (GDR)** 1,000,612 945,000 0.5
Consumer Products 456,000 IFB Industries Ltd. 540,796 502,025 0.3
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Engineering 26,000 Larsen & Toubro Ltd. (GDR)** 494,000 377,000 0.2
190,500 Larsen & Toubro Ltd. (GDR)** ++++ 2,924,175 2,762,250 1.4
------------ ------------ ------
3,418,175 3,139,250 1.6
Financial Services 45,181 Housing Development Finance
Corporation Ltd. 2,812,530 2,689,255 1.3
113,200 Industrial Credit & Investment
Corporation of India Ltd. (GDR)** 1,315,950 976,350 0.5
------------ ------------ ------
4,128,480 3,665,605 1.8
Total Long-Term Investments in India 11,252,574 9,767,540 5.0
Indochina Mutual Funds 75,000 ++Southeast Asia Frontier Fund 397,500 367,500 0.2
141,300 ++Vietnam Frontier Fund 1,455,390 1,342,350 0.6
Total Long-Term Investments in
Indochina 1,852,890 1,709,850 0.8
Indonesia Banking 2,779,520 P.T. Bank International Indonesia 1,588,559 2,579,119 1.3
Building & 4,550,000 P.T. Citra Marga Nusaphala 3,040,036 3,833,724 1.9
Construction
Food 2,900,000 P.T. Davomas Abadi 'Foreign' 2,530,022 2,536,263 1.3
Insurance 3,374,000 P.T. Lippo Life Insurance 3,795,842 2,806,869 1.4
Miscellaneous-- 107,000 P.T. Modern Photo Film 607,017 268,185 0.1
Consumer
Telecommunications 56,600 P.T. Telekomunikasi Indonesia
(Persero) (ADR)* 1,178,424 1,860,725 0.9
Tobacco 1,107,500 P.T. Hanjaya Mandala Sampoerna 1,958,010 5,646,171 2.9
Total Long-Term Investments in
Indonesia 14,697,910 19,531,056 9.8
Malaysia Automobiles 410,000 Edaran Otomobil Nasional BHD 3,983,110 4,040,768 2.0
Banking 801,600 Arab-Malaysian Merchant Bank BHD 3,624,193 6,377,265 3.2
3,498,666 Public Bank BHD 'Foreign' 5,612,875 7,477,853 3.7
------------ ------------ ------
9,237,068 13,855,118 6.9
Building & 1,907,000 I.J.M. Corp. BHD 3,299,946 4,340,095 2.2
Construction
Conglomerates 3,297,000 Renong BHD 4,727,193 6,081,148 3.0
US$ 465,000 Renong BHD, 2.50% due 1/15/2005 508,013 551,025 0.3
------------ ------------ ------
5,235,206 6,632,173 3.3
Consumer 340,500 ++Amway (Malaysia) Holdings BHD 2,073,026 2,021,571 1.0
Products
Engineering & US$ 4,225,000 United Engineering, Ltd., 2% due 4,903,317 6,527,625 3.3
Construction 3/01/2004
Industrial 508,475 O.Y.L. Industries BHD 2,833,447 5,282,988 2.7
Leisure 1,977,000 Berjaya Sports TOTO BHD 3,474,963 9,390,065 4.7
776,000 Resorts World BHD 4,528,444 3,900,732 2.0
------------ ------------ ------
8,003,407 13,290,797 6.7
Metal 461,000 ++Timah Langat BHD 2,499,858 2,536,276 1.3
Publishing 716,000 Star Publications (Malaysia) BHD 2,644,465 2,734,771 1.4
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Shares Held/ Value Percent of
COUNTRY Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Malaysia Real Estate 980,000 IOI Properties BHD $ 3,555,471 $ 3,219,474 1.6%
(concluded) 1,217,500 Land & General BHD (Ordinary) 1,521,421 2,963,636 1.5
692,000 Malaysian Resources Corp. BHD 2,988,836 3,040,253 1.5
------------ ------------ ------
8,065,728 9,223,363 4.6
Telecommuni- US$ 2,090,000 Telekom Malaysia BHD, 4% due
cations 10/03/2004 2,116,225 2,215,400 1.1
Utilities-- 646,000 Tenaga Nasional BHD 2,968,605 2,940,431 1.5
Electric
Total Long-Term Investments in
Malaysia 57,863,408 75,641,376 38.0
Philippines Banking 19,716 Metropolitan Bank & Trust Company 124,047 457,570 0.2
US$ 3,790,000 Metropolitan Bank & Trust Company,
2.75% due 9/10/2000 4,813,078 4,858,780 2.5
------------ ------------ ------
4,937,125 5,316,350 2.7
Beverages 740,740 San Miguel Corp. 'B' 2,547,424 2,959,127 1.5
Conglomerates 219,900 ++Benpres Holdings Corp. (GDR)**++++ 2,159,018 1,616,265 0.8
Engineering & 5,475,600 ++DMCI Holdings Inc. 3,519,079 3,749,840 1.9
Construction
Food & Beverage 4,040,800 Universal Robina Corp. 3,047,558 1,998,570 1.0
International 4,134,900 ++International Container Terminal
Trade Services, Inc. 3,955,596 3,185,654 1.6
Real Estate US$ 1,315,000 AC International Finance, 1.74%
due 12/08/2000 (c) 1,226,100 1,153,913 0.6
1,182,500 Ayala Land, Inc. 'B' 1,256,677 1,282,196 0.6
------------ ------------ ------
2,482,777 2,436,109 1.2
Retail 7,486,346 SM Prime Holdings, Inc. 1,229,713 1,794,399 0.9
9,670,000 ++Uniwide Holdings, Inc. 1,792,055 1,839,522 0.9
------------ ------------ ------
3,021,768 3,633,921 1.8
Utilities-- 432,159 Manila Electric Co. (MERALCO) 'B' 2,913,550 3,206,171 1.6
Electric
Total Long-Term Investments
in the Philippines 28,583,895 28,102,007 14.1
Singapore Airlines 516,000 Singapore Airlines Ltd. 'Foreign' 4,907,692 4,854,740 2.4
Banking 457,000 Development Bank of Singapore Ltd. 4,665,122 5,895,723 3.0
683,400 United Overseas Bank Ltd. 4,965,842 7,257,776 3.6
------------ ------------ ------
9,630,964 13,153,499 6.6
Beverages 196,000 Fraser & Neave Ltd. 1,858,848 2,039,629 1.0
Industrial 635,000 Clipsal Industries Ltd. 1,767,649 2,032,000 1.0
Publishing & 339,800 Singapore Press Holdings Ltd. 4,867,466 6,418,175 3.2
Broadcasting
Real Estate 350,000 City Developments Ltd. 2,826,650 3,093,371 1.6
1,593,000 DBS Land Ltd. 4,715,480 5,677,121 2.9
------------ ------------ ------
7,542,130 8,770,492 4.5
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Long-Term Investments in
Singapore 30,574,749 37,268,535 18.7
Sri Lanka Finance 90,833 Development Finance Corp. 718,327 458,980 0.2
Total Long-Term Investments in
Sri Lanka 718,327 458,980 0.2
Thailand Banking US$ 1,992,000 Bangkok Bank Public Company Ltd.,
3.25% due 3/03/2004 2,321,875 2,051,760 1.0
171,920 Bangkok Bank Public Company Ltd.
'Foreign' 1,558,359 1,965,723 1.0
303,100 Thai Farmers Bank, Ltd. 'Foreign' 2,089,374 2,587,353 1.3
53,512 Thai Farmers Bank, Ltd. 'Foreign'
(Warrants)(b) 53,003 52,385 0.0
------------ ------------ ------
6,022,611 6,657,221 3.3
Building & 134,000 Land & House Public Co. 'Foreign' 2,930,452 1,059,911 0.5
Construction
Communications 65,300 Advanced Info Services PLC 534,460 761,978 0.4
Financial Services 323,600 Finance One Co., Ltd. 'Foreign' 193,850 925,006 0.5
Mutual Funds 2,800,000 Ruam Pattana Fund II 'Foreign' 1,953,894 1,288,276 0.7
Oil--Related 229,500 PTT Exploration and Production
Public Co. 'Foreign' 1,835,627 3,378,965 1.7
Total Long-Term Investments in
Thailand 13,470,894 14,071,357 7.1
Total Long-Term Investments 170,802,352 200,274,066 100.6
Face
Amount Short-Term Securities
Commercial US$ 136,000 General Electric Capital Corp., 5.70% 135,957 135,957 0.1
Paper*** due 12/02/1996
US Government & 10,000,000 Federal Home Loan Mortgage Corp.,
Agency 5.22% due 12/11/1996 9,984,050 9,984,050 5.0
Obligations***
Total Investments in Short-Term
Securities 10,120,007 10,120,007 5.1
Total Investments $180,922,359 210,394,073 105.7
============
Liabilities in Excess of Other Assets (11,290,257) (5.7)
------------ ------
Net Assets $199,103,816 100.0%
============ ======
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Commercial Paper and certain US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid
at the time purchase by the Fund.
(a) Security is regarded as an investment in China. A company is
considered to be in an emerging market Asia-Pacific country 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 assets or activities located in such countries.
(b) Warrants entitle the Fund to purchase a predetermined number of
shares of Common Stock. The purchase price and number of shares are
subject to adjustment under certain conditions until the expiration
date.
(c) Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase by the Fund.
++ Non-income producing security.
++++ Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $4,379,000, representing 2.2% of
net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Benpres Holdings Corp. (GDR) 10/27/1994 $ 2,159,018 $ 1,616,265
Larsen & Toubro Ltd. (GDR) 3/01/1996 2,924,175 2,762,250
Total $ 5,083,193 $ 4,378,515
=========== ===========
</TABLE>
See Notes to Financial Statements.
53
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of November 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$180,922,359) (Note 1a) $210,394,073
Receivables:
Securities sold $ 1,419,042
Dividends 136,806
Interest 119,591
Capital shares sold 14,716 1,690,155
------------
Deferred organization expenses (Note 1f) 23,251
Prepaid registration fees and other assets (Note 1f) 21,155
------------
Total assets 212,128,634
------------
Liabilities: Payables:
Securities purchased 11,438,968
Capital shares redeemed 1,034,895
Investment adviser (Note 2) 156,930
Distributor (Note 2) 3,862 12,634,655
------------
Accrued expenses and other liabilities 390,163
------------
Total liabilities 13,024,818
------------
Net Assets: Net assets $199,103,816
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 1,241,081
Consist of: Class B Common Stock, $0.10 par value, 150,000,000 shares authorized 23,952
Class C Common Stock, $0.10 par value, 50,000,000 shares authorized 5,717
Class D Common Stock, $0.10 par value, 100,000,000 shares authorized 6,114
Paid-in capital in excess of par 168,935,630
Undistributed investment income--net 528,007
Accumulated realized capital losses on investments and foreign
currency transactions--net (Note 6) (1,115,006)
Unrealized appreciation on investments and foreign currency
transactions--net 29,478,321
------------
Net assets $199,103,816
============
Net Asset Class A--Based on net assets of $193,544,714 and 12,410,814
Value: shares outstanding $ 15.59
============
Class B--Based on net assets of $3,719,464 and 239,521
shares outstanding $ 15.53
============
Class C--Based on net assets of $887,137 and 57,169
shares outstanding $ 15.52
============
Class D--Based on net assets of $952,501 and 61,140
shares outstanding $ 15.58
============
</TABLE>
See Notes to Financial Statements.
54
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended November 30, 1996
<S> <C> <C> <C>
Investment Income Dividends (net of $298,838 foreign withholding tax) $ 2,521,930
(Notes 1d & 1e): Interest and discount earned (net of $257 foreign withholding tax) 1,947,928
------------
Total income 4,469,858
------------
Expenses: Investment advisory fees (Note 2) 2,800,027
Custodian fees 438,910
Transfer agent fees--Class A (Note 2) 222,157
Registration fees (Note 1f) 92,524
Printing and shareholder reports 75,550
Accounting services (Note 2) 65,766
Professional fees 58,525
Directors' fees and expenses 33,562
Account maintenance and distribution fees--Class B (Note 2) 12,392
Amortization of organization expenses (Note 1f) 10,731
Pricing fees 7,530
Account maintenance and distribution fees--Class C (Note 2) 3,088
Transfer agent fees--Class B (Note 2) 2,455
Transfer agent fees--Class C (Note 2) 663
Account maintenance fees--Class D (Note 2) 493
Transfer agent fees--Class D (Note 2) 273
Other 19,829
------------
Total expenses 3,844,475
------------
Investment income--net 625,383
------------
Realized & Realized gain (loss) from:
Unrealized Investments--net $ 13,187,987
Gain (Loss) on Foreign currency transactions--net (213,007) 12,974,980
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 32,163,396
(Notes 1b, 1c, Foreign currency transactions--net 1,175 32,164,571
1e & 3): ------------ ------------
Net realized and unrealized gain on investments
and foreign currency transactions 45,139,551
------------
Net Increase in Net Assets Resulting from Operations $ 45,764,934
============
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended November 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 625,383 $ 741,919
Realized gain (loss) on investments and foreign currency
transactions--net 12,974,980 (14,284,572)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 32,164,571 (6,776,045)
------------ ------------
Net increase (decrease) in net assets resulting from operations 45,764,934 (20,318,698)
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (248,019) (2,727,906)
Shareholders Class B -- --
(Note 1g): Class C -- --
Class D -- --
Realized gain on investments--net:
Class A -- (536,928)
Class B -- --
Class C -- --
Class D -- --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (248,019) (3,264,834)
------------ ------------
Capital Share Offering and underwriting costs resulting from the
Transactions issuance of Common Stock -- (96)
(Notes 1f & 4): Net decrease in net assets from capital share transactions (141,243,207) --
------------ ------------
Net decrease in net assets derived from capital
share transactions (141,243,207) (96)
------------ ------------
Net Assets: Total decrease in net assets (95,726,292) (23,583,628)
Beginning of year 294,830,108 318,413,736
------------ ------------
End of year* $199,103,816 $294,830,108
============ ============
*Undistributed investment income--net (Note 1h) $ 528,007 $ 234,058
============ ============
<CAPTION>
FINANCIAL HIGHLIGHTS
Class A
For the Period
The following per share data and ratios have been derived March 4,
from information provided in the financial statements. For the Year Ended 1994++ to
November 30, November 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.40 $ 14.47 $ 14.18
Operating ------------ ------------ ------------
Performance: Investment income--net .05 .03 .12
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net 2.15 (.96) .19
------------ ------------ ------------
Total from investment operations 2.20 (.93) .31
------------ ------------ ------------
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Less dividends and distributions:
Investment income--net (.01) (.12) --
Realized gain on investments--net -- (.02) --
------------ ------------ ------------
Total dividends and distributions (.01) (.14) --
------------ ------------ ------------
Capital charge resulting from issuance of
Common Stock -- --++++ (.02)
------------ ------------ ------------
Net asset value, end of period $ 15.59 $ 13.40 $ 14.47
============ ============ ============
Total Investment Based on net asset value per share 16.43% (6.23%) 2.05%+++
Return:** ============ ============ ============
Ratios to Average Expenses 1.36% 1.32% 1.32%*
Net Assets: ============ ============ ============
Investment income--net .23% .24% 1.12%*
============ ============ ============
Supplemental Net assets, end of period (in thousands) $ 193,545 $ 294,830 $ 318,414
Data: ============ ============ ============
Portfolio turnover 44.09% 18.84% 9.10%
============ ============ ============
Average commission rate paid++++++ $ .0086 -- --
============ ============ ============
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period June 10, 1996++ to
November 30, 1996
Increase (Decrease) in Net Asset Value: Class B Class C Class D
Per Share Net asset value, beginning of period $ 15.53 $ 15.53 $ 15.53
Operating ------------ ------------ ------------
Performance: Investment loss--net (.05) (.05) (.01)
Realized and unrealized gain on investments and
foreign currency transactions--net .05 .04 .06
------------ ------------ ------------
Total from investment operations -- (.01) .05
------------ ------------ ------------
Net asset value, end of period $ 15.53 $ 15.52 $ 15.58
============ ============ ============
Total Investment Based on net asset value per share .00%+++ (.06%)+++ .32%+++
Return:** ============ ============ ============
Ratios to Average Expenses 2.67%* 2.68%* 1.88%*
Net Assets: ============ ============ ============
Investment loss--net (.99%)* (.98%)* (.34%)*
============ ============ ============
Supplemental Net assets, end of period (in thousands) $ 3,719 $ 887 $ 953
Data: ============ ============ ============
Portfolio turnover 44.09% 44.09% 44.09%
============ ============ ============
Average commission rate paid++++++ $ .0086 $ .0086 $ .0086
============ ============ ============
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Commencement of Operations.
++++ Amount is less than $0.01 per share.
++++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly affect the rate
shown.
+++ Aggregate total investment return.
See Notes to Financial Statements.
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Emerging Tigers Fund, Inc. (the "Fund"), formerly
Emerging Tigers Fund, Inc., is registered under the Investment
Company Act of 1940 as a non-diversified, open-end management
investment company. Effective June 10, 1996, as a result of the
approval of its shareholders, the Fund converted to an open-end
management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--The Fund 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-US dollar denominated
securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
58
<PAGE>
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have already passed are subsequently recorded when
the Fund has determined the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period beginning with the commencement
of operations. Direct expenses relating to the public offering of
the Common Stock were charged to capital at the time of issuance.
Prepaid registration fees are charged to expense as the related
shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$83,415 have been reclassified between accumulated net realized
capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of 1.00% of
the average daily net assets of the Fund.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended November 30, 1996, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $2,643 $12,887
Class D $1,470 $ 6,871
For the year ended November 30, 1996, MLPF&S received contingent
deferred sales charges of $2,389 and $84 relating to transactions in
Class B and Class C Shares, respectively.
In addition, MLPF&S received $35,356 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
November 30, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended November 30, 1996 were $111,581,891 and
$233,333,351, respectively.
Net realized and unrealized gains (losses) as of November 30, 1996
were as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $13,190,458 $29,471,714
Short-term investments (2,471) --
Foreign currency transactions (213,007) 6,607
----------- -----------
Total $12,974,980 $29,478,321
=========== ===========
As of November 30, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $29,471,714, of which $39,072,650
related to appreciated securities and $9,600,936 related to
depreciated securities. At November 30, 1996, the aggregate cost of
investments for Federal income tax purposes was $180,922,359.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $141,243,207 for the year ended November 30, 1996. During the
year ended November 30, 1995, shares issued and outstanding remained
constant at 22,007,055.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
Shares sold 376,008 $ 5,726,244
Shares redeemed (9,972,249) (152,370,175)
------------- -------------
Net decrease (9,596,241) $(146,643,931)
============= =============
Class B Shares for the Period
June 10, 1996++ to Dollar
November 30, 1996 Shares Amount
Shares sold 294,088 $ 4,450,564
Shares redeemed (52,601) (796,992)
Automatic conversion of shares (1,966) (29,132)
----------- -----------
Net increase 239,521 $ 3,624,440
=========== ===========
++ Commencement of Operations.
Class C Shares for the Period
June 10, 1996++ to Dollar
November 30, 1996 Shares Amount
Shares sold 61,472 $ 937,156
Shares redeemed (4,303) (64,508)
----------- -----------
Net increase 57,169 $ 872,648
=========== ===========
++ Commencement of Operations.
60
<PAGE>
Class D Shares for the Period
June 10, 1996++ to Dollar
November 30, 1996 Shares Amount
Shares sold 119,709 $ 1,774,038
Automatic conversion of shares 1,964 29,132
----------- -----------
Total issued 121,673 1,803,170
Shares redeemed (60,533) (899,534)
----------- -----------
Net increase 61,140 $ 903,636
=========== ===========
++ Commencement of Operations.
5. Commitments:
At November 30, 1996, the Fund had entered into foreign exchange
contracts under which it agreed to purchase and sell various foreign
currency with approximate values of $11,435,000 and $1,398,000,
respectively.
6. Capital Loss Carryforward:
At November 30, 1996, the Fund had a net capital loss carry-forward
of approximately $1,115,000, all of which expires in 2003. This
amount will be available to offset like amounts of any future
taxable gains.
7. Subsequent Event:
On December 1, 1996, the Fund's Board of Directors declared an
ordinary income dividend in the amount of $.046195 per Class A Share
and $.030288 per Class D Share, payable on December 30, 1996 to
shareholders of record as of December 19, 1996.
61
<PAGE>
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62
<PAGE>
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63
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Hedging Techniques....................................................... 2
Other Investment Policies and Practices.................................. 7
Investment Restrictions.................................................. 10
Management of the Fund.................................................... 13
Directors and Officers................................................... 13
Compensation of Directors................................................ 14
Advisory and Management Arrangements..................................... 15
Purchase of Shares........................................................ 16
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 17
Reduced Initial Sales Charges............................................ 19
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 21
Distribution Plans....................................................... 21
Limitations on the Payment of Deferred Sales Charges..................... 22
Redemption of Shares...................................................... 23
Deferred Sales Charges--
Class B and Class C Shares.............................................. 24
Portfolio Transactions and Brokerage...................................... 24
Determination of Net Asset Value.......................................... 26
Shareholder Services...................................................... 27
Investment Account....................................................... 27
Automatic Investment Plans............................................... 28
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 28
Systematic Withdrawal Plans--
Class A and Class D Shares.............................................. 28
Exchange Privilege....................................................... 29
Dividends, Distributions and Taxes........................................ 32
Dividends and Distributions.............................................. 32
Taxes.................................................................... 32
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 35
Special Rules for Certain Foreign Currency Transactions.................. 35
Performance Data.......................................................... 36
General Information....................................................... 39
Description of Shares.................................................... 39
Computation of Offering Price Per Share.................................. 40
Independent Auditors..................................................... 40
Custodian................................................................ 40
Transfer Agent........................................................... 40
Legal Counsel............................................................ 41
Reports to Shareholders.................................................. 41
Additional Information................................................... 41
Security Ownership of Certain Beneficial Owners.......................... 41
Appendix.................................................................. 42
Independent Auditors' Report.............................................. 48
Financial Statements...................................................... 50
</TABLE>
Code #17035-0397
[LOGO] MERRILL LYNCH
Merrill Lynch
Emerging Tigers Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
March 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the two-year period
ended November 30, 1996, and for the period March 4, 1994
(commencement of operations) to November 30, 1994.
Contained in Part B:
Schedule of Investments as of November 30, 1996.
Statement of Assets and Liabilities as of November 30, 1996.
Statement of Operations for the year ended November 30, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended November 30, 1996.
Financial Highlights for each of the years in the two-year period
ended November 30, 1996 and for the period March 4, 1994
(commencement of operations) to November 30, 1994.
(B)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Form of Amended and Restated Articles of Incorporation of the
Registrant, dated June 6, 1996.(a)
(b) --Form of Articles Supplementary to Amended and Restated Articles of
Incorporation of the Registrant, dated June 6, 1996.(a)
2 --By-Laws of the Registrant.(b)
3 --None.
4 --Portions of the Amended and Restated Articles of Incorporation and
the By-Laws of the Registrant defining the rights of holders of
shares of the Registrant.(c)
5(a) --Form of Amended Investment Advisory Agreement between the Registrant
and Fund Asset Management, L.P.(b)
(b) --Sub-Advisory Agreement between Fund Asset Management L.P. and
Merrill Lynch Asset Management U.K. Limited.
6(a) --Form of Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(b)
(b) --Form of Class B Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(b)
(c) --Form of Class C Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(b)
(d) --Form of Class D Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(b)
7 --None.
8 --Custodian Agreement between the Registrant and Brown Brothers
Harriman & Co.(d)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc.(b)
(b) --Form of License Agreement relating to the use of name between the
Registrant and Merrill Lynch & Co., Inc.(a)
10 --Opinion of Brown & Wood LLP, counsel for the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Fund Asset Management, L.P.(d)
14 --None.
15(a) --Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(b)
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.(b)
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(b)
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares.(a)
(b) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares.(a)
(c) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares.(a)
(d) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares.(a)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Merrill Lynch Select PricingSM System Plan Pursuant to Rule 18f-
3.(e)
</TABLE>
- --------
(a) Filed on June 7, 1996, as an Exhibit to Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended (File No. 333-2741) (the "Registration Statement").
(b) Filed on April 23, 1996, as an Exhibit to the Registration Statement.
(c) Reference is made to Article IV, V (Sections 3, 5, 6 and 7), VI, VII and IX
of Registrant's Amended and Restated Articles of Incorporation, as amended
and supplemented, filed as Exhibits 1(a) and 1(b) to the Registration
Statement; and to Article II, III (Sections 1, 3, 5 and 6), VI, VII, XIII
and XIV of Registrant's By-Laws, filed as Exhibit 2 to the Registration
Statement.
(d) Incorporated by reference to Pre-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form N-2 under the Securities Act of
1933, as amended (File No. 33-51701), filed on February 24, 1994.
(e) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS FEBRUARY 28, 1997*
-------------- ------------------
<S> <C>
Class A Common Stock, par value $0.10 per share.............. 17,943
Class B Common Stock, par value $0.10 per share.............. 651
Class C Common Stock, par value $0.10 per share.............. 235
Class D Common Stock, par value $0.10 per share.............. 96
</TABLE>
- --------
*Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of the Registrant's Amended and Restated
Articles of Incorporation, Article VI of the Registrant's By-Laws, Section 2-
418 of the Maryland General Corporations and Associations Code and Section 9 of
the Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or director
is not guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Each officer and director of the Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on
C-3
<PAGE>
a review of facts readily available to the Registrant at the time the advance
is proposed to be made, that there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase
insurance on behalf of any officer or director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"1933 Act"), against certain types of civil liabilities arising in connection
with the Registration Statement or the Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(a) Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), acts as
the investment adviser for the following open-end investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
C-4
<PAGE>
Municipal Fund Accumulation Program, Inc.; and for the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy
Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund,
Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund,
Inc., MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNewYork Holdings, Inc. and WorldWide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of FAM, acts as
the investment adviser for the following open-end investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust,
Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government
Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch Utility Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc.;
and for the following closed-end investment companies: Convertible Holdings,
Inc., Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Investment Adviser, MLAM,
Princeton Services, Inc. ("Princeton Services"), and Princeton Administrators,
L.P. is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton,
New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of Merrill Lynch Financial Data Services, Inc. ("MLFDS") is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
C-5
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since December 1, 1994 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the first two
paragraphs of this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are directors, trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
ML&Co. ................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services...... General Partner General Partner of MLAM
Arthur Zeikel........... President President of MLAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML&Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General
President, General Counsel and Secretary of MLAM;
Counsel and Secretary Senior Vice President, General
Counsel, Director and Secretary of
Princeton Services; Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of MLAM; Senior Vice President and
Controller of Princeton Services
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Senior Vice President Senior Vice President of MLAM; Senior
Jr. ................... Vice President of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer
and Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
C-7
<PAGE>
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World Income
Fund, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since December 1, 1994, for
his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard and
Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel........... Director and Chairman President of MLAM and FAM; President
and Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.;
Alan J. Albert.......... Senior Managing Vice President of MLAM
Director
Terry K. Glenn.......... Director Executive Vice President of MLAM and
FAM; Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Adrian Holmes........... Managing Director Director of Merrill Lynch Global
Asset Management
Andrew John Bascand..... Director Director of Merrill Lynch Global
Asset Management
Edward Gobora........... Director Director of Merrill Lynch Global
Asset Management
Richard Kilbride........ Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan.......... Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer
of MLAM and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
Stephen J. Yardley...... Director Director of Merrill Lynch Global
Asset Management
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs
of Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., and The
Municipal Fund Accumulation Program, Inc., and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Arthur Zeikel........... Director President and Director
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Kevin P. Boman.......... Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
Mark A. Desario......... Vice President None
James T. Fatseas........ Vice President None
Michelle T. Lau......... Vice President None
Debra W. Landsman-
Yaros.................. Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
C-9
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended and the rules
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536 and its transfer agent, Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the Fund--Advisory
and Management Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Advisory and
Management Arrangements" in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not a
party to any management-related service contract.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro and the State of New Jersey, on the 24th day of
March 1997.
Merrill Lynch Emerging Tigers Fund,
Inc.
(Registrant)
/s/ Gerald M. Richard
By:__________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATE(S)
Arthur Zeikel* President and Director
- ---------------------------------- (Principal Executive Officer)
(ARTHUR ZEIKEL)
Gerald M. Richard* Treasurer (Principal Financial
- ---------------------------------- and Accounting Officer)
(GERALD M. RICHARD)
Donald Cecil* Director
- -------------------------------------
(DONALD CECIL)
Edward H. Meyer* Director
- -------------------------------------
(EDWARD H. MEYER)
Charles C. Reilly* Director
- -------------------------------------
(CHARLES C. REILLY)
Richard R. West* Director
- -------------------------------------
(RICHARD R. WEST)
Edward D. Zinbarg* Director
- -------------------------------------
(EDWARD D. ZINBARG)
/s/ Gerald M. Richard March 24, 1997
*By: ________________________________
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S> <C>
5(b) --Sub-Advisory Agreement between Fund Asset Management, L.P. and
Merrill Lynch Asset Management U.K. Limited.
10 --Opinion of Brown & Wood LLP, counsel for the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) --Financial Data Schedule for Class A shares.
(b) --Financial Data Schedule for Class B shares.
(c) --Financial Data Schedule for Class C shares.
(d) --Financial Data Schedule for Class D shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Merril Lynch Emerging Tigers Fund, Inc - Class A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 180922359
<INVESTMENTS-AT-VALUE> 210394073
<RECEIVABLES> 1690155
<ASSETS-OTHER> 44406
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 212128634
<PAYABLE-FOR-SECURITIES> 11438968
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1585850
<TOTAL-LIABILITIES> 13024818
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 170212494
<SHARES-COMMON-STOCK> 12410814
<SHARES-COMMON-PRIOR> 22007055
<ACCUMULATED-NII-CURRENT> 528007
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1115006)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29478321
<NET-ASSETS> 193544714
<DIVIDEND-INCOME> 2521930
<INTEREST-INCOME> 1947928
<OTHER-INCOME> 0
<EXPENSES-NET> (3844475)
<NET-INVESTMENT-INCOME> 625383
<REALIZED-GAINS-CURRENT> 12974980
<APPREC-INCREASE-CURRENT> 32164571
<NET-CHANGE-FROM-OPS> 45764934
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (248019)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 376008
<NUMBER-OF-SHARES-REDEEMED> (9972249)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (95726292)
<ACCUMULATED-NII-PRIOR> 234058
<ACCUMULATED-GAINS-PRIOR> (14173401)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2800027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3844475
<AVERAGE-NET-ASSETS> 279019869
<PER-SHARE-NAV-BEGIN> 13.40
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 2.15
<PER-SHARE-DIVIDEND> (.01)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.59
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Merrill Lynch Emerging Tigers Fund, Inc - Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 180922359
<INVESTMENTS-AT-VALUE> 210394073
<RECEIVABLES> 1690155
<ASSETS-OTHER> 44406
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 212128634
<PAYABLE-FOR-SECURITIES> 11438968
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1585850
<TOTAL-LIABILITIES> 13024818
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 170212494
<SHARES-COMMON-STOCK> 239521
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 528007
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1115006)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29478321
<NET-ASSETS> 3719464
<DIVIDEND-INCOME> 2521930
<INTEREST-INCOME> 1947928
<OTHER-INCOME> 0
<EXPENSES-NET> (3844475)
<NET-INVESTMENT-INCOME> 625383
<REALIZED-GAINS-CURRENT> 12974980
<APPREC-INCREASE-CURRENT> 32164571
<NET-CHANGE-FROM-OPS> 45764934
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 294088
<NUMBER-OF-SHARES-REDEEMED> (54567)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (95726292)
<ACCUMULATED-NII-PRIOR> 234058
<ACCUMULATED-GAINS-PRIOR> (14173401)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2800027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3844475
<AVERAGE-NET-ASSETS> 1242629
<PER-SHARE-NAV-BEGIN> 15.53
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> .05
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.53
<EXPENSE-RATIO> 2.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> Merrill Lynch Emerging Tigers Fund, Inc - Class C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 180922359
<INVESTMENTS-AT-VALUE> 210394073
<RECEIVABLES> 1690155
<ASSETS-OTHER> 44406
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 212128634
<PAYABLE-FOR-SECURITIES> 11438968
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1585850
<TOTAL-LIABILITIES> 13024818
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 170212494
<SHARES-COMMON-STOCK> 57169
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 528007
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1115006)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29478321
<NET-ASSETS> 887137
<DIVIDEND-INCOME> 2521930
<INTEREST-INCOME> 1947928
<OTHER-INCOME> 0
<EXPENSES-NET> (3844475)
<NET-INVESTMENT-INCOME> 625383
<REALIZED-GAINS-CURRENT> 12974980
<APPREC-INCREASE-CURRENT> 32164571
<NET-CHANGE-FROM-OPS> 45764934
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 61472
<NUMBER-OF-SHARES-REDEEMED> (4303)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (95726292)
<ACCUMULATED-NII-PRIOR> 234058
<ACCUMULATED-GAINS-PRIOR> (14173401)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2800027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3844475
<AVERAGE-NET-ASSETS> 309692
<PER-SHARE-NAV-BEGIN> 15.53
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> .04
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.52
<EXPENSE-RATIO> 2.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> Merrill Lynch Emerging Tigers Fund, Inc - Class D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 180922359
<INVESTMENTS-AT-VALUE> 210394073
<RECEIVABLES> 1690155
<ASSETS-OTHER> 44406
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 212128634
<PAYABLE-FOR-SECURITIES> 11438968
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1585850
<TOTAL-LIABILITIES> 13024818
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 170212494
<SHARES-COMMON-STOCK> 61140
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 528007
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1115006)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29478321
<NET-ASSETS> 952501
<DIVIDEND-INCOME> 2521930
<INTEREST-INCOME> 1947928
<OTHER-INCOME> 0
<EXPENSES-NET> (3844475)
<NET-INVESTMENT-INCOME> 625383
<REALIZED-GAINS-CURRENT> 12974980
<APPREC-INCREASE-CURRENT> 32164571
<NET-CHANGE-FROM-OPS> 45764934
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 121673
<NUMBER-OF-SHARES-REDEEMED> (60533)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (95726292)
<ACCUMULATED-NII-PRIOR> 234058
<ACCUMULATED-GAINS-PRIOR> (14173401)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2800027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3844475
<AVERAGE-NET-ASSETS> 197594
<PER-SHARE-NAV-BEGIN> 15.53
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.58
<EXPENSE-RATIO> 1.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.5(b)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 4th day of November, 1996, by and between FUND
ASSET MANAGEMENT, L.P., a Delaware limited partnership (hereinafter referred to
as "FAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a corporation
organized under the laws of England and Wales (hereinafter referred to as "MLAM
U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH EMERGING TIGERS FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as a non-diversified, open-end
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, FAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, FAM has entered into an amended investment advisory agreement (the
"Investment Advisory Agreement") dated June 10, 1996, pursuant to which FAM
provides management and investment and advisory services to the Fund; and
<PAGE>
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
FAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and FAM hereby agree as follows:
ARTICLE I
---------
Duties of MLAM U.K.
-------------------
FAM hereby employs MLAM U.K. to act as investment adviser to FAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of FAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. FAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for or represent the
Fund in any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on FAM and shall
provide FAM with such investment research, advice
2
<PAGE>
and supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of the Fund; shall furnish continuously an
investment program for the Fund and shall make recommendations from time to time
as to which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Articles of Incorporation and By-Laws
of the Fund, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to
the manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
3
<PAGE>
MLAM U.K. will not hold money on behalf of FAM or the Fund, nor will MLAM
U.K. be the registered holder of the registered investments of FAM or the Fund
or be the custodian of documents or other evidence of title.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
-----------
Compensation of MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., FAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by FAM and MLAM U.K. but in no event in excess of the amount that
FAM actually receives for providing services to the Fund pursuant to the
Investment Advisory Agreement.
ARTICLE IV
----------
Limitation of Liability of MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
performance of sub-advisory
4
<PAGE>
services rendered with respect to the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, MLAM U.K. shall include any affiliates of MLAM U.K. performing
services for FAM contemplated hereby and directors, officers and employees of
MLAM U.K. and such affiliates.
ARTICLE V
---------
Activities of MLAM U.K.
-----------------------
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM U.K.
(for purposes of this Article V referred to as "affiliates") being free to
render services to others. It is understood that Directors, officers, employees
and shareholders of the Fund are or may become interested in MLAM U.K. and its
affiliates, as directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of MLAM U.K. and its
affiliates are or may become similarly interested in the Fund, and that MLAM
U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
MLAM U.K. Statements Pursuant to IMRO Rules
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K.
5
<PAGE>
FAM has the right to obtain from MLAM U.K. a copy of the IMRO complaints
procedure and to approach IMRO directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures or contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
ARTICLE VII
-----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until the date of termination of the Management
Agreement (but not later than two years after the date hereof) and thereafter,
but only so long as such continuance is specifically approved at least annually
by (i) the Directors of the Fund or by the vote of a majority of the
6
<PAGE>
outstanding voting securities of the Fund and (ii) a majority of those Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by FAM or by vote of a majority of the outstanding voting securities of
the Fund, or by MLAM U.K., on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment or
in the event of the termination of the Investment Advisory Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
------------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
----------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective
7
<PAGE>
meanings specified in the Investment Company Act and the rules and regulations
thereunder, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
ARTICLE X
---------
Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
FUND ASSET MANAGEMENT, L.P.
By /s/ Terry K. Glenn
----------------------------------------
Title: Executive Vice President
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By /s/ Arthur Zeikel
----------------------------------------
Title: Director and Chairman
9
<PAGE>
EXHIBIT 99.10
BROWN & WOOD LLP
One World Trade Center
New York, New York 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5599
March 25, 1997
Merrill Lynch Emerging Tigers Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch Emerging Tigers Fund, Inc., a Maryland corporation (the "Fund"), of shares
of common stock, par value $0.10 per share, of the Fund (the "Shares"), under
the Securities Act of 1933, as amended, pursuant to the Fund's registration
statement on Form N-1A (File No. 333-2741), as amended (the "Registration
Statement"), in the amount set forth under "Amount Being Registered" on the
facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended and restated, the By-Laws of the Fund and such other
documents as we have deemed relevant to the matters referred to in this opinion.
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Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
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EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Emerging Tigers Fund, Inc.
We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 333-2741 of our report dated January 9, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Pricenton, New Jersey
March 24, 1997
