<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1999
SECURITIES ACT FILE NO. 333-2741
INVESTMENT COMPANY ACT FILE NO. 811-7135
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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. 3 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 8 [X]
(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)
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:
<TABLE>
<S> <C>
Counsel for the Fund: Michael J. Hennewinkel, 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.
</TABLE>
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It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
------------------------
Title of Securities Being Registered: Common Stock, par value $.10 per share.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not use this prospectus to sell securities until the registration statement
containing this prospectus, which has been filed with the Securities and
Exchange Commission, is effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
PROSPECTUS
[MERRILL LYNCH LOGO]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY , 1999
Merrill Lynch Emerging Tigers Fund, Inc.
March , 1999
This Prospectus contains information you should know before
investing, including information about risks. Please read
it before you invest and keep it for future reference.
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of
this Prospectus. Any representation to the contrary is a
criminal offense.
<PAGE> 3
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
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The Merrill Lynch Emerging Tigers Fund at a Glance.......... 3
Fees and Expenses........................................... 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
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How the Fund Invests........................................ 8
Investment Risks............................................ 9
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
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Merrill Lynch Select Pricing(SM) System..................... 17
How to Buy, Sell, Transfer and Exchange Shares.............. 22
Participation in Merrill Lynch Fee-Based Programs........... 26
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
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Fund Asset Management....................................... 28
Financial Highlights........................................ 29
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
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Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>
MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 4
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.
ASIA-PACIFIC COUNTRIES -- all countries in Asia and the Pacific Basin other than
Japan, Taiwan, Australia, New Zealand and Hong Kong.
COMMON STOCK -- shares of ownership of a corporation.
CONVERTIBLE SECURITY -- a fixed-income security, such as a bond or preferred
stock that is exchangeable for shares of common stock of the issuer or another
company.
THE MERRILL LYNCH EMERGING TIGERS FUND
AT A GLANCE
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WHAT ARE THE FUND'S OBJECTIVE AND GOALS?
The Fund's investment objective is to seek long term capital appreciation by
investing primarily in equity securities of corporations in designated emerging
market countries located in Asia and the Pacific Basin.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
Under normal market conditions, the Fund expects to invest at least 65% of its
total assets in equity securities of companies located in emerging market
ASIA-PACIFIC COUNTRIES. The Fund currently expects that a majority of the Fund's
assets will be invested in COMMON STOCKS and CONVERTIBLE SECURITIES of companies
in Malaysia, India, Thailand, Singapore, China, the Philippines, Indonesia,
Pakistan, and Sri Lanka. The Fund may invest in certain types of "derivative"
securities. The Fund may also invest up to 35% of its total assets in debt
securities, including high yield or "junk bonds", of companies or governments in
emerging market Asia-Pacific countries. We cannot guarantee that the Fund will
achieve its goal.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any fund, the value of the Fund's investments -- and therefore the value
of Fund shares -- may go up or down. These changes may occur because a
particular stock market is rising or falling. At other times, there are specific
factors that may affect the value of a particular investment. Generally, when
interest rates go up, the value of debt securities goes down. If the value of
the Fund's investments goes down, you may lose money.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks -- including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
MERRILL LYNCH EMERGING TIGERS FUND, INC. 3
<PAGE> 5
[KEY FACTS ICON] Key Facts
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
Derivatives and high yield or "junk" bonds may be volatile and subject to
liquidity, leverage, credit and other types of risk.
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you if you:
- Are looking for capital appreciation for long term goals such as
retirement or funding a child's education.
- Want a professionally managed portfolio.
- Are looking for exposure to markets of Asia-Pacific countries.
- Are willing to accept the risks of foreign investing in order to
seek potentially higher long term returns.
- Are not looking for a significant amount of current income.
4 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 6
RISK/RETURN BAR CHART
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The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. Sales
charges are not reflected in the bar chart. If these amounts were reflected,
returns would be less than those shown. The table compares the average annual
total returns for each class of the Fund's shares for the periods shown with
those of the Southeast Asia Emerging Markets Free Index. How the Fund performed
in the past is not necessarily an indication of how the Fund will perform in the
future.
[BAR CHART]
During the period shown in the bar chart, the highest return for a quarter was
13.95% (quarter ended December 31, 1998) and the lowest return for a quarter was
- -32.29% (quarter ended September 30, 1997).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE
CALENDAR YEAR ENDED PAST
DECEMBER 31, 1998) ONE YEAR SINCE INCEPTION
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<S> <C> <C>
Merrill Lynch Emerging Tigers Fund*--Class A -23.07% -15.72%+
Southeast Asia Emerging Markets Free Index** -14.63% -19.71%+++
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Merrill Lynch Emerging Tigers Fund*--Class B -22.82% -30.26%++
Southeast Asia Emerging Markets Free Index** -14.63% -35.32%#
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Merrill Lynch Emerging Tigers Fund*--Class C -20.41% -29.74%++
Southeast Asia Emerging Markets Free Index** -14.63% -35.32%#
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Merrill Lynch Emerging Tigers Fund*--Class D -23.20% -30.65%++
Southeast Asia Emerging Markets Free Index** -14.63% -35.32%#
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</TABLE>
<TABLE>
<S> <C>
* Includes sales charge.
** This unmanaged Index, which is a blend of the Financial
Times/Standard & Poor's-Actuaries World Index and the IFC
Investible Index, is comprised of holdings in China, India,
Indonesia, Malaysia, Pakistan, the Philippines, Singapore,
Sri Lanka and Thailand. Past performance is not predictive
of future performance.
+ Inception date is March 4, 1994. The Fund converted to an
open end investment company on June 10, 1996 and all shares
outstanding on that date were redesignated Class A shares.
Includes the operations of the Fund as a closed end fund.
++ Inception date is June 10, 1996.
+++ Since February 28, 1994.
# Since May 31, 1996.
</TABLE>
MERRILL LYNCH EMERGING TIGERS FUND, INC. 5
<PAGE> 7
[KEY FACTS ICON] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEE -- a fee paid to the Investment Adviser for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities
dealers for account maintenance activities.
FEES AND EXPENSES
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The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of the Fund. Future expenses may be greater
or less than those indicated below.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT) CLASS A CLASS B(a) CLASS C CLASS D
<S> <C> <C> <C> <C>
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Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering
price) 5.25%(b) None None 5.25%(b)
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Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(c) 4.0%(b) 1.0%(b) None(c)
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Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
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Redemption Fee None None None None
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Exchange Fee None None None None
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Maximum Account Fee None None None None
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ANNUAL FUND OPERATING EXPENSES (EXPENSES
THAT ARE DEDUCTED FROM FUND ASSETS):
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MANAGEMENT FEE 1.00% 1.00% 1.00% 1.00%
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DISTRIBUTION AND/OR SERVICE (12b-1) FEES(d) None 1.00% 1.00% 0.25%
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Other Expenses (including transfer agency
fees)(e) 1.17% 1.22% 1.22% 1.19%
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Total Annual Fund Operating Expenses(f) 2.17% 3.22% 3.22% 2.44%
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</TABLE>
(a) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares for a long time,
it may cost you more in distribution (12b-1) fees than the maximum sales
charge that you would have paid if you had bought one of the other classes.
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the Merrill Lynch
Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
year. This fee begins the month following the month the account is closed
and ends at the end of the calendar year. For the fiscal year ended November
30, 1998, the Fund paid the Transfer Agent fees totaling $140,348. The
Investment Adviser provides accounting services to the Fund at its cost. For
the fiscal year ended November 30, 1998, the Fund reimbursed the Investment
Adviser $127,146 for these services.
(f) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
6 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 8
EXAMPLES:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Class A $734 $1,168 $1,628 $ 2,897
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Class B $725 $1,192 $1,683 $3,350*
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Class C $425 $ 992 $1,683 $ 3,522
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Class D $759 $1,246 $1,757 $ 3,156
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</TABLE>
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $734 $1,168 $1,628 $ 2,897
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Class B $325 $ 992 $1,683 $3,350*
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Class C $325 $ 992 $1,683 $ 3,522
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Class D $759 $1,246 $1,757 $ 3,156
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</TABLE>
* Assumes conversion to Class D shares approximately eight years after purchase.
See note (a) to the Fees and Expenses table above.
MERRILL LYNCH EMERGING TIGERS FUND, INC. 7
<PAGE> 9
[DETAILS ABOUT THE FUND ICON] DETAILS ABOUT THE FUND
ABOUT THE PORTFOLIO MANAGER
Kara W.Y. Tan Bhala is a Senior Vice President and the portfolio manager of the
Fund. Ms. Tan Bhala has been a First Vice President of Merrill Lynch Asset
Management since 1997, a Senior Portfolio Manager of the Investment Adviser and
Merrill Lynch Asset Management since 1992, and a Vice President of Merrill Lynch
Asset Management from 1992 to 1997.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Fund Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund's main goal is long term capital appreciation by investing primarily in
equity securities of companies in emerging markets located in Asia-Pacific
countries. The Fund anticipates that under normal market conditions at least 65%
of its total assets will consist of corporate securities of emerging market
Asia-Pacific countries, primarily common stocks and securities convertible into
common stock. 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. However, the Fund anticipates that a majority of the
Fund's assets will be invested in:
- Malaysia
- India
- Thailand
- Singapore
- China
- the Philippines
- Indonesia
- Pakistan
- Sri Lanka
The Fund will normally seek to diversify 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 Asia-Pacific region has some of the world's most vibrant developing
economies. Although these economies have experienced very significant turmoil
over the last few years, Fund management believes that the economies and
securities markets of the region present attractive long term investment
opportunities.
The Fund may also seek capital appreciation by investing up to 35% of its total
assets in debt securities including high yield or "junk" bonds and distressed
securities, of companies or governments in emerging market Asia-Pacific
countries. Capital appreciation in these debt securities can result from
favorable changes in exchange rates, interest rates and the creditworthiness of
the issuer. The income earned from these securities can also be used to offset
the operating expenses of the Fund. The Fund may also invest in distressed
securities, or securities that are subject to bankruptcy proceedings or are in
default, or at risk of being in default, when Fund management believes that
there is the possibility that the issuer of these securities will make an
exchange offer or be reorganized in a beneficial manner.
8 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 10
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 including futures, forwards, options, indexed securities,
inverse securities and swaps to enhance return. Derivatives are financial
instruments whose value is derived from another security, a commodity (such as
oil or gold), or an index such as the Southeast Asia Emerging Markets Index.
The Fund may borrow amounts representing up to 20% of its total assets taken at
market value, but only as a temporary measure for emergency purposes, including
to meet redemptions.
The Fund also may hold cash, cash equivalents, and short term securities
including money market securities denominated in U.S. dollars or foreign
currencies as a temporary defensive measure in anticipation of investment in
emerging market Asia-Pacific countries. Temporary defensive positions may limit
the potential for the Fund to achieve its goal of long term capital
appreciation.
The Fund may lend securities representing up to 33 1/3% of its total assets to
financial institutions which provide government securities as collateral.
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period of
time.
CONCENTRATION RISK -- The Fund is a non-diversified fund. By concentrating in a
smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
STOCK MARKET AND SELECTION RISK -- Stock market risk is the risk that the stock
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the
MERRILL LYNCH EMERGING TIGERS FUND, INC. 9
<PAGE> 11
[DETAILS ABOUT THE FUND ICON] DETAILS ABOUT THE FUND
investments that Fund management selects will underperform the stock market or
other funds with similar investment objectives and investment strategies.
FOREIGN MARKET RISK -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because stocks traded on foreign markets have often (although
not always) performed differently than stocks in the United States. However,
such investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, the Fund is
subject to the risk that because there are generally fewer investors on foreign
exchanges and a smaller number of shares traded each day, it may make it
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
FOREIGN ECONOMY RISK -- The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and balance
of payments position. Certain such economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Since September 1998, Malaysia has imposed currency controls that limit the
Fund's ability to repatriate proceeds of Malaysian investments. As of December
31, 1998 the portion of the Fund's net assets invested in Malaysia is
approximately 12.6%. Other foreign market risks include foreign exchange
controls, difficulties in pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable legal judgments in foreign
courts, and political and social instability. Legal remedies available to
investors in certain foreign countries may be less extensive than those
available to investors in the United States or other foreign countries.
10 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 12
CURRENCY RISK -- Securities in which the Fund invests are usually denominated or
quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated in
that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a stronger U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the United States securities laws do. For
example, some countries may have no laws or rules against insider trading.
Insider trading occurs when a person buys or sells a company's securities based
on non-public information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for the Fund's management to completely
and accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher in
foreign countries than they are in the United States. This reduces the amount
the Fund can earn on its investments.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES -- The Fund
generally holds its foreign securities in which it invests outside the United
States in foreign banks and securities depositories. Some foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. In addition, there may be limited or no regulatory oversight over
their operations. Also, the laws of certain countries may put limits on the
Fund's ability to recover its assets if a foreign bank, depository or issuer of
a security, or any of their agents, goes bankrupt. In addition, it is often more
expensive for the Fund to buy, sell and hold securities in certain foreign
markets than in the U.S. The increased expense of investing in foreign markets
reduces the amount the Fund can earn on its investments and typically results in
a higher operating expense ratio for the Fund than investment companies invested
only in the U.S.
SETTLEMENT RISK -- Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign
MERRILL LYNCH EMERGING TIGERS FUND, INC. 11
<PAGE> 13
[DETAILS ABOUT THE FUND ICON] DETAILS ABOUT THE FUND
settlement and clearance procedures and trade regulations also may involve
certain risks (such as delays in payment for or delivery of securities) not
typically involved with the settlement of U.S. investments. Communications
between the United States and emerging market countries may be unreliable,
increasing the risk of delayed settlements or losses of security certificates.
Settlements in certain foreign countries at times have not kept pace with the
number of securities transactions; these problems may make it difficult for the
Fund to carry out transactions. If the Fund cannot settle or is delayed in
settling a purchase of securities, it may miss attractive investment
opportunities and certain of its assets may be uninvested with no return earned
thereon for some period. If the Fund cannot settle or is delayed in settling a
sale of securities, it may lose money if the value of the security then declines
or, if it has contracted to sell the security to another party, the Fund could
be liable to that party for any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding and other taxes. Shareholders may be able to
take a credit or a deduction for foreign taxes paid by the Fund, if certain
requirements are met.
EMERGING MARKETS RISK -- The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, investments in them may be more likely to suffer sharp and
frequent price changes or long term price depression because of adverse
publicity, investor perceptions or the actions of a few large investors. In
addition, traditional measures of investment value used in the United States,
such as price to earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt changes
in policies. As a result, their governments are more likely to take actions that
are hostile or detrimental to private enterprise or foreign investment than
those of more developed countries. Certain emerging markets may also face other
significant internal or external risks, including the risk of war, and ethnic,
religious, and racial conflicts. In addition,
12 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 14
governments in many emerging market countries participate to a significant
degree in their economies and securities markets, which may impair investment
and economic growth.
BORROWING AND LEVERAGE -- Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The cost of borrowing may reduce
the Fund's return. Certain securities that the Fund buys may create leverage
including, for example, when issued securities, forward commitments, options,
warrants and reverse repurchase agreements.
DEBT SECURITIES -- Debt securities, such as bonds, involve credit risk. This is
the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. These securities are also subject to interest
rate risk. This is the risk that the value of the security may fall when
interest rates rise. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than
the market price of shorter term securities.
SOVEREIGN DEBT -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt subject the Fund to the risk that a government entity may
delay or refuse to pay interest or to repay principal on its Sovereign Debt.
Some of these reasons may include cash flow problems, insufficient foreign
currency reserves, political considerations, the relative size of its debt
position to its economy or its failure to put in place economic reforms required
by the International Monetary Fund or other multilateral agencies. If a
government entity defaults, it may ask for more time in which to pay or for
further loans. There is no legal process for collecting sovereign debts that a
government does not pay or bankruptcy proceeding by which all or part of
Sovereign Debt that a government entity has not repaid may be collected.
JUNK BONDS -- Although junk bonds generally pay higher rates of interest than
investment grade bonds, they are high risk investments that may cause income and
principal losses for the Fund. Junk bonds generally are less liquid and
experience more price volatility than higher rated debt securities. The issuers
of junk bonds may have a larger amount of outstanding debt relative to their
assets than issuers of investment grade bonds. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk
bond holders, leaving few or no assets available to repay junk bond holders.
Junk bonds may be subject to greater call and redemption risk than higher rated
debt securities.
MERRILL LYNCH EMERGING TIGERS FUND, INC. 13
<PAGE> 15
[DETAILS ABOUT THE FUND ICON] DETAILS ABOUT THE FUND
DISTRESSED SECURITIES -- Distressed securities are speculative and involve
substantial risks. Generally the Fund will invest in distressed securities when
Fund management believes they offer significant potential for higher returns or
can be exchanged for other securities that offer this potential. However, there
can be no assurance that the issuer will make an exchange offer or adopt a plan
of reorganization. The Fund will generally not receive interest payments on the
distressed securities and may incur costs to protect its investment. In
addition, the Fund's principal may not be repaid. Distressed securities and any
securities received in an exchange may be difficult to sell and may be subject
to restriction on resale.
ILLIQUID INVESTMENTS -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that the
Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be very illiquid. The Fund may be unable to resell
them on short notice or may be able to sell them only at a price below current
value. The Fund may get only limited information about the issuer, so it may be
less able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
RULE 144A: DESCRIPTION AND RISK MITIGATION -- Rule 144A securities are
restricted securities that can be resold to qualified institutional buyers but
not to the general public. Rule 144A securities may have an active trading
market, but carry the risk that the active trading market may not continue.
CONVERTIBLES -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. Convertibles typically pay current
income as either interest (debt security convertibles) or dividends (preferred
stocks). A convertible's value usually reflects both the stream of current
income payments and the value of the underlying common stock. The market value
of a convertible performs like regular debt securities; that is, if market
interest rates rise, the value of a convertible usually falls. Since
14 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 16
it is convertible into common stock, the convertible also has the same types of
market and issuer risk as the value of the underlying common stock.
WARRANTS -- A warrant gives the Fund the right to buy a quantity of stock. The
warrant specifies the amount of underlying stock, the purchase (or "exercise")
price, and the date the warrant expires. The Fund has no obligation to exercise
the warrant and buy the stock.
A warrant has value only if the Fund exercises it before it expires. If the
price of the underlying stock does not rise above the exercise price before the
warrant expires, the warrant generally expires without any value and the Fund
loses any amount it paid for the warrant. Thus, investments in warrants may
involve substantially more risk than investments in common stock. Warrants may
trade in the same markets as their underlying stock; however, the price of the
warrant does not necessarily move with the price of the underlying stock.
DERIVATIVES -- Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:
LEVERAGE RISK -- the risk associated with certain types of
investments or trading strategies (such as borrowing money to
increase the amount of investments) that relatively small market
movements may result in large changes in the value of an
investment. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the amount
originally invested.
CREDIT RISK -- the risk that the counterparty (the party on the
other side of the transaction) on a derivative transaction will be
unable to honor its financial obligation to the Fund.
CURRENCY RISK -- the risk that changes in the exchange rate
between currencies will adversely affect the value (in U.S. dollar
terms) of an investment.
MERRILL LYNCH EMERGING TIGERS FUND, INC. 15
<PAGE> 17
[DETAILS ABOUT THE FUND ICON] Details About the Fund
LIQUIDITY RISK -- the risk that certain securities may be
difficult or impossible to sell at the time that the seller would
like or at the price that the seller believes the security is
currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a different
manner than anticipated by the Fund or if the cost of the derivative outweighs
the benefit of the hedge. Hedging also involves the risk that changes in the
value of the derivative will not match those of the holdings being hedged as
expected by the Fund, in which case any losses on the holdings being hedged may
not be reduced. There can be no assurance that the Fund's hedging strategy will
reduce risk or that hedging transactions will be either available or cost
effective. The Fund is not required to use hedging and may choose not to do so.
The Fund may also use indexed securities to gain exposure to certain markets
when it deems these derivatives to be potentially more advantageous than the
purchase of equity securities in those markets.
SECURITIES LENDING -- Securities lending involves the risk that the borrower may
fail to return the securities in a timely manner or at all. As a result, the
Fund may lose money and there may be a delay in recovering the loaned
securities. The Fund could also lose money if it does not recover the securities
and the value of the collateral falls. These events could trigger adverse tax
consequences to the Fund.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
16 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 18
Your Account [YOUR ACCOUNT ICON]
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge
waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
MERRILL LYNCH EMERGING TIGERS FUND, INC. 17
<PAGE> 19
[YOUR ACCOUNT ICON] Your Account
The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
- Current Class A Limited availability Limited availability Limited availability
shareholders through other securities through other securities through other securities
- Certain Retirement dealers. dealers. dealers.
Plans
- Participants in certain
Merrill Lynch sponsored
programs
- Certain affiliates of
Merrill Lynch.
- ----------------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time of No. Entire purchase No. Entire purchase Yes. Payable at time of
Charge? purchase. Lower sales price is invested in price is invested in purchase. Lower sales
charges available for shares of the Fund. shares of the Fund. charges available for
larger investments. larger investments.
- ----------------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged for Yes. Payable if you Yes. Payable if you No. (May be charged for
Charge? purchases over $1 redeem within four years redeem within one year purchases over $1
million that are of purchase. of purchase. million that are
redeemed within one redeemed within one
year.) year.)
- ----------------------------------------------------------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account 0.25% Account 0.25% Account
and Distribution Maintenance Fee 0.75% Maintenance Fee 0.75% Maintenance Fee No
Fees? Distribution Fee. Distribution Fee. Distribution Fee.
- ----------------------------------------------------------------------------------------------------------------------------------
Conversion to Class D No. Yes, automatically after No. No.
shares? approximately eight
years.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 20
RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing System funds that you
agree to buy within a 13 month period. Certain restrictions apply.
CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.
<TABLE>
<CAPTION>
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* OFFERING PRICE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 5.25% 5.54% 5.00%
- --------------------------------------------------------------------------------------
$25,000 but less than
$50,000 4.75% 4.99% 4.50%
- --------------------------------------------------------------------------------------
$50,000 but less than
$100,000 4.00% 4.17% 3.75%
- --------------------------------------------------------------------------------------
$100,000 but less than
$250,000 3.00% 3.09% 2.75%
- --------------------------------------------------------------------------------------
$250,000 but less than
$1,000,000 2.00% 2.04% 1.80%
- --------------------------------------------------------------------------------------
$1,000,000 and over** 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain employer sponsored
retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
- Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.
- TMA(SM) Managed Trusts.
- Certain Merrill Lynch investment or central asset accounts.
- Certain employer-sponsored retirement or savings plans.
- Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.
MERRILL LYNCH EMERGING TIGERS FUND, INC. 19
<PAGE> 21
[YOUR ACCOUNT ICON] Your Account
- Certain investors, including directors of Merrill Lynch mutual
funds and Merrill Lynch employees.
- Certain Merrill Lynch fee-based programs.
Only certain investors are eligible to buy Class A shares. Your Financial
Consultant can help you determine whether you are eligible to buy Class A shares
or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to an account maintenance fee, while Class A
shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase, or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.75% and account maintenance fees of 0.25% each year under distribution
plans that the Fund has adopted under Rule 12b-1. Because these fees are paid
out of the Fund's assets on an ongoing basis, over time these fees increase the
cost of your investment and may cost you more than paying an initial sales
charge. The Distributor uses the money that it receives from the deferred sales
charges and the distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial Consultant or other securities
dealer who assists you in purchasing Fund shares.
CLASS B SHARES
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually
20 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 22
decreases as you hold your shares over time, according to the following
schedule:
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE SALES CHARGE*
- -----------------------------------------
<S> <C>
0 - 1 4.00%
- -----------------------------------------
1 - 2 3.00%
- -----------------------------------------
2 - 3 2.00%
- -----------------------------------------
3 - 4 1.00%
- -----------------------------------------
4 AND THEREAFTER 0.00%
- -----------------------------------------
</TABLE>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends or distributions are not subject to a
deferred sales charge. Not all Merrill Lynch funds have identical deferred
sales charge schedules. If you exchange your shares for shares of another
fund, the higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old.
- Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts and certain retirement plan rollovers.
- Redemption in connection with participation in certain Merrill
Lynch fee-based programs.
- Withdrawals resulting from shareholder death or disability as
long as the waiver request is made within one year of death or
disability or, if later, reasonably promptly following
completion of probate, or in connection with involuntary
termination of an account in which Fund shares are held.
- Withdrawal through the Merrill Lynch Systematic Withdrawal Plan
of up to 10% per year of your Class B account value at the time
the plan is established.
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for Federal
income tax purposes.
MERRILL LYNCH EMERGING TIGERS FUND, INC. 21
<PAGE> 23
[YOUR ACCOUNT ICON] Your Account
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, the Fund's eight year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class B
shares of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. The length of time that you hold both the original and
exchanged Class B shares in both funds will count toward the conversion
schedule. The conversion schedule may be modified in certain other cases as
well.
CLASS C SHARES
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with participation in certain Merrill Lynch fee-based programs, involuntary
termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
22 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 24
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 18.
appropriate for you Be sure to read this prospectus carefully.
-------------------------------------------------------------------------------------------------------
Next, determine the amount of your The minimum initial investment for the Fund is $1,000 for
investment all accounts except: - $250 for certain Merrill Lynch
fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------------
Have your Merrill Lynch Financial The price of your shares is based on the next calculation of
Consultant or securities dealer net asset value after your order is placed. Any purchase
submit your purchase order orders placed within fifteen minutes after the close of
business on the New York Stock Exchange will be priced at
the net asset value determined that day.
Purchase orders placed after that time will be priced at the
net asset value determined on the next business day. The
Fund may reject any order to buy shares and may suspend the
sale of shares at any time. Merrill Lynch may charge a
processing fee to confirm a purchase. This fee is currently
$5.35.
-------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this Prospectus.
- --------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for
Investment all accounts except $1 for retirement plans. (The minimums
for additional purchases may be waived under certain
circumstances.)
-------------------------------------------------------------------------------------------------------
Acquire additional shares through the All dividends and capital gains distributions are
automatic dividend reinvestment plan automatically reinvested without a sales charge.
-------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan certain Merrill Lynch investment or central asset accounts.
- --------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your Fund shares only to another securities
Another Securities securities dealer dealer that has entered into an agreement with Merrill
Dealer Lynch. All shareholder services will be available for the
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these assets must be coordinated by the receiving
firm.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH EMERGING TIGERS FUND, INC. 23
<PAGE> 25
[YOUR ACCOUNT ICON] Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares to Transfer to a non-participating You must either:
Another Securities securities dealer - Transfer your shares to an account with the Transfer
Dealer (continued) Agent; or
- Sell your shares.
- --------------------------------------------------------------------------------------------------------------------------------
Sell Your Shares Have your Merrill Lynch Financial The price of your shares is based on the next calculation of
Consultant or securities dealer net asset value after your order is placed. For your
submit your sales order redemption request to be priced at the net asset value on
the day of your request, you must submit your request to
your dealer within fifteen minutes after that day's close of
business on the New York Stock Exchange (generally 4:00 p.m.
Eastern time). Any redemption request placed after that time
will be priced at the net asset value at the close of
business on the next business day. Dealers must submit
redemption requests to the Fund not more than thirty minutes
after the close of business on the New York Stock Exchange
on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a
fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares directly through the Transfer
Agent.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter and signatures must be guaranteed. If you
hold stock certificates, return the certificates with the
letter. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to
the Transfer Agent before they can be converted. Check with
the Transfer Agent or your Merrill Lynch Financial
Consultant for details.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 26
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Shares Participate in the Fund's Systematic You can choose to receive systematic payments from your Fund
Systematically Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. If you have a
Merrill Lynch CMA(R), CBA(R) or Retirement Account you can
arrange for systematic redemptions of a fixed dollar amount
on a monthly, bi-monthly, quarterly, semi-annual or annual
basis, subject to certain conditions. Under either method
you must have dividends and other distributions
automatically reinvested. For Class B and C shares your
total annual withdrawals cannot be more than 10% per year of
the value of your shares at the time your plan is
established. The deferred sales charge is waived for
systematic redemptions. Ask your Merrill Lynch Financial
Consultant for details.
- --------------------------------------------------------------------------------------------------------------------------------
Exchange Your Select the fund into which you want You can exchange your shares of the Fund for shares of many
Shares to exchange. Be sure to read that other Merrill Lynch mutual funds. You must have held the
fund's prospectus shares used in the exchange for at least 15 calendar days
before you can exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another fund. If you own Class A
shares and wish to exchange into a fund in which you have no
Class A shares, you will exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different
initial or deferred sales charge schedule. If you exchange
Class A or D shares for shares of a fund with a higher
initial sales charge than you originally paid, you will be
charged the difference at the time of exchange. If you
exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. If you exchange Class A or D shares for money
market fund shares, you will receive Class A shares of
Summit Cash Reserves Fund. Class B or C shares of the Fund
will be exchanged for Class B shares of Summit.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH EMERGING TIGERS FUND, INC. 25
<PAGE> 27
[YOUR ACCOUNT ICON] Your Account
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.
26 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 28
DIVIDENDS -- income paid to shareholders. Dividends may be reinvested in
additional Fund shares as they are paid.
DISTRIBUTIONS -- capital gains paid to shareholders. Distributions may be
reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend or distribution. The
reason? If you buy shares when a fund has realized but not yet distributed
income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable distribution.
Before investing you may want to consult your tax adviser.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute any net investment income and any net realized long or
short term capital gains at least annually. The Fund may also pay a special
distribution at the end of the calendar year to comply with Federal tax
requirements. If your account is with Merrill Lynch and you would like to
receive DIVIDENDS and DISTRIBUTIONS in cash, contact your Merrill Lynch
Financial Consultant. If your account is with the Transfer Agent and you would
like to receive dividends and distributions in cash, contact the Transfer Agent.
You will pay tax on dividends and distributions from the Fund whether you
receive them in cash or additional shares. If you redeem Fund shares or exchange
them for shares of another fund, any gain on the transaction may be subject to
tax. The Fund intends to make distributions that will either be taxed as
ordinary income or capital gains. Capital gains are taxed at different rates
than ordinary income.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. You may be
able to claim a credit or take a deduction for foreign taxes paid by the Fund if
certain requirements are met.
By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
MERRILL LYNCH EMERGING TIGERS FUND, INC. 27
<PAGE> 29
Management of the Fund [MANAGEMENT OF THE FUND ICON]
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Fund Asset Management, the Fund's Investment Adviser, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Investment Adviser has the responsibility for
making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate. The Investment Adviser has paid no fees to date to MLAM U.K. pursuant
to the sub-advisory agreement. The Fund pays the Investment Adviser a fee at the
annual rate of 1.00% of the average daily net assets of the Fund.
Fund Asset Management is part of Merrill Lynch Asset Management Group, which had
approximately $501 billion in investment company and other portfolio assets
under management as of December, 1998. This amount includes assets managed for
Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the companies in which the
Fund invests, and this could hurt the Fund's investment returns.
28 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 30
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects the
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
CLASS A(1) CLASS B
--------------------------------------------------------------- -------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED
NOVEMBER 30, MARCH 4, 1994+ NOVEMBER 30,
INCREASE (DECREASE) IN -------------------------------------------- TO NOVEMBER 30, -------------------
NET ASSET VALUE: 1998++ 1997++ 1996 1995 1994 1998++ 1997++
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $ 8.12 $15.59 $13.40 $14.47 $14.18 $ 8.03 $15.53
- ----------------------------------------------------------------------------------------------------------------------
Investment income
(loss) -- net .04 (.04) .05 .03 .12 (.03) (.15)
- ----------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net (1.73) (7.38) 2.15 (.96) .19 (1.71) (7.35)
- ----------------------------------------------------------------------------------------------------------------------
Total from investment
operations (1.69) (7.42) 2.20 (.93) .31 (1.74) (7.50)
- ----------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income -- net -- (.01) (.01) (.12) -- -- --
In excess of investment
income -- net (.01) (.04) -- -- -- -- --
Realized gain on
investments -- net -- -- -- (.02) -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (.01) (.05) (.01) (.14) -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Capital charge resulting from
issuance of Common Stock -- -- -- --# (.02) -- --
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.42 $ 8.12 $15.59 $13.40 $14.47 $ 6.29 $ 8.03
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ----------------------------------------------------------------------------------------------------------------------
Based on net asset value per
share (20.81)% (47.76)% 16.43% (6.23)% 2.05%## (21.67)% (48.29)%
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------------------------------
Expenses 2.17% 1.69% 1.36% 1.32% 1.32%* 3.22% 2.75%
- ----------------------------------------------------------------------------------------------------------------------
Investment income
(loss) -- net .52% (.27)% .23% .24% 1.12%* (.51)% (1.20)%
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $34,111 $63,760 $193,545 $294,830 $318,414 $5,347 $4,887
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover 73.52% 35.63% 44.09% 18.84% 9.10% 73.52% 35.63%
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------
FOR THE PERIOD
JUNE 10, 1996+
INCREASE (DECREASE) IN TO NOVEMBER 30,
NET ASSET VALUE: 1996
<S> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------
Net asset value,
beginning of period $15.53
- --------------------------------------------------
Investment income
(loss) -- net (.05)
- --------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net .05
- --------------------------------------------------
Total from investment
operations --
- --------------------------------------------------
Less dividends and
distributions:
Investment income -- net --
In excess of investment
income -- net --
Realized gain on
investments -- net --
- --------------------------------------------------
Total dividends and
distributions --
- --------------------------------------------------
Capital charge resulting from
issuance of Common Stock --
- --------------------------------------------------
Net asset value, end of period $15.53
- --------------------------------------------------
TOTAL INVESTMENT RETURN:**
- --------------------------------------------------
Based on net asset value per
share .00%##
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- --------------------------------------------------
Expenses 2.67%*
- --------------------------------------------------
Investment income
(loss) -- net (.99)%*
- --------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------
Net assets, end of period
(in thousands) $3,719
- --------------------------------------------------
Portfolio turnover 44.09%
- --------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(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.
++ Based on average shares outstanding.
# Amount is less than $.01 per share.
## Aggregate total investment return.
</TABLE>
MERRILL LYNCH EMERGING TIGERS FUND, INC. 29
<PAGE> 31
[MANAGEMENT OF THE FUND ICON] Management of the Fund
FINANCIAL HIGHLIGHTS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS D
--------------------------------------- ---------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
NOVEMBER 30, JUNE 10, 1996+ NOVEMBER 30, JUNE 10, 1996+
INCREASE (DECREASE) IN ------------------- TO NOVEMBER 30, ------------------- TO NOVEMBER 30,
NET ASSET VALUE: 1998++ 1997++ 1996 1998++ 1997++ 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $ 8.02 $15.52 $15.53 $ 8.10 $15.58 $15.53
- ------------------------------------------------------------------------------------------------------------
Investment income
(loss) -- net (.03) (.11) (.05) .02 (.04) (.01)
- ------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net (1.71) (7.39) .04 (1.73) (7.41) .06
- ------------------------------------------------------------------------------------------------------------
Total from investment
operations (1.74) (7.50) (.01) (1.71) (7.45) .05
- ------------------------------------------------------------------------------------------------------------
Less dividends:
Investment
income -- net -- -- -- -- --+++ --
In excess of investment
income -- net -- -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------
Total dividends -- -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 6.28 $ 8.02 $15.52 $ 6.39 $ 8.10 $15.58
- ------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:**
- ------------------------------------------------------------------------------------------------------------
Based on net asset value
per share (21.70)% (48.32)% (.06)%# (21.11)% (47.91)% .32%#
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
- ------------------------------------------------------------------------------------------------------------
Expenses 3.22% 2.83% 2.68%* 2.44% 2.01% 1.88%*
- ------------------------------------------------------------------------------------------------------------
Investment income
(loss) -- net (.52)% (1.01)% (.98)%* .28% (.30)% (.34)%*
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $2,139 $2,870 $ 887 $1,578 $1,057 $ 953
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover 73.52% 35.63% 44.09% 73.52% 35.63% 44.09%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
# Aggregate total investment returns.
</TABLE>
30 MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 32
<TABLE>
<S> <C>
POTENTIAL
INVESTORS
Open an account (two options).
1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
OR SECURITIES DEALER FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
Advises shareholders on their Fund investments. Jacksonville, Florida 32232-5289
Performs recordkeeping and reporting services.
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
COUNSEL THE FUND CUSTODIAN
BROWN & WOOD LLP The Board of Directors BROWN BROTHERS HARRIMAN & CO.
One World Trade Center oversees the Fund. 40 Water Street
New York, New York 10048-0557 Boston, Massachusetts 02109
Provides legal advice to the Fund. Holds the Fund's assets for safekeeping.
INDEPENDENT AUDITORS INVESTMENT ADVISER
DELOITTE & TOUCHE LLP FUND ASSET MANAGEMENT
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.
</TABLE>
MERRILL LYNCH EMERGING TIGERS FUND, INC.
<PAGE> 33
The information in this statement of additional information is not complete and
may be changed. This statement of additional information is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
Preliminary Statement of Additional Information Dated January , 1999
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 to provide shareholders with
long term capital appreciation by investing primarily in equity securities of
corporations in designated emerging market countries located in Asia and the
Pacific Basin ("Asia-Pacific Countries"). Current income from dividends and
interest will not be an important consideration in selecting portfolio
securities. The Fund expects that 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. For more information on the Fund's
investment objectives and policies, see "Investment Objective and Policies."
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Purchase of Shares."
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated March
, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
------------------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is March , 1999.
<PAGE> 34
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies........................... 2
Risk Factors and Special Considerations................... 5
Other Investment Policies, Practices, and Risk Factors.... 10
Derivatives............................................... 13
Investment Restrictions................................... 18
Portfolio Turnover........................................ 21
Management of the Fund...................................... 22
Directors and Officers.................................... 22
Compensation of Directors................................. 23
Management and Advisory Arrangements...................... 24
Code of Ethics............................................ 25
Purchase of Shares.......................................... 26
Initial Sales Charge Alternatives -- Class A and Class D
Shares................................................. 26
Deferred Sales Charge Alternatives -- Class B and Class C
Shares................................................. 31
Distribution Plans........................................ 33
Limitations on the Payment of Deferred Sales Charges...... 35
Redemption of Shares........................................ 36
Redemption................................................ 36
Repurchase................................................ 37
Reinstatement Privilege -- Class A and Class D Shares..... 37
Pricing of Shares........................................... 38
Determination of Net Asset Value.......................... 38
Computation of Offering Price Per Share................... 39
Portfolio Transactions and Brokerage........................ 39
Transactions in Portfolio Securities...................... 39
Shareholder Services........................................ 41
Investment Account........................................ 41
Exchange Privilege........................................ 41
Fee-Based Programs........................................ 43
Retirement Plans.......................................... 44
Automatic Investment Plans................................ 44
Automatic Dividend Program................................ 44
Systematic Withdrawal Plan................................ 45
Distributions and Taxes..................................... 46
Dividends and Distributions............................... 46
Taxes..................................................... 46
Tax Treatment of Options, Futures and Forward Foreign
Exchange Transactions.................................. 48
Special Rules for Certain Foreign Currency Transactions... 48
Performance Data............................................ 50
General Information......................................... 52
Description of Shares..................................... 52
Independent Auditors...................................... 52
Custodian................................................. 52
Transfer Agent............................................ 53
Legal Counsel............................................. 53
Reports to Shareholders................................... 53
Shareholder Inquiries..................................... 53
Additional Information.................................... 53
Financial Statements........................................ 53
</TABLE>
<PAGE> 35
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
investment objective of the Fund is to seek long term capital appreciation by
investing primarily in 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 of 1940, as amended (the "Investment
Company Act"). The Fund is authorized to employ a variety of investment
techniques to hedge against market and currency risk, although suitable hedging
instruments may not be available on a timely basis and on acceptable terms.
There can be no assurance that the Fund's investment objective will be achieved.
The Fund 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
Investors Service, Inc. ("Moodys") and "BBB" or lower by Standard & Poor's
("S&P"), or in unrated U.S. and non-U.S. securities considered by Fund Asset
Management, L.P., the Fund's investment adviser (the "Investment Adviser" or
"FAM") 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 securities that are
subject to bankruptcy proceedings or otherwise are in default or in risk of
being in default at the time they are acquired ("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.
A number of Asia-Pacific countries have recently undergone significant
financial turmoil; however, some of the emerging market Asia-Pacific countries
have been among the most rapidly growing economies in the world in recent years.
The Investment Adviser believes regional growth will be seen in certain
Asia-Pacific countries to the extent government policies are directed towards
market-oriented economic reform. There has been growth resulting from an
increase in domestic demand in certain Asia-Pacific countries. 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. 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 long term investment opportunities.
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.
2
<PAGE> 36
The Fund may invest in debt securities issued or guaranteed by emerging
market Asia-Pacific governments ("sovereign debt") (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 market Asia-Pacific currency. The Fund also
may consider a debt security that is denominated in an emerging market
Asia-Pacific currency to be a security of a company in an emerging market
Asia-Pacific country without reference to the principal trading market of the
security or to the location of its issuer. 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 also 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 make venture
capital investments and invest in 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.
Convertible Securities. Convertible securities entitle the holder to
receive interest payments paid on corporate debt securities or the dividend
preference on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the conversion
privilege. Synthetic convertible securities may be either (i) a debt security or
preferred stock that may be convertible only under certain contingent
circumstances or that may pay the holder a cash amount based on the value of
shares of underlying common stock partly or wholly in lieu of a conversion right
(a "Cash-Settled Convertible") or (ii) a combination of separate securities
chosen by the Investment Adviser in order to create the economic characteristics
of a convertible security, i.e., a fixed income security paired with a security
with equity conversion features, such as an option or warrant (a "Manufactured
Convertible").
3
<PAGE> 37
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion feature, however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if the securities
were issued in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible securities
held by the Fund are denominated in United States dollars, the underlying equity
securities may be quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share price
is quoted will affect the value of the convertible security. As described below,
the Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
As indicated above, synthetic convertible securities may include either
Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled
Convertibles are instruments that are created by the issuer and have the
economic characteristics of traditional convertible securities but may not
actually permit conversion into the underlying equity securities in all
circumstances. As an example, a private company may issue a Cash-Settled
Convertible that is convertible into common stock only if the company
successfully completes a public offering of its common stock prior to maturity
and otherwise pays a cash amount to reflect any equity appreciation.
Manufactured Convertibles are created by the Investment Adviser by combining
separate securities that possess one of the two principal characteristics of a
convertible security, i.e., fixed income ("fixed income component") or a right
to acquire equity securities ("convertibility component"). The fixed income
component is achieved by investing in nonconvertible fixed income securities,
such as nonconvertible bonds, preferred stocks and money market instruments. The
convertibility component is achieved by investing
4
<PAGE> 38
in call options, warrants, Long-term equity anticipation participations, or
other securities with equity conversion features ("equity features") granting
the holder the right to purchase a specified quantity of the underlying stocks
within a specified period of time at a specified price or, in the case of a
stock index option, the right to receive a cash payment based on the value of
the underlying stock index.
A Manufactured Convertible differs from traditional convertible securities
in several respects. Unlike a traditional convertible security, which is a
single security having a unitary market value, a Manufactured Convertible is
comprised of two or more separate securities, each with its own market value.
Therefore, the total "market value" of such a Manufactured Convertible is the
sum of the values of its fixed income component and its convertibility
component.
More flexibility is possible in the creation of a Manufactured Convertible
than in the purchase of a traditional convertible security. Because many
corporations have not issued convertible securities, the Investment Adviser may
combine a fixed income instrument and an equity feature with respect to the
stock of the issuer of the fixed income instrument to create a synthetic
convertible security otherwise unavailable in the market. The Investment Adviser
may also combine a fixed income instrument of an issuer with an equity feature
with respect to the stock of a different issuer when the Investment Adviser
believes such a Manufactured Convertible would better promote the Fund's
objective than alternative investments. For example, the Investment Adviser may
combine an equity feature with respect to an issuer's stock with a fixed income
security of a different issuer in the same industry to diversify the Fund's
credit exposure, or with a U.S. Treasury instrument to a create a Manufactured
Convertible with a higher credit profile than a traditional convertible security
issued by that issuer. A Manufactured Convertible also is a more flexible
investment in that its two components may be purchased separately and, upon
purchasing the separate securities, "combined" to create a Manufactured
Convertible. For example, the Fund may purchase a warrant for eventual inclusion
in a Manufactured Convertible while postponing the purchase of a suitable bond
to pair with the warrant pending development of more favorable market
conditions.
The value of a Manufactured Convertible may respond differently to certain
market fluctuations than would a traditional convertible security with similar
characteristics. For example, in the event the Fund created a Manufactured
Convertible by combining a short term U.S. Treasury instrument and a call option
on a stock, the Manufactured Convertible would likely outperform a traditional
convertible of similar maturity and which is convertible into that stock during
periods when Treasury instruments outperform corporate fixed income securities
and underperform during periods when corporate fixed income securities
outperform Treasury instruments.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Foreign Market Risk. Since the Fund invests in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because stocks traded on foreign markets have often
(though not always) performed differently than stocks in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may be
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
Foreign Economy Risk. The economies of certain foreign markets often do
not compare favorably with that of the United States with respect to such issues
as growth of gross national product, reinvestment of capital, resources and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain
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industries. Any of these actions could severely affect security prices, impair
the Fund's ability to purchase or sell foreign securities or transfer the Fund's
assets or income back into the United States, or otherwise adversely affect the
Fund's operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
Currency Risk. Securities in which the Fund invests are usually
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the Fund's portfolio.
Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value because the currency is worth
fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against
a foreign currency, a security denominated in that currency gains value because
the currency is worth more U.S. dollars. This risk, generally known as "currency
risk", means that a stronger U.S. dollar will reduce returns for U.S. investors
while and a weak U.S. dollar will increase those returns.
Emerging Markets Risk. The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation, or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, they may be more likely to suffer sharp and frequent price changes
or long-term price depression because of adverse publicity, investor
perceptions, or the actions of a few large investors. In addition, traditional
measures of investment value used in the United States, such as price of
earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
Risk of Investing in Asia-Pacific Countries. In addition to the risks of
foreign investing and the risks of investing in emerging markets, the emerging
market Asia-Pacific countries in which the Fund invests are subject to certain
additional or specific risks. The Fund expects to make substantial investments
in Asia-Pacific countries. There is 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 well 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.
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: (1) 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
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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.
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 companies that keep accounting records in the
local currency, for both tax and accounting purposes, to restate certain assets
and liabilities 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.
Management of the Fund may determine that, notwithstanding otherwise
favorable investment criteria, it may not be practicable or appropriate to
invest in a particular emerging market Asia-Pacific country. The Fund may invest
in countries in which foreign investors, including management of the Fund, have
had no or limited prior experience.
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.
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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. For example, since September 1998, Malaysia has imposed currency
controls that limit the Fund's ability to repatriate proceeds of Malaysian
investments. The precise nature of some of the restrictions is currently
unclear. It is also possible that Malaysia will impose additional restrictions
or that certain other countries may impose similar restrictions or other
restrictions relating to their currencies or to securities of issuers in those
countries. The Fund's investments in Malaysia together with any investments it
might make in illiquid securities may not be available to meet redemptions. As
of December 31, 1998 the portion of the Fund's net assets invested in Malaysia
is approximately 12.6%. Depending on a variety of financial factors, the
percentage of the Fund's portfolio subject to currency controls may increase. In
the event other countries impose similar controls, the portion of the Fund's
assets that may be used to meet redemptions may be further decreased.
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 work, at its own cost, to create its
own investment entities under the laws of certain emerging market Asia-Pacific
countries.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the United States securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading. Insider trading occurs when a person buys or sells a company's
securities based on non-public information about that company. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for the Fund's portfolio
manager to completely and accurately determine a company's financial condition.
Certain Risks of Holding Fund Assets Outside the United States. The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operation. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Fund to buy, sell and
hold securities in certain foreign markets than in the U.S. For example,
brokerage commissions often are higher in foreign countries than they are in the
United States. The increased expense of investing in foreign markets reduces the
amount the Fund can earn on its investments and typically results in a higher
operating expense ratio for the Fund than investment companies invested only in
the U.S.
Settlement Risk. Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign settlement
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
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securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
Junk Bonds. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. The major risks in junk bond
investments include:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their interest
or principal payment obligations because of an economic downturn, specific
issuer developments or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations. The
issuer's ability to pay its debt obligations also may be lessened by specific
issuer developments, or the unavailability of additional financing.
Junk bonds are frequently ranked junior in claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If the issuer redeems
the junk bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds than
on other higher rated fixed income securities.
Junk bonds may be less liquid than higher rated fixed income securities
even under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid judgment may play a greater
role in valuing certain of the Fund's portfolio securities than is the case with
securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
Debt Securities. Debt securities, such as bonds, involve credit risk. This
is the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. These securities are also subject to interest
rate risk. This is the risk that the value of the security may fall when
interest rates rise. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than
the market price of shorter term securities.
Sovereign Debt. Certain emerging market Asia-Pacific countries owe
significant amounts of debt to commercial banks and foreign governments.
Investments in sovereign debt subject the Fund to the risk that a government
entity may delay or refuse to pay interest or repay principal on its Sovereign
Debt. Some of these reasons may include cash flow problems, insufficient foreign
currency reserves, political considerations, the relative size of its debt
position to its economy or its failure to put in place economic reforms required
by the International Monetary Fund or other multilateral agencies. If a
government entity defaults, it may ask for more time in which to pay or for
further loans. There is no legal process for collecting sovereign debts that a
government does not pay or bankruptcy proceeding by which all or part of
Sovereign Debt that a government entity has not repaid may be collected.
Distressed Securities. Distressed securities are securities which are the
subject of bankruptcy proceedings or otherwise in default as to repayment of
principal or interest at the time of acquisition by the Fund or are rated in the
lower rating categories (Ca or lower by Moody's and CC or lower by S&P) or
which, if
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unrated, are in the judgment of the Investment Adviser of equivalent quality.
Investment in Distressed securities is speculative and involves significant
risk. The Fund will generally make such investments only when the Investment
Adviser believes it is reasonably likely that the issuer of the distressed
securities will make an exchange offer or will be the subject of a plan of
reorganization pursuant to which the Fund will receive new securities; 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 extraordinary expenses to protect and recover its investment. Therefore,
to the extent the Fund pursues its secondary objective of capital appreciation
through investment in distressed securities, the Fund's ability to achieve
current income for its shareholders may be diminished. In addition, even if an
exchange offer is made or 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 may have been 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. 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.
OTHER INVESTMENT POLICIES, PRACTICES, AND RISK FACTORS
Securities Lending. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets. In return, the Fund receives collateral
in an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
The Fund receives securities as collateral for the loaned securities and the
Fund and the borrower negotiate a rate for the loan premium to be received by
the Fund for the loaned securities, which increases the Fund's yield. The Fund
may receive a flat fee for its loans. The loans are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, administrative and
custodial fees in connection with its loans. In the event that the borrower
defaults on its obligation to return borrowed securities because of insolvency
or for any other reason, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent the value of the
collateral falls below the market value of the borrowed securities.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases privately placed
securities may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. As a result of the
absence of a public trading market, privately placed securities may be less
liquid and more difficult to value than publicly traded securities. To the
extent that privately placed securities may be resold in privately negotiated
transactions, the prices realized from the sales, due to illiquidity, could be
less than those originally paid by the
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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 restricted securities that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act. The
Board of Directors has determined to treat as liquid Rule 144A securities that
are either (i) freely tradable in their primary markets offshore or (ii) non-
investment grade debt securities which the Investment Adviser determines are as
liquid as publicly registered non-investment grade debt securities. The Board of
Directors has adopted guidelines and delegated to the Investment Adviser the
daily function of determining and monitoring liquidity of restricted securities.
The Board of Directors, however, will retain sufficient oversight and be
ultimately responsible for the determinations. Since it is not possible to
predict with assurance exactly how this market for restricted securities sold
and offered under Rule 144A will continue to develop, the Board of Directors
will carefully monitor the Fund's investments in these securities. This
investment practice could have the effect of increasing the level of illiquidity
in the Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
Suitability. The economic benefit of an investment in the Fund depends
upon many factors beyond the control of the Fund, the Investment Adviser and its
affiliates. Because of its emphasis on foreign securities, the Fund should be
considered a vehicle for diversification and not as a balanced investment
program. The suitability for any particular investor of a purchase of shares in
the Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks associated with
investing in foreign securities, including the risk of loss of principal.
Investment 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.
Warrants. Buying a warrant does not make the Fund a shareholder of the
underlying stock. The warrant holder has no right to dividends or votes on the
underlying stock. A warrant does not carry any right to assets of the issuer,
and for this reason investment in warrants may be more speculative than other
equity-based investments.
Borrowing and Leverage. The use of leverage by the Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest the Fund will have
to pay on the borrowings, the Fund's return will be
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greater than if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such borrowed funds is not
sufficient to cover the cost of borrowing, the return to the Fund will be less
than if leverage had not been used, and therefore the amount available for
distribution to shareholders as dividends and other distributions will be
reduced. In the latter case, the Investment Adviser in its best judgment
nevertheless may determine to maintain the Fund's leveraged position if it
expects that the benefits to the Fund's shareholders of maintaining the
leveraged position will outweigh the current reduced return.
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and require
the Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace. The fee paid to
the Investment Adviser will be calculated on the basis of the Fund's assets
including proceeds from borrowings.
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.
When Issued Securities, Delayed Delivery Securities and Forward
Commitments. The Fund may purchase or sell securities that it is entitled to
receive on a when issued basis. The Fund may also purchase or sell securities on
a delayed delivery basis. The Fund may also purchase or sell securities through
a forward commitment. These transactions involve the purchase or sale of
securities by the Fund at an established price with payment and delivery taking
place in the future. The Fund enters into these transactions to obtain what is
considered an advantageous price to the Fund at the time of entering into the
transaction. The Fund has not established any limit on the percentage of its
assets that may be committed in connection with these transactions. When the
Fund purchases securities in these transactions, the Fund segregates liquid
securities in an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when issued basis
will be issued or that a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may not
benefit from an appreciation in the value of the security during the commitment
period.
Standby Commitment Agreements. The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities which may be issued and sold to the Fund
at the option of the issuer. The price of the security is fixed at the time of
commitment. At the time of entering into the agreement the Fund is paid a
commitment fee, regardless of whether or not the security is ultimately issued.
The Fund will enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered advantageous to
the Fund. The Fund will 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.
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<PAGE> 46
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date 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.
DERIVATIVES
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the S&P 500 or the prime lending rate). Derivatives allow the Fund to
increase or decrease the level of risk to which the Fund is exposed more quickly
and efficiently than transactions in other types of instruments.
The Fund may use Derivatives for hedging purposes. Hedging is a strategy in
which a Derivative is used to offset the risk that other Fund holdings may
decrease in value. Losses on the other investment may be substantially reduced
by gains on a Derivative that reacts in an opposite manner to market movements.
While hedging can reduce losses, it can also reduce or eliminate gains if the
market moves in a different manner than anticipated by the Fund or if the cost
of the Derivative outweighs the benefit of the hedge. Hedging also
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<PAGE> 47
involves the risk that changes in the value of the Derivative will not match
those of the holdings being hedged as expected by the Fund, in which case any
losses on the holdings being hedged may not be reduced. This risk is known as
"Correlation Risk."
The Fund may use the following types of Derivative instruments and trading
strategies:
Indexed and Inverse Securities. The Fund may invest in securities the
potential return of which is based on an index. As an illustration, the Fund may
invest in a debt security that pays interest based on the current value of an
interest rate index, such as the prime rate. The Fund may also invest in a debt
security which returns principal at maturity based on the level of a securities
index or a basket of securities, or based on the relative changes of two
indices. In addition, the Fund may invest in securities the potential return of
which is based inversely on the change in an index (that is, a security the
value of which will move in the opposite direction of changes to an index). For
example, the Fund may invest in securities that pay a higher rate of interest
when a particular index decreases and pay a lower rate of interest (or do not
fully return principal) when the value of the index increases. If the Fund
invests in such securities, it may be subject to reduced or eliminated interest
payments or loss of principal in the event of an adverse movement in the
relevant index or indices. Indexed and inverse securities involve credit risk,
and certain indexed and inverse securities may involve leverage risk, liquidity
risk, and currency risk. The Fund may invest in indexed and inverse securities
for hedging purposes only. When used for hedging purposes, indexed and inverse
securities involve correlation risk.
Options on Securities and Securities Indices
Purchasing Options. The Fund may purchase put options on securities held
in its portfolio or securities or interest rate indices which are correlated
with securities held in its portfolio. When the Fund purchases a put option, in
consideration for an up front payment (the "option premium") the Fund acquires a
right to sell to another party specified securities owned by the Fund at a
specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put. Purchasing a put
option may involve correlation risk, and may also involve liquidity and credit
risk.
The Fund may also purchase call options on securities it intends to
purchase or securities or interest rate indices, which are correlated with the
types of securities it intends to purchase. When the Fund purchases a call
option, in consideration for the option premium the Fund acquires a right to
purchase from another party specified securities at the exercise price on or
before the expiration date, in the case of an option on securities, or to
receive from another party a payment based on the amount a specified securities
index increases beyond a specified level on or before the expiration date, in
the case of an option on a securities index. The purchase of a call option may
protect the Fund from having to pay more for a security as a consequence of
increases in the market value for the security during a period when the Fund is
contemplating its purchase, in the case of an option on a security, or
attempting to identify specific securities in which to invest in a market the
Fund believes to be attractive, in the case of an option on an index (an
"anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium. Purchasing a call option involves correlation risk, and may also
involve liquidity and credit risk.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates with securities held in its portfolio. When the Fund writes a call
option, in return for an option premium the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or before
the expiration date, in the case of an option on
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<PAGE> 48
securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write call
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund has written an option fails to exercise its rights under
the option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding. Writing a call option may involve correlation risk.
The Fund may not write covered options on underlying securities exceeding
5% of its total assets, taken at market value.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund has written an option fails to exercise its rights under
the option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. The Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
on a security) or is writing the put in connection with trading strategies
involving combinations of options -- for example, the sale and purchase of
options with identical expiration dates on the same security or index but
different exercise prices (a technique called a "spread"). Writing a put option
may involve substantial leverage risks.
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures, Swaps and Currency
Instruments" below. A call option will also be considered covered if the Fund
owns the securities it would be required to deliver upon exercise of the option
(or, in the case of option on a securities index, securities which substantially
correlate with the performance of such index) or owns a call option, warrant or
convertible instrument which is immediately exercisable for, or convertible
into, such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions" below.
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<PAGE> 49
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. No price is paid upon entering into
a futures contract. Rather, upon purchasing or selling a futures contract the
Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying asset is a
currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
Swaps
The Fund is authorized to enter into equity swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a 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. Swap agreements may be
used to obtain exposure to an equity or market without owning or taking physical
custody of securities in circumstances in which direct investment is restricted
by local law or is otherwise impractical.
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.
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the US
dollar.
Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. The Fund may
enter into a foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Fund has received or anticipates
receiving a dividend or distribution. The Fund may enter into a foreign
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<PAGE> 50
exchange transaction for purposes of hedging a portfolio position by selling
forward a currency in which a portfolio position of the Fund is denominated or
by purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future. The Fund may also hedge portfolio positions through
currency swaps, which are transactions in which one currency is simultaneously
bought for a second currency on a spot basis and sold for the second currency on
a forward basis. Forward foreign exchange transactions involve substantial
currency risk, and also involve credit and liquidity risk.
The Fund may also hedge against the decline in the value of a currency
against the US dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
Currency futures involve substantial currency risk, and also involve leverage
risk.
The Fund may also hedge against the decline in the value of a currency
against the US dollar through the use of currency options. Currency options are
similar to options on securities, but in consideration for an option premium the
writer of a currency option is obligated to sell (in the case of a call option)
or purchase (in the case of a put option) a specified amount of a specified
currency on or before the expiration date for a specified amount of another
currency. The Fund may engage in transactions in options on currencies either on
exchanges or OTC markets. See "Types of Options" above and "Additional Risk
Factors of OTC Transactions" below. Currency options involve substantial
currency risk, and may also involve credit, leverage or liquidity risk.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities sales),
or has committed to or anticipates purchasing, which are denominated in such
currency. The Fund may, however, hedge a currency by entering into a transaction
in a Currency Instrument denominated in a currency other than the currency being
hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the
Investment Adviser believes that (i) there is a demonstrable high correlation
between the currency in which the cross-hedge is denominated and the currency
being hedged, and (ii) executing a cross-hedge through the currency in which the
cross-hedge is denominated will be significantly more cost-effective or provide
substantially greater liquidity than executing a similar hedging transaction by
means of the currency being hedged.
Risk Factors in Hedging Foreign Currency Risks. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. While the Fund's use of Currency Instruments to effect hedging strategies
is intended to reduce the volatility of the net asset value of the Fund's
shares, the net asset value of the Fund's shares will fluctuate. Moreover,
although Currency Instruments will be used with the intention of hedging against
adverse currency movements, transactions in Currency Instruments involve the
risk that anticipated currency movements will not be accurately predicted and
that the Fund's hedging strategies will be ineffective. To the extent that the
Fund hedges against anticipated currency movements which do not occur, the Fund
may realize losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the Fund will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in
currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able to
enter into a hedging transaction at an effective price, or (ii) the currency
exchange rate movement relates to a market with respect to which Currency
Instruments are not available (such as certain developing markets) and it is not
possible to engage in effective foreign currency hedging.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks.
Credit risk -- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
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<PAGE> 51
Currency risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be completely
offset by movements in the value of the hedged instruments.
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a Derivative or the Fund will
otherwise be able to sell such instrument at an acceptable price. It may
therefore not be possible to close a position in a Derivative without incurring
substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve a substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. When
the Fund engages in such a transaction, the Fund will deposit in a segregated
account at its custodian liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Securities and Exchange Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund's
exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain Derivatives traded in OTC markets, including indexed securities,
swaps and OTC options, involve substantial liquidity risk. The absence of
liquidity may make it difficult or impossible for the Fund to sell such
instruments promptly at an acceptable price. The absence of liquidity may also
make it more difficult for the Fund to ascertain a market value for such
instruments. The Fund will therefore acquire illiquid OTC instruments (i) if the
agreement pursuant to which the instrument is purchased contains a formula price
at which the instrument may be terminated or sold, or (ii) for which the
Investment Adviser anticipates the Fund can receive on each business day at
least two independent bids or offers, unless a quotation from only one dealer is
available, in which case that dealer's quotation may be used.
Because Derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that the Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in Strategic
Instruments traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Fund with a third-party guaranty
or other credit enhancement.
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).
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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) 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, in
selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors 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. As a matter of policy, however, the Fund will not purchase
shares of any registered open-end investment company or registered unit
investment trust, in reliance on Section 12(d)(1)(F) or (G) (the "fund of
funds" provisions) of the Investment Company Act, at any
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<PAGE> 53
time its shares are owned by another investment company that is part of the
same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund 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.
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.
20
<PAGE> 54
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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") 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 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.
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 "Distributions and Taxes -- Taxes." To qualify, the Fund will comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (i) not more than 25% of the market
value of the Fund's total assets will be invested in the securities of a single
issuer and (ii) with respect to 50% of the market value of its total assets, not
more than 5% of the market value of its total assets will be invested in the
securities of a single issuer, and the Fund will not own more than 10% of the
outstanding voting securities of a single issuer. 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.
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. The rate of portfolio turnover
is not a limiting factor and, given the Fund's investment policies, it is
anticipated that there may be periods when high portfolio turnover will exist.
The use of covered call options at times when the underlying securities are
appreciating in value may result in higher portfolio turnover. The Fund pays
brokerage commissions in connection with writing call options and effecting
closing purchase transactions, as well as in connection with purchases and sales
of portfolio securities. High portfolio turnover may also result in negative tax
consequences, such as an increase in capital gains dividends or in ordinary
income dividends of accrued market discount. See "Distributions and
Taxes -- Taxes." The portfolio turnover rate is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of all securities with maturities at the time
of acquisition of one year or less) by the monthly average value of the
securities in the portfolio during the year. The Fund's turnover rate may vary
greatly from year to year or during periods within a year. A high rate of
portfolio turnover results in correspondingly greater brokerage commission
expenses.
21
<PAGE> 55
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors of the Fund consists of seven individuals, six of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Directors"). The Directors are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act.
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for at
least the last five years, is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- President and Director(1)(2) -- Chairman of the
Investment Adviser and Merrill Lynch Asset Management, L.P. ("MLAM") (which
terms as used herein include their corporate predecessors) since 1997; President
of the Investment Adviser and MLAM from 1977 to 1997; Chairman of Princeton
Services, Inc. ("Princeton Services") since 1997 and Director thereof since
1993; President of Princeton Services from 1993 to 1997; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
DONALD CECIL (72) -- Director(2)(3) -- 1114 Avenue of the Americas, New
York, New York 10036. Special Limited Partner of Cumberland Associates (an
investment partnership) since 1982; Member of Institute of Chartered Financial
Analysts; Member and Chairman of Westchester County (N.Y.) Board of
Transportation.
ROLAND M. MACHOLD (62) -- Director(2)(3) -- 1091 Princeton-Kingston Road,
Princeton, New Jersey 08540. Director of the State of New Jersey Division of
Investment from 1977 to 1988; Trustee of Bryn Mawr College since 1990 and of
Teacher's College, Columbia University since 1985; Co-Chair Emeritus and
Founding Director of the Council of Institutional Investors; Member of the
Capital Formation and Regulatory Processes Advisory Committee of the Securities
and Exchange Commission from 1995 to 1996; Member of the Institutional Investor
Advisory Committee of the New York Stock Exchange from 1992 to 1995.
EDWARD H. MEYER (72) -- Director(2)(3) -- 777 Third Avenue, New York, New
York 10017. President of Grey Advertising Inc. since 1968, Chief Executive
Officer since 1970 and Chairman of the Board of Directors since 1972; Director
of The May Department Stores Company, Bowne & Co., Inc. (financial printers),
Ethan Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (67) -- Director(2)(3) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to 1990;
Partner, Small Cities Cable Television from 1986 to 1997.
RICHARD R. WEST (60) -- Director(2)(3) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993, and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding company) and Alexander's, Inc. (real
estate company).
EDWARD D. ZINBARG (64) -- Director(2)(3) -- 5 Hardwell Road, Short Hills,
New Jersey 07078-2117. Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; Former Director of Prudential Reinsurance
Company and former Trustee of The Prudential Foundation.
TERRY K. GLENN (58) -- 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 Princeton
Funds Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P. since 1988.
22
<PAGE> 56
NORMAN R. HARVEY (65) -- Senior Vice President(1)(2) -- Senior Vice
President of The Investment Adviser and MLAM since 1982; Senior Vice President
of Princeton Services since 1993.
KARA W.Y. TAN BHALA (39) -- Senior Vice President and Portfolio
Manager(1)(2) -- First Vice President of MLAM since 1997; Vice President of MLAM
from 1992 to 1997; Senior Portfolio Manager of the Investment Adviser and MLAM
from 1992 to 1997.
DONALD C. BURKE (38) -- Vice President and Treasurer(1)(2) -- First Vice
President of MLAM since 1997; Vice President of MLAM from 1990 to 1997; Director
of Taxation of MLAM since 1990.
PHILLIP S. GILLESPIE (35) -- Secretary(1)(2) -- Attorney associated with
the Investment Adviser and MLAM since 1998; Assistant General Counsel of
Chancellor LGT Asset Management, Inc. from 1997 to 1998; Senior Counsel and
Attorney in the Division of Investment Management and the Office of General
Counsel at the U.S. Securities and Exchange Commission from 1993 to 1997.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as the
investment adviser.
(3) Member of the Fund's Audit and Nominating Committee which is responsible for
the selection of the independent auditors and the selection and nomination
of non-interested Directors.
As of January 4, 1999, the Directors and officers of the Fund as a group
(12 persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates members of its Audit
and Nominating Committee (the "Committee"), which consists of all the
non-interested Directors, a fee of $500 per meeting attended. The Fund pays the
Chairman of the Committee an additional fee of $250 per meeting attended. The
Fund reimburses each non-interested Director for his out-of-pocket expenses
relating to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended November 30, 1998 and the aggregate
compensation paid to them from all registered investment companies advised by
the Investment Adviser and its affiliate, MLAM ("MLAM/FAM-Advised Funds"), for
the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR ESTIMATED COMPENSATION FROM
RETIREMENT BENEFITS ANNUAL FUND AND OTHER
POSITION WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME FUND FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
---- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Donald Cecil............ Director $8,500 None None $277,808
Roland M. Machold....... Director $ 792 None None $ 39,208
Edward H. Meyer......... Director $5,500 None None $214,558
Charles C. Reilly....... Director $7,500 None None $362,858
Richard R. West......... Director $7,500 None None $334,125
Edward D. Zinbarg....... Director $7,500 None None $133,959
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Cecil (34 registered investment companies of 34 portfolios); Mr. Machold (19
registered investment companies consisting of 19 portfolios); Mr. Meyer (34
registered investment companies consisting of 34 portfolios); Mr. Reilly (54
registered investment companies consisting of 67 portfolios); Mr. West (56
registered investment companies consisting of 81 portfolios); and Mr.
Zinbarg (19 registered investment companies consisting of 19 portfolios).
(2) Mr. Machold was elected a Director of the Fund and certain other MLAM/FAM
Advised Funds on October 20, 1998.
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 the Investment Adviser, MLAM
and certain other entities directly or indirectly wholly owned and controlled by
23
<PAGE> 57
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.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Management Services. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Board of Directors, the Investment Adviser is responsible for the actual
management of the Fund's portfolio and constantly reviews the Fund's holdings in
light of its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser performs certain of
the other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Fund.
Management Fee. The Fund has entered into an investment advisory agreement
with the Investment Adviser (the "Investment Advisory Agreement"), pursuant to
which 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. The table below sets forth information about the total investment advisory
fees paid by the Fund to the Investment Adviser for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, INVESTMENT ADVISORY FEE
- ------------------------------ -----------------------
<S> <C>
1998......................... $ 549,520
1997......................... $1,509,163
1996......................... $2,800,027*
</TABLE>
- ---------------
* Includes operations of the Fund as a closed-end investment company prior to
June 10, 1996.
The Investment Adviser has entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") pursuant to which MLAM
U.K. provides investment advisory services to the Investment Adviser with
respect to the Fund. For the fiscal years ended November 30, 1996, 1997 and
1998, the Investment Adviser paid no fees to MLAM U.K. pursuant to this
agreement.
Payment of Fund Expenses. 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 ML & Co. or any of its affiliates. The Fund pays all other
expenses incurred in the operation of the Fund, including among other things:
taxes, expenses for legal and auditing services, costs of printing proxies,
stock certificates, shareholder reports, prospectuses and statements of
additional information, except to the extent paid by Merrill Lynch Funds
Distributor, a division of PFD (the "Distributor"); charges of the custodian and
the transfer agent; expenses of redemption of shares; Commission fees; expenses
of registering the shares under Federal and state securities laws; fees and
expenses of unaffiliated Directors; accounting and pricing costs (including the
daily calculations of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other expenses
properly payable by the Fund. Accounting services are provided for the Fund by
the Investment Adviser and the Fund reimburses the Investment Adviser for its
costs in connection with such services. See "Purchase of Shares -- Distribution
Plans."
Organization of the Investment Adviser. The Investment Adviser is a
limited partnership, the partners of which are ML & Co., a financial services
holding company and the parent of Merrill Lynch, and Princeton Services. ML &
Co. and Princeton Services are "controlling persons" of the 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.
The following entities may be considered "controlling persons" of MLAM
U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill
Lynch International Holdings, Inc., a subsidiary of Merrill Lynch International,
Inc., a subsidiary of ML & Co.
24
<PAGE> 58
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
$11.00 per Class A or Class D account and $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts which close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
Distribution Expenses. The Fund has entered into four separate
distribution agreements with the Distributor in connection with the continuous
offering of each class of shares of the Fund (the "Distribution Agreements").
The Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays for
the printing and distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
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 pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees of
the 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 that
at the time is being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any fund advised by
the 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).
25
<PAGE> 59
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C or Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees (also known as service fees) and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The contingent deferred sales charges ("CDSCs"), distribution fees
and account maintenance fees that are imposed on Class B and Class C shares, as
well as the account maintenance fees that are imposed on Class D shares, are
imposed directly against those classes and not against all assets of the Fund
and, accordingly, such charges do not affect the net asset value of any other
class or have any impact on investors choosing another sales charge option.
Dividends paid by the Fund for each class of shares are calculated in the same
manner at the same time and differ only to the extent that account maintenance
and distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Each class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by MLAM or FAM. Funds advised by MLAM or
FAM that utilize the Merrill Lynch Select PricingSM System are referred to
herein as "Select Pricing Funds."
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may charge
its customers a processing fee (presently $5.35) to confirm a sale of shares to
such customers. Purchases made directly through the Transfer Agent are not
subject to the processing fee.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase Class
A shares should purchase Class A shares rather than Class D shares because there
is an account maintenance fee imposed on Class D shares. Investors qualifying
for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A or
Class D shares, because over time the accumulated ongoing account maintenance
and distribution fees on Class B or Class C shares may exceed the initial sales
charge and, in the case of Class D shares, the account maintenance fee. Although
some investors who previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other Select Pricing Funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charge on new initial sales charge purchases.
In addition, the ongoing Class B and Class C account maintenance and
distribution fees will cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than the initial sales
charge shares. The ongoing Class D account
26
<PAGE> 60
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his, her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Eligible Class A Investors
Class A shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares. Investors
who currently own Class A shares are entitled to purchase additional Class A
shares of the Fund in that account. Certain Employer Sponsored Retirement or
Savings Plans, including eligible 401(k) plans, may purchase Class A shares at
net asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its affiliates.
Class A shares are available at net asset value to corporate warranty insurance
reserve fund programs provided that the program has $3 million or more initially
invested in Select Pricing Funds. Also eligible to purchase Class A shares at
net asset value are participants in certain investment programs including
TMA(SM)Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and certain purchases made in connection
with certain fee-based programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies. Certain
persons who acquired shares of certain MLAM-advised closed-end funds in their
initial offerings who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may purchase
Class A shares of the Fund if certain conditions are met. In addition, Class A
shares of the Fund and certain other Select Pricing Funds are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and, if certain conditions are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of the
Fund and certain other Select Pricing Funds.
Class A and Class D Sales Charge Information
CLASS A SHARES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
For the Fiscal Gross Sales Sales Charges Sales Charges CDSCs Received on
Year Ended Charges Retained by Paid to Redemption of
November 30, Collected Distributor Merrill Lynch Load-Waived Shares
- ------------------- ------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
1998 $25,032 $1,571 $23,461 $0
1997 $36,296 $4,406 $31,890 0
1996+ $15,530 $2,643 $12,887 0
</TABLE>
27
<PAGE> 61
CLASS D SHARES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
For the Fiscal Gross Sales Sales Charges Sales Charges CDSCs Received on
Year Ended Charges Retained by Paid to Redemption of
November 30, Collected Distributor Merrill Lynch Load-Waived Shares
- ------------------- ------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
1998 $24,323 $1,571 $22,752 $0
1997 $25,551 $2,094 $23,457 0
1996+ $ 8,341 $1,470 $ 6,871 0
</TABLE>
- ---------------
+ For the period June 10, 1996 to November 30, 1996.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Reinvested Dividends and Capital Gains. No initial sales charges are
imposed upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of any other Select Pricing Funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent is not a binding obligation to purchase any amount of Class A
or Class D shares; however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intent may be included under a
subsequent Letter of Intent executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. The
value of Class A and Class D shares of the Fund and of other Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, may be included as
a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intent (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to at least 5.0% of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intent must be at least 5.0% of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the further reduced percentage
sales charge that would be applicable to a single
28
<PAGE> 62
purchase equal to the total dollar value of the Class A or Class D shares then
being purchased under such Letter, but there will be no retroactive reduction of
the sales charge on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
TMA(SM) Managed Trusts. Class A shares are offered at net asset value to
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the plan.
Additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements is available toll-free from Merrill
Lynch Business Financial Services at (800) 237-7777.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised funds, 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 that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and, second, the investor must establish that such
redemption had been made within 60 days prior to the investment in the Fund and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and, second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and, second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
29
<PAGE> 63
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select Pricing(SM) System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing dividends
from shares of common stock acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities that (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
30
<PAGE> 64
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Select Pricing Funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.
Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class D shares of the Fund after a conversion period of approximately eight
years, and thereafter investors will be subject to lower ongoing fees.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions. It
will be assumed that the redemption is first of shares held for over four years
or shares acquired pursuant to reinvestment of dividends or distributions and
then of shares held longest during the four-year period. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- --------------------
<S> <C>
0-1............................................... 4.0%
1-2............................................... 3.0%
2-3............................................... 2.0%
3-4............................................... 1.0%
4 and thereafter.................................. None
</TABLE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability, or, if later, reasonably promptly following
completion of probate. The Class B CDSC may also be waived on redemptions of
shares by certain eligible
31
<PAGE> 65
401(a) and eligible 401(k) plans. The CDSC also is waived for any Class B shares
that are purchased by eligible 401(k) or eligible 401(a) plans that are rolled
over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held
in such account at the time of redemption. The Class B CDSC is waived for any
Class B shares that were acquired and held at the time of the redemption in an
Employee Access(SM) Account available through employers providing eligible
401(k) plans. The Class B CDSC also is waived for any Class B shares that are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The Class B CDSC may be waived or its
terms may be modified in connection with certain fee-based programs. The Class B
CDSC may also be waived in connection with involuntary termination of an account
in which Fund shares are held or for withdrawals through the Merrill Lynch
Systematic Withdrawal Plan. See "Shareholder Services -- Fee-Based Programs" and
"-- Systematic Withdrawal Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the CDSC
upon redemption, based on the number of employees or number of employees
eligible to participate in the plan, the aggregate amount invested by the plan
in specified investments and/or the services provided by Merrill Lynch to the
plan. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing Fund.
Minimum purchase requirements may be waived or varied for such plans. Additional
information regarding purchases by employer-sponsored retirement or savings
plans and certain other arrangements is available toll-free from Merrill Lynch
Business Financial Services at (800) 237-7777.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset value of the shares of
the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately ten
years after initial purchase. If, during the Conversion Period, a shareholder
exchanges Class B shares with an eight-year Conversion Period for Class B shares
with a ten-year Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange will apply and the
holding period for the shares exchanged will be tacked on to the holding period
for the shares acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services -- Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
32
<PAGE> 66
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. In
determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no Class C CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no Class C CDSC will be assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It will be assumed that the redemption is first of shares held for over one year
or shares acquired pursuant to reinvestment of dividends or distributions and
then of shares held longest during the one-year period. The charge will not be
applied to dollar amounts representing an increase in the net asset value since
the time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a redemption.
The Class C CDSC may be waived in connection with certain fee-based programs,
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee-Based Programs."
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
CLASS B SHARES*
- -----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended November 30, by Distributor Merrill Lynch
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
1998 $23,920 $23,920
1997 $24,693 $24,693
1996 $ 2,052 $ 2,052
</TABLE>
* Additional Class B CDSCs payable to the Distributor
with respect to the fiscal years ended November 30,
1997 and 1998 may have been waived or converted to a
contingent obligation in connection with a
shareholder's participation in certain fee-based
programs.
<TABLE>
<CAPTION>
CLASS C SHARES
- -----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended November 30, by Distributor Merrill Lynch
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
1998 $8,233 $8,233
1997 $1,656 $1,656
1996 $ 84 $ 84
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in whole
or in part by the Distributor to defray the expenses of dealers (including
Merrill Lynch) related to providing distribution-related services to the Fund in
connection with the sale of the Class B and Class C shares, such as the payment
of compensation to financial consultants for selling Class B and Class C shares
from the dealer's own funds. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time of purchase.
See "Distribution Plans" below. Imposition of the CDSC and the distribution fee
on Class B and Class C shares is limited by the NASD asset-based sales charge
rule. See "Limitations on the Payment of Deferred Sales Charges" below.
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each
a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
33
<PAGE> 67
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities with respect to Class B, Class C and Class D shares. Each of those
classes has exclusive voting rights with respect to the Distribution Plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides that
the Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of 0.75%
of the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
Independent Directors shall be committed to the discretion of the Independent
Directors then in office. In approving each Distribution Plan in accordance with
Rule 12b-1, the Independent Directors concluded that there is reasonable
likelihood that each Distribution Plan will benefit the Fund and its related
class of shareholders. Each Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the Independent Directors or by
the vote of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in an easily
accessible place.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans annually, as of December 31 of each year, on a "fully allocated accrual"
basis and quarterly on a "direct expense and revenue/cash" basis. On the fully
allocated accrual basis, revenues consist of the account maintenance fees,
distribution fees, the CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses, advertising, sales
promotion and marketing expenses, corporate overhead and interest expense. On
the direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs and the expenses consist of
financial consultant compensation.
As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual expenses of the Distributor and
Merrill Lynch for the period since the commencement of operations of Class B
shares exceeded the fully allocated accrual revenues by approximately $109,000
(2.05% of Class B net assets at that date). As of November 30, 1998, direct cash
revenues for the period since the
34
<PAGE> 68
commencement of operations of Class B shares exceeded direct cash expenses by
$43,500 (.81% of Class B net assets at that date). As of December 31, 1997, the
fully allocated accrual expenses incurred by the Distributor and Merrill Lynch
for the period since the commencement of operations of Class C shares exceeded
the fully allocated accrual revenues by approximately $28,000 (1.17% of Class C
net assets at that date). As of November 30, 1998, direct cash revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $26,767 (1.25% of Class C net assets at that date).
For the fiscal year ended November 30, 1998, the Fund paid the Distributor
$57,913 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $5.8 million),
all of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended November 30, 1998, the Fund paid the Distributor
$26,653 pursuant to the Class C Distribution Plan (based on average daily net
assets subject to such Class C Distribution Plan of approximately $2.7 million),
all of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended November 30, 1998, the Fund paid the Distributor
$4,067 pursuant to the Class D Distribution Plan (based on average daily net
assets subject to such Class D Distribution Plan of approximately $1.6 million),
all of which was paid to Merrill Lynch for providing account maintenance
activities in connection with Class D shares.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges), plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any CDSCs will be paid
to the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of November 30,
1998 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under
35
<PAGE> 69
the NASD maximum sales charge rule and, with respect to the Class B shares, the
Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1998
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE ALLOWABLE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS AGGREGATE UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) SALES CHARGE 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) TO NOVEMBER 30, 1998
Under NASD Rule as Adopted.......... $8,388 $524 $42 $566 $148 $415 $40
Under Distributor's Voluntary
Waiver............................ $8,388 $524 $42 $566 $148 $418 $40
CLASS C SHARES, FOR THE PERIOD JUNE
10, 1996 (COMMENCEMENT OF
OPERATIONS) TO NOVEMBER 30, 1998
Under NASD Rule as Adopted.......... $6,035 $377 $38 $415 $ 41 $370 $16
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) 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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch Mutual
Fund Advisor (Merrill Lynch MFA(SM)) Program (the "MFA Program"). The CDSC
is booked as a contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program.
(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 voluntary maximum (with respect to Class B shares) or
the NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Commission as a result
of which disposal of portfolio securities or determination of the net asset
value of the Fund is not reasonably practicable, and for such other periods as
the Commission may by order permit for the protection of shareholders of the
Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities held
by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter
36
<PAGE> 70
requesting redemption. Proper notice of redemption in the case of shares for
which certificates have been issued may be accomplished by a written letter as
noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the Transfer
Agent's register. The signature(s) on the redemption requests must be guaranteed
by an "eligible guarantor institution" as such is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents such as,
but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be mailed
within seven days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to fifteen minutes after
the regular close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time), and such request is received by the Fund from such dealer
not later than 30 minutes after the close of business on the NYSE on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE, in
order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent on
accounts held at the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem Fund shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
37
<PAGE> 71
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of 15 minutes after the close of business on
the NYSE on each day the NYSE is open for trading. The NYSE generally closes at
4:00 p.m., Eastern time. Any assets or liabilities initially expressed in terms
of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held by
the Portfolio plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the fees payable to the Investment Adviser and
Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of Class D shares reflecting the daily expense accruals of
the distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends 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 for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Trustees as the primary market. Long
positions in securities traded in the over-the-counter ("OTC") market are valued
at the last available bid price in the OTC market prior to the time of
valuation. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Short positions in securities traded in the OTC market are valued at the
last available ask price in the OTC market prior to the time of valuation. When
the Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Directors of the
Fund. Such valuations and procedures will be reviewed periodically by the
Directors.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such
38
<PAGE> 72
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Directors.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on November 30, 1998 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets............................. $ 34,111,088 $ 5,346,462 $ 2,139,196 $ 1,578,441
============ ============ =========== ============
Number of Shares Outstanding........... 5,314,337 850,034 340,430 246,839
============ ============ =========== ============
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)......................... $ 6.42 $ 6.29 $ 6.28 $ 6.39
Sales Charge (for Class A and Class D
shares: 5.25% of offering price;
5.54% of net asset value per
share)*.............................. .36 ** ** .35
------------ ------------ ----------- ------------
Offering Price......................... $ 6.78 $ 6.29 $ 6.28 $ 6.74
============ ============ =========== ============
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares" herein.
PORTFOLIO TRANSACTIONS AND BROKERAGE
TRANSACTIONS IN PORTFOLIO SECURITIES
Subject to policies established by the Board of Directors the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to deal
with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Fund. Where possible, the Fund deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the best results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread or commission), the size, type and difficulty of
the transaction involved, the firm's general execution and operations facilities
and the firm's risk in positioning the securities involved. The portfolio
securities of the Fund generally are traded on a principal basis and normally do
not involve either brokerage commissions or transfer taxes. The cost of
portfolio securities transactions of the Fund primarily consists of dealer or
underwriter spreads. While reasonable competitive spreads or commissions are
sought, the Fund will not necessarily be paying the lowest spread or commission
available. Transactions with respect to the securities of small and emerging
growth companies in which the Fund may invest may involve specialized services
on the part of the broker or dealer and thereby entail higher commissions or
spreads than would be the case with transactions involving more widely traded
securities.
Subject to obtaining the best net results, dealers who provide supplemental
investment research (such as information concerning tax-exempt securities,
economic data and market forecasts) to the 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 its Investment Advisory Agreement and the expense of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information. Supplemental investment research obtained from such
dealers might be used by the Investment Adviser in servicing all of its accounts
and all such research might not be used by the Investment Adviser in connection
with the Fund. Consistent with the Conduct Rules of the NASD and
39
<PAGE> 73
policies established by the Directors of the Fund, the Investment Adviser may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
AGGREGATE BROKERAGE COMMISSIONS PAID
FISCAL YEAR ENDED NOVEMBER 30, COMMISSIONS PAID TO MERRILL LYNCH
- -------------------------------------------- ------------------- ----------------
<S> <C> <C>
1998........................................ $ 311,463 $30,668
1997........................................ $ 850,140 $27,378
1996........................................ $1,448,138 $35,356
</TABLE>
For the fiscal year ended November 30, 1998, the brokerage commissions paid
to Merrill Lynch represented 9.85% of the aggregate brokerage commissions paid
and involved 9.21% of the Fund's dollar amount of transactions involving payment
of commissions during the year. For the fiscal year ended November 30, 1996,
prior to June 10, 1996 the Fund operated as a closed-end investment company and,
consequently, the brokerage commissions paid prior to June 10, 1996, may not
necessarily be indicative of the costs of future brokerage commissions of the
Fund.
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such persons are prohibited from dealing with
the Fund as principal in the purchase and sale of securities unless a permissive
order allowing such transactions is obtained from the Commission. Since
transactions in the over-the-counter market usually involve transactions with
dealers acting as principal for their own accounts, affiliated persons of the
Fund, including Merrill Lynch and any of its affiliates, will not serve as the
Fund's dealer in such transactions. However, affiliated persons of the Fund may
serve as its broker in listed or over-the-counter transactions conducted on an
agency basis provided that, among other things, the fee or commission received
by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. In addition, the Fund may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the Board of Directors
of the Fund that either comply with rules adopted by the Commission or with
interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Directors have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Directors will
reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i) has
obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund. Securities may be held by, or be appropriate investments for, the Fund
as well as other funds or investment advisory clients of the Investment Adviser
or MLAM.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate when
one or more clients of the Investment Adviser or an affiliate are selling the
same security. If purchases or sales of securities arise for consideration at or
about the same time that would involve the Fund or other clients or funds for
which the Investment Adviser or an affiliate act as investment adviser,
transactions in such securities will be made, insofar as feasible, for the
40
<PAGE> 74
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
an affiliate during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gain distributions. The statements will also show any other activity
in the account since the preceding statement. Shareholders will also receive
separate confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gains distributions. A shareholder with an account held at the
Transfer Agent may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders 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 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 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 firm for
re-registration in the new brokerage firm's name.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
41
<PAGE> 75
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at any time as long
as, at the time of the exchange, the shareholder holds Class A shares of the
second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
Class A shares of Summit ("new Class A or Class D shares"), are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the new
Class B shares acquired through use of the exchange privilege. In addition,
Class B shares of the Fund acquired through use of the exchange privilege will
be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B or Class C shares of the fund from which the
exchange has been made. For purposes of computing the CDSC that may be payable
on a disposition of the new Class B or Class C shares, the holding period for
the outstanding Class B or Class C shares is "tacked" to the holding period of
the new Class B shares. For example, an investor may exchange Class B or Class C
shares of the Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special
Value Fund") after having held the Fund's Class B shares for two and a half
years. The 2% CDSC that generally would apply to a redemption would not apply to
the exchange. Three years later the investor may decide to redeem the Class B
shares of Special Value Fund and receive cash. There will be no CDSC due on this
redemption, since by "tacking" the two and a half year holding period of Fund
Class B shares to the three-year holding period for the Special Value Fund Class
B shares, the investor will be deemed to have held the Special Value Fund Class
B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and
42
<PAGE> 76
toward satisfaction of any Conversion Period with respect to Class B shares.
Class B shares of Summit will be subject to a distribution fee at an annual rate
of 0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other money market funds and subsequently
wish to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if any. The holding
period for the money market fund shares will not count toward satisfaction of
the holding period requirement for reduction of the CDSC imposed on such shares,
if any, and, with respect to Class B shares, toward satisfaction of the
Conversion Period. However, the holding period for Class B or Class C shares
received in exchange for such money market fund shares will be aggregated with
the holding period for the original shares for purposes of reducing the CDSC or
satisfying the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA program. First, the initial
allocation of assets is made under the MFA program. Then, any subsequent
exchange under the MFA program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and shareholders
of the other MLAM-advised mutual funds with shares for which certificates have
not been issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares to the general
public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be made. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the
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<PAGE> 77
automatic exchange thereof to another class at net asset value, which may be
shares of a money market fund. In addition, upon termination of participation in
a Program, shares that have been held for less than specified periods within
such Program may be subject to a fee based upon the current value of such
shares. These Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding a
specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in such
Program's client agreement and from the Transfer Agent at (1-800-MER-FUND) or
1-(800)-637-3863.
RETIREMENT PLANS
Individual retirement accounts and other retirement plans are available
from Merrill Lynch. Under these plans, investments may be made in the Fund and
certain of the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these plans is
available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100, and the minimum subsequent purchase is $1.
AUTOMATIC INVESTMENT PLANS
A 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) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities dealer,
or by mail directly to the Transfer Agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
For investors who buy shares of the Fund through Blueprint, no minimum charge to
the investor's bank account is required. Alternatively, an investor that
maintains a CMA(R) or CBA(R) account may arrange to have periodic investments
made in the Fund of amounts of $100 or more ($1 or more for retirement accounts)
or more through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC DIVIDEND PROGRAM
Unless specific instructions are given as to the method of payment,
dividends and capital gains distributions will be automatically reinvested,
without sales charge, in additional full and fractional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund as of the
close of business on the NYSE on the monthly payment date for such dividends and
distributions. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends or both dividends and
capital gains distributions, paid in cash, rather than reinvested in shares of
the Fund or vice versa (provided that, in the event that a payment on an account
maintained at the Transfer Agent would amount to $10.00 or less, a shareholder
will not receive such payment in cash and such payment will automatically be
reinvested in additional shares). Commencing ten days after the receipt by the
Transfer Agent of such notice, those instructions will be effected. The Fund is
not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution checks. Cash payments can also be directly deposited to the
shareholder's bank account.
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<PAGE> 78
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
the class of shares to be redeemed. With respect to shareholders who hold
accounts directly at the Transfer Agent, redemptions will be made at net asset
value as determined 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time) on the 24th day of each month or the 24th
day of the last month of each quarter, whichever is applicable. With respect to
shareholders who hold accounts with their broker-dealer, redemptions will be
made at net asset value as determined 15 minutes after the close of business on
the NYSE (generally, 4:00 p.m., New York time) on the first, second, third, or
fourth Monday of each month or the first, second, third, or fourth Monday of the
last month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the close of business on
the following business day. The check for the withdrawal payment will be made,
on the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all shares in the
Investment Account are reinvested automatically in Fund shares. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will be applied thereafter to Class D shares if the
shareholder so elects. If an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should contact his or her
Financial Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
Purchases of additional shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of the Fund from
investors that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Automatic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
Account or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the shareholder's
account three business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month, in the case of
bimonthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at
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<PAGE> 79
net asset value on the next business day. The CMA(R) or CBA(R) Systematic
Redemption Program is not available if Fund shares are being purchased within
the account pursuant to the Automated Investment Program. For more information
on the CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders
should contact their Merrill Lynch Financial Consultant.
Capital gains and ordinary income received in each of the retirement plans
referred to above are exempt from Federal taxation until distributed from the
plan. Investors considering participation in any such plan should review
specific tax laws relating thereto and should consult their attorneys or tax
advisers with respect to the establishment and maintenance of any such plan.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such investment income are paid at least annually. All
net realized capital gains, if any, are distributed to the Fund's shareholders
at least annually. Premiums from expired call options written by the Fund and
net gains from closing purchase transactions are treated as short-term capital
gains for Federal income tax purposes. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. See "Shareholder
Services -- Automatic Reinvestment of Dividends and Capital Gains Distributions"
for information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. 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 "Pricing of Shares -- Determination of Net
Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as the Fund so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the part
of its net ordinary income and net realized capital gains that it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general on a October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income, whether or not reinvested. 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
gains, regardless of the length of time the shareholder has owned Fund shares.
Any loss upon the sale or exchange of Fund shares held for six months or less
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Fund's
earnings and profits will first
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<PAGE> 80
reduce the adjusted tax basis of a holder's shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder (assuming
the shares are held as a capital asset). Certain categories of capital gains are
taxable at different rates. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gains
dividends, as well as any amount of capital gains dividends in the different
categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend paid by the Fund only if the shareholder meets
certain holding period requirements. The Fund also must meet these holding
period requirements, and if the Fund fails to do so, it will not be able to
"pass through" to shareholders the ability to claim a credit or deduction for
the related foreign taxes paid by the Fund. If the Fund satisfies the holding
period requirements and more than 50% in value of its total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible, and intends, to file an election with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to include
their proportionate shares of such withholding taxes in their United States
income tax returns as gross income, treat such proportionate shares as taxes
paid by them, and deduct such proportionate shares in computing in their taxable
incomes or, alternatively, use them as foreign tax credits against their United
States income taxes. No deductions for foreign taxes, moreover, may be claimed
by noncorporate shareholders who do not itemize deductions. A shareholder that
is a nonresident alien individual or a foreign corporation may be subject to
United States withholding taxes on the income resulting from the Fund's election
described in this paragraph but may not be able to claim a credit or deduction
against such United States tax for the foreign taxes treated as having been paid
by such shareholder. The Fund will report annually to its shareholders the
amount per
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<PAGE> 81
share of such withholding taxes and other information needed to claim the
foreign tax credit. For this purpose, the Fund will allocate foreign taxes and
foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission rule permitting the issuance and sale of multiple classes of stock)
that is based on the gross income allocable to the Class A, Class B, Class C and
Class D shareholders during the taxable year or such other method as the
Internal Revenue Service may prescribe.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest or currency exchange rates with respect
to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar).
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In general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from future contracts that are not "regulated futures
contracts" and from unlisted options will be treated as ordinary income or loss
under Code Section 988. In certain circumstances, the Fund may elect capital
gain or loss treatment for such transactions. Regulated futures contracts as
described above, will be taxed under Code Section 1256 unless application of
Section 988 is elected by the Fund. In general, however, Code Section 988 gains
or losses will increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's basis in Fund shares
(assuming the shares were held as a capital asset). These rules and the
mark-to-market rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as described in the Prospectus and in this
Statement of Additional Information. Some of these high yield securities may be
purchased at a discount and may therefore cause the Fund to accrue and
distribute income before amounts due under the obligations are paid. In
addition, a portion of the interest payments on such high yield securities may
be treated as dividends for Federal income tax purposes; in such case, if the
issuer of such high yield securities is a domestic corporation, dividend
payments by the Fund will be eligible for the dividends received deduction to
the extent of the deemed dividend portion of such interest payments.
The Fund may invest up to 10% of its total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (the
"interest charge"), on a portion of the distributions from such a company and on
gain from the disposition of the shares of such a company (collectively referred
to as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, under recent legislation, the Fund
could elect to "mark to market" at the end of each taxable year all shares that
it holds in PFICs. If it made this election, the Fund would recognize as
ordinary income any increase in the value of such shares over their adjusted
basis and as ordinary loss any decrease in such value to the extent it did not
exceed prior increases. By making the mark-to-market election, the Fund could
avoid imposition of the interest charge with respect to distributions from
PFICs, but in any particular year might be required to recognize income in
excess of the distributions it received from PFICs and its proceeds from
dispositions of PFIC stock.
The 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 United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
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<PAGE> 83
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data for various periods other than those
noted below. Such data will be computed as described above, except that (1) as
required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted and (2) the
maximum applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. In order to reflect the
reduced sales charges in the case of Class A or Class D shares or the waiver of
the CDSC in the case of Class B or Class C shares applicable to certain
investors, as described under "Purchase of Shares" the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may take into account the
waiver of the CDSC and therefore may reflect greater total return since, due to
the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted. The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
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
------------------------------------- -------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended November 30, 1998.. (24.97)% $ 750.30 (24.80)% $ 752.00
Inception (June 10, 1996) to
November 30, 1998............... -- -- (31.17)% $ 396.90
Inception (March 4, 1994) to
November 30, 1998............... (16.03)% $ 436.70 -- --
</TABLE>
50
<PAGE> 84
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES
------------------------------------- -------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1998.............................. (20.81)% $ 791.90 (21.67)% $ 783.30
1997.............................. (47.76)% $ 522.40 (48.29)% $ 517.10
1996.............................. 16.43% $1,164.30 -- --
1995.............................. (6.23)% $ 937.70 -- --
Inception (June 10, 1996) to
November 30, 1996............... -- -- 0.00% $1,000.00
Inception (March 4, 1994) to
November 30, 1994............... 2.05% $1,020.50 -- --
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (June 10, 1996) to
November 30, 1998............... -- -- (60.31)% $396.90
Inception (March 4, 1994) to
November 30, 1998............... (56.33)% $ 436.70 -- --
</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.
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- -------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended November 30, 1998.. (22.48)% $775.20 (25.25)% $ 747.50
Inception (June 10, 1996) to
November 30, 1998............... (30.65)% $404.40 (31.61)% $ 390.60
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1998.............................. (21.70)% $783.00 (21.11)% $ 788.90
1997.............................. (48.32)% $516.80 (47.91)% $ 520.90
Inception (June 10, 1996) to
November 30, 1996............... (0.06)% $999.40 0.32% $1,003.20
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (June 10, 1996) to
November 30, 1998............... (59.56)% $404.40 (60.94)% $ 390.60
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
the total return data quoted by the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales charge
or may not take into account the CDSC, and, therefore, may reflect greater total
return since, due to the reduced sales charges or the waiver of CDSCs, a
51
<PAGE> 85
lower amount of expenses may be deducted. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Southeast Asia
Emerging Markets Free Index, the Standard & Poor's 500 Index, the Dow Jones
Industrial Average, or to performance data published by Lipper Analytical
Services, Inc., Morningstar Publications, Inc. ("Morningstar"), CDA Investment
Technology, Inc., Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine, Fortune Magazine or other industry publications. In addition,
from time to time the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.
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.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-
52
<PAGE> 86
interested Directors of the Fund. The independent auditors are responsible for
auditing the annual financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as custodian of the Fund's assets. Under its contract
with the Fund, the Custodian is authorized to establish separate accounts in
foreign currencies and to cause foreign securities owned by the Fund to be held
in its offices outside the U.S. and with certain foreign banks and securities
depositories. The Custodian is responsible for safeguarding and controlling the
Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "How to Buy, Sell,
Transfer and Exchange Shares -- Through the Transfer Agent" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on November 30 of each year. The Fund
sends to its shareholders, at least semi-annually, reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name to
any other company, and the Fund has granted ML & Co., under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of any class of the Fund's shares as of January 4, 1999.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
53
<PAGE> 87
[This page intentionally left blank]
<PAGE> 88
CODE #17035-03-99
<PAGE> 89
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S> <C>
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 -- 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)
4(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.(e)
5(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 the Distributor(b)
(c) -- Form of Class C Shares Distribution Agreement between the
Registrant and the Distributor(b)
(d) -- Form of Class D Shares Distribution Agreement between the
Registrant and the Distributor(b)
6 -- None.
7 -- Custody Agreement between the Registrant and Brown Brothers
Harriman & Co.(d)
8(a) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the
Registrant and Financial Data Services, Inc.(b)
(b) -- Form of License Agreement relating to the use of name
between the Registrant and Merrill Lynch & Co., Inc.(b)
9 -- Opinion of Brown & Wood LLP, counsel to the Registrant.(g)
10 -- Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
11 -- None.
12 -- Certificate of Fund Asset Management, L.P.(d)
13(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)
14(a) -- Financial Data Schedule for Class A Shares.
</TABLE>
C-1
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S> <C>
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
15 -- Merrill Lynch Select Pricing(SM) System Plan Pursuant to
Rule 18f-3.(f)
</TABLE>
- ---------------
<TABLE>
<S> <C>
(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) Filed on March 25, 1997, as an Exhibit to Post-Effective
Amendment No. 1 to the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, filed on
January 25, 1996, relating to shares of Merrill Lynch New
York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
(g) Previously filed as an Exhibit to the Registration
Statement.
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 25. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that such payments
will be made only on the following conditions: (i) advances may be made only on
receipt of a written affirmation of such person's good faith belief that the
standard of conduct necessary for indemnification has been met and a written
undertaking to repay any such advance if it is ultimately determined that the
standard of conduct has not been met; and (ii) (a) such promise must be secured
by a security for the undertaking in form and amount acceptable to the
Registrant, (b) the Registrant is insured against losses arising by receipt by
the advance, or (c) a majority of a quorum of the Registrant's disinterested
non-party Directors, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that at the time the
advance is proposed to be made, there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "1933 Act"), against certain types of civil liabilities arising in
connection with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission
C-2
<PAGE> 91
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser") acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Governmental 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 Corporate High
Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc., and The Municipal Fund Accumulation
Program, Inc.; and for the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAsset Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, 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. 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 registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate
Government Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch
C-3
<PAGE> 92
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 Hotchkis and Wiley funds (advised by
Hotchkis and Wiley, a division of MLAM); and for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as
sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisor Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665. The
address of FAM, MLAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. ("Princeton Administrators") is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributer ("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 10281-1201. The address of the Fund's transfer agent, Financial
Data Services, Inc. ("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
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, 1996 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President and
Mr. Glenn is Executive Vice President of substantially all of the investment
companies described in the first two paragraphs of this Item 26, and Messrs.
Giordano, Harvey and Monagle are officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE 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.................... Chairman Chairman of MLAM; President of FAM
and MLAM from 1977 to 1997;
Chairman and Director of Princeton
Services; President of Princeton
Services from 1993 to 1997;
Executive Vice President of ML &
Co.
Jeffrey M. Peek.................. President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-Head
of the Investment Banking Division
of Merrill Lynch in 1997; Senior
Vice President and Director of the
Global Securities and Economics
Division of Merrill Lynch from
1995 to 1997
Terry K. Glenn................... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and
Director of Princeton Services;
President and Director of PFD;
Director of FDS; President of
Princeton Administrators
Mark A. DeSario.................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
C-4
<PAGE> 93
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------------ ----------------------------------
<S> <C> <C>
Linda L. Federici................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano.............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Elizabeth A. Griffin............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
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, Secretary
Secretary and General and General Counsel of MLAM;
Counsel Senior Vice President of Princeton
Services
Philip L. Kirstein............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President; Director
and Secretary of Princeton
Services
Ronald M. Kloss.................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Debra W. Landsman-Yaros.......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Vice President of PFD
Stephen M. M. Miller............. Senior Vice President Executive Vice President of
Princeton Administrators; Senior
Vice President of Princeton
Services
Joseph T. Monagle, Jr............ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Brian A. Murdock................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Gerald M. Richard................ Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior Vice
President of Princeton Services;
Vice President and Treasurer of
PFD
Gregory D. Upah.................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President and
Treasurer of Princeton Services
Ronald L. Welburn................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Consults Interna-
C-5
<PAGE> 94
tional Portfolio, Merrill Lynch Convertible Fund, Inc., Merrill Lynch Corporate
Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill
Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, 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 Fund, Inc., Merrill
Lynch World Income Fund, Inc., The Municipal Fund Accumulation Program, Inc. and
Worldwide DollarVest Fund, Inc. The address of each of these registered
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of MLAM U.K. is 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,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 26:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- --------------------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel.................. Director and Chairman Chairman of FAM and MLAM;
President of FAM and MLAM from
1977 to 1997; Chairman and
Director of Princeton Services;
President of Princeton Services
from 1993 to 1997; Executive Vice
President of ML & Co.
Alan J. Albert................. Senior Managing Director Vice President of MLAM
Nicholas C.D. Hall............. Director Director of Merrill Lynch Europe
PLC; General Counsel of Merrill
Lynch International Private
Banking Group
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 PFD
Carol Ann Langham.............. Company Secretary None
Debra Anne Searle.............. Assistant Company Secretary None
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies referred
to in the first two paragraphs of Item 26 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc. and The Municipal Fund Accumulation Program, Inc.; and MLFD also acts as
the principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund,
C-6
<PAGE> 95
Inc., Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund, Inc. A separate division of PFD acts as the principal
underwriter of a number of other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081, except
that the address of Messrs. Breen, Crook, Fatseas and Wasel is One Financial
Center, 23rd Floor, Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH PFD WITH REGISTRANT
---- ---------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn........................... President and Director Executive Vice President
Michael G. Clark......................... Director None
Thomas J. Verage......................... Director None
Robert W. Crook.......................... Senior Vice President None
Michael J. Brady......................... Vice President None
William M. Breen......................... Vice President None
James T. Fatseas......................... Vice President None
Debra W. Landsman-Yaros.................. Vice President None
Michelle T. Lau.......................... Vice President None
Gerald M. Richard........................ Vice President and Treasurer None
Salvatore Venezia........................ Vice President None
William Wasel............................ Vice President None
Robert Harris............................ Secretary None
</TABLE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder are maintained at the
offices of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey
08536), and its transfer agent, Financial Data Services, Inc. (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484).
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund -- Fund
Asset Management" in the Prospectus constituting Part A of the Registration
Statement and under "Management of the Fund -- Management and Advisory
Arrangements" in the Statement of Additional Information constituting Part B of
the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-7
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 29th day of January, 1999.
MERRILL LYNCH EMERGING TIGERS FUND,
INC.
(Registrant)
By: /s/ ARTHUR ZEIKEL
------------------------------------
(Arthur Zeikel, President)
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following persons in the capacities and
on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARTHUR ZEIKEL President and Director January 29, 1999
- --------------------------------------------- (Principal Executive Officer)
(Arthur Zeikel)
DONALD C. BURKE* Vice President and Treasurer
- --------------------------------------------- (Principal Financial and
(Donald C. Burke) Accounting Officer)
DONALD CECIL* Director
- ---------------------------------------------
(Donald Cecil)
ROLAND M. MACHOLD* Director
- ---------------------------------------------
(Roland M. Machold)
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)
*By: /s/ ARTHUR ZEIKEL January 29, 1999
- ---------------------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 97
POWER OF ATTORNEY
The undersigned, a director of each of the Maryland corporations listed
below and a trustee of each of the Massachusetts business trusts listed below,
hereby authorizes Arthur Zeikel, Terry K. Glenn, Donald C. Burke, Barbara G.
Fraser, Phillip S. Gillespie, Robert Harris, Philip M. Mandel, Ira P. Shapiro or
Michael J. Hennewinkel, or any of them, as attorney-in-fact, to sign on his
behalf any amendments to the Registration Statement for each of the following
registered investment companies and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission: Merrill Lynch Americas Income Fund,
Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.; Merrill Lynch Dragon
Fund, Inc.; Merrill Lynch Emerging Tigers Fund, Inc.; Merrill Lynch EuroFund;
Merrill Lynch Global Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for
Investment and Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch
Global SmallCap Fund, Inc.; Merrill Lynch Global Technology Fund, Inc.; Merrill
Lynch Global Value Fund, Inc.; 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 Short-Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.;
and Worldwide DollarVest Fund, Inc.
Dated: January 21, 1999
/s/ DONALD CECIL
--------------------------------------
(Donald Cecil)
/s/ ROLAND M. MACHOLD
--------------------------------------
(Roland M. Machold)
/s/ EDWARD H. MEYER
--------------------------------------
(Edward H. Meyer)
/s/ CHARLES C. REILLY
--------------------------------------
(Charles C. Reilly)
/s/ RICHARD B. WEST
--------------------------------------
(Richard B. West)
/s/ ARTHUR ZEIKEL
--------------------------------------
(Arthur Zeikel)
/s/ EDWARD D. ZINBARG
--------------------------------------
(Edward D. Zinbarg)
C-9
<PAGE> 98
POWER OF ATTORNEY
The undersigned, the Vice President and Treasurer of each of the registered
investment companies listed below, hereby authorizes Arthur Zeikel, Terry K.
Glenn, Barbara G. Fraser, Phillip S. Gillespie, Robert Harris, Phillip M.
Mandel, Ira P. Shapiro, or Michael J. Hennewinkel, or any of them, as
attorney-in-fact, to sign on his behalf any amendments to the Registration
Statement for each of the following registered investment companies and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission: Merrill Lynch Americas Income Fund, Inc.; Merrill Lynch Developing
Capital Markets Fund, Inc.; Merrill Lynch Dragon Fund, Inc.; Merrill Lynch
Emerging Tigers Fund, Inc.; Merrill Lynch EuroFund; Merrill Lynch Global
Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for Investment and
Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch Global SmallCap
Fund, Inc.; Merrill Lynch Global Technology Fund, Inc.; Merrill Lynch Global
Value Fund, Inc.; 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
Short-Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.; and
Worldwide DollarVest Fund, Inc.
Dated: January 22, 1999
/s/ DONALD C. BURKE
--------------------------------------
(Donald C. Burke)
C-10
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
10 Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
14(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> 1
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH EMERGING TIGERS FUND, INC.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 3 to Registration Statement No. 333-2741 of our report dated January 12,
1999, appearing in the annual report to shareholders of Merrill Lynch Emerging
Tigers Fund, Inc. for the year ended November 30, 1998, and to the reference to
us under the caption "Financial Highlights" in the Prospectus, which is a part
of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
January 28, 1999
<TABLE> <S> <C>
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<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 53907984
<INVESTMENTS-AT-VALUE> 40951159
<RECEIVABLES> 80960
<ASSETS-OTHER> 2535890
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43568009
<PAYABLE-FOR-SECURITIES> 86659
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 306163
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 99276766
<SHARES-COMMON-STOCK> 5314337
<SHARES-COMMON-PRIOR> 7850529
<ACCUMULATED-NII-CURRENT> 477374
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<ACCUMULATED-NET-GAINS> (43554916)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (13024037)
<NET-ASSETS> 34111088
<DIVIDEND-INCOME> 795382
<INTEREST-INCOME> 688934
<OTHER-INCOME> 0
<EXPENSES-NET> (1287539)
<NET-INVESTMENT-INCOME> 196777
<REALIZED-GAINS-CURRENT> (24179379)
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<NUMBER-OF-SHARES-SOLD> 2689944
<NUMBER-OF-SHARES-REDEEMED> (5233128)
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<GROSS-EXPENSE> 1287539
<AVERAGE-NET-ASSETS> 44624047
<PER-SHARE-NAV-BEGIN> 8.12
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> (1.73)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916368
<NAME> MERRILL LYNCH EMERGING TIGERS FUND, INC.
<SERIES>
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<NAME> CLASS B
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<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
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<INVESTMENTS-AT-VALUE> 40951159
<RECEIVABLES> 80960
<ASSETS-OTHER> 2535890
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43568009
<PAYABLE-FOR-SECURITIES> 86659
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 306163
<TOTAL-LIABILITIES> 392822
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<PAID-IN-CAPITAL-COMMON> 99276766
<SHARES-COMMON-STOCK> 850034
<SHARES-COMMON-PRIOR> 608498
<ACCUMULATED-NII-CURRENT> 477374
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (43554916)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (13024037)
<NET-ASSETS> 5346462
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<INTEREST-INCOME> 688934
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<EXPENSES-NET> (1287539)
<NET-INVESTMENT-INCOME> 196777
<REALIZED-GAINS-CURRENT> (24179379)
<APPREC-INCREASE-CURRENT> 9360343
<NET-CHANGE-FROM-OPS> (14622259)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1441240
<NUMBER-OF-SHARES-REDEEMED> (1199704)
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<NET-CHANGE-IN-ASSETS> (29398375)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (18407861)
<OVERDISTRIB-NII-PRIOR> (596457)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 549520
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1287539
<AVERAGE-NET-ASSETS> 5759743
<PER-SHARE-NAV-BEGIN> 8.03
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> (1.71)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.29
<EXPENSE-RATIO> 3.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916368
<NAME> MERRILL LYNCH EMERGING TIGERS FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 53907984
<INVESTMENTS-AT-VALUE> 40951159
<RECEIVABLES> 80960
<ASSETS-OTHER> 2535890
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43568009
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<SENIOR-LONG-TERM-DEBT> 0
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<SHARES-COMMON-STOCK> 340430
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<ACCUMULATED-NII-CURRENT> 477374
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<NET-ASSETS> 2139196
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<EXPENSES-NET> (1287539)
<NET-INVESTMENT-INCOME> 196777
<REALIZED-GAINS-CURRENT> (24179379)
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<NET-CHANGE-FROM-OPS> (14622259)
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<NUMBER-OF-SHARES-REDEEMED> (563728)
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<GROSS-EXPENSE> 1287539
<AVERAGE-NET-ASSETS> 2650802
<PER-SHARE-NAV-BEGIN> 8.02
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> (1.71)
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<EXPENSE-RATIO> 3.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916368
<NAME> MERRILL LYNCH EMERGING TIGERS FUND, INC.
<SERIES>
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<NAME> CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
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<SHARES-COMMON-PRIOR> 130543
<ACCUMULATED-NII-CURRENT> 477374
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<ACCUMULATED-NET-GAINS> (43554916)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (13024037)
<NET-ASSETS> 1578441
<DIVIDEND-INCOME> 795382
<INTEREST-INCOME> 688934
<OTHER-INCOME> 0
<EXPENSES-NET> (1287539)
<NET-INVESTMENT-INCOME> 196777
<REALIZED-GAINS-CURRENT> (24179379)
<APPREC-INCREASE-CURRENT> 9360343
<NET-CHANGE-FROM-OPS> (14622259)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 286964
<NUMBER-OF-SHARES-REDEEMED> (170668)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (29398375)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (18407861)
<OVERDISTRIB-NII-PRIOR> (596457)
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1287539
<AVERAGE-NET-ASSETS> 1617931
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<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> (1.73)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.39
<EXPENSE-RATIO> 2.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
